Financial Analysis Of Everest bank

A Comparative Study on Liquidity and Profitability Position of Nabil Bank Limited and Kumari Bank Limited

Chapter – 1 1.

INTRODUCTION 1.1 Background This introduction chapter aims to provide a simple & apt introduction of the subject matter related to the project work-study. A society consists of two units-surplus unit & deficit unit. Surplus units are those entitle, whose earnings exceed their expenditure & deficit units are those, who are in need of money. Hence, the mechanism, which facilitates the transactions between savers of fund and users of fund, is called banking in the words of kent, “A bank is an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure.”1 Banks are the most important financial institution that helps in the commercial & economic development of a country. They are like reservoirs and mobilize the savings of the people and direct it towards productive purposes. They play an important role in the economy by channeling funds from surplus spending units. They promote the habit of thrift & saving among people by accepting deposits from the public. “Banks today have gained paramount trust among the general public. They are not the preservers of money but also the manufacturer of money. Bank is a manufacturer of credit and machine so facilitations exchange”2 Moreover large-scale production & distribution can only be achieved by a proper banking system in the country. Hence, banks have profound impact on the economic and commercial development of a country.

1.1.1 History of Bank In Nepal The origin of the word “Bank” is linked to the Latin word “Bancus” meaning a bench. Italian word “banca” meaning a bench and French word “Banque” meaning a bench. In the old days, merchants of Italy settled their accounts by sitting on a bench in the market place plan of ancient Rome. In the century, goldsmiths of England began to provide safekeeping of valuable money & they issued receipt to their clients. This receipt has higher reputation & they were used for the settlement of accounts. This was the beginning of modern banking Bank of Venice set up in 1157 in Venice, Italy is regarded as the first modern bank Subsequently , Bank of Barcelonea (1401)& Bank of Geneva (1407) were established. Although some from of banking was known top be in practice in the ancient period. However, the history of institution banking began in Nepal with the introduction of Nepal Bank Limited under Nepal Bank Act 1937.There were no dynamic changes visible in the commercial banking system until the establishment of Nepal Rastra Bank in 1956.Leter, Rastriya Banijya Bank come 1 2

Kent Cited from Banking and Insurance Practices in Nepal by Divi Raj Bhandari. P-15 Horace White, cited from “Banking & Insurance” by Shakespeare Vaidya. P-112

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into existence as the second commercial bank in 1966. This government owned banks were set up for the genuine purpose of expediting the financial development and pursuing the financial intermediation of competences, quality, service delivery, productivity &efficiency led these institutions to become unsound and inefficient in delivering the services.These factors led the government to open up door for the establishment of joint venture banks in the Mid-1980s.Asa result of this, NABIL become the first foreign Joint Venture commercial bank to begin its operations in 1984. The trend of establishment of different banks in Nepal is presented below: Nepal Bank Limited in 1994 B.S Nepal Restra Bank in 2013 B.S Restriya Banijya Bank in 2022 B.S Agricultural Development Bank in 2024 B.S Nabil Bank in 2041 B.S Nepal investment Bank in 2042 B.S Standard Chartered Bank in 2043 B.S Himalayan Bank in 2049 B.S Nepal SBI Bank in 2050 B.S Bank of Kathmandu in 2051 B.S Everest Bank in 2051 B.S Machhapuchre Bank in 2056 B.S Kumari Bank in 2057 B.S Laxmi Bank in 2058 B.S Siddhartha Bank in 2058 B.S Nepal Credit & commercial Bank in 2059 B.S Lumbini Bank in 2060 B.S.

1.1.2 Kinds of Banks with Emphasis on Commercial Bank: With the industrial, commercial & scientific revolution the banking system has been developed & extended a lot. The sustainable commercial & economic development of a country demands a proper banking system. In the absence of development & extension of banks, there is no possibility of economic revolution. Banks differ according to their nature & functions. An individual types of bank cannot performe all sorts of functions. So, today banks are opened differently according to their nature. The general types of banks are: 1. Central Bank 2. commercial Bank 3. Agriculture Development Bank 4. Industrial Banks 5. Exchange Bank 6. Saving Bank 7. Rural Development Bank 8. Development Bank 9. Merchant Bank 10. Student Bank (Not in existence in Nepal) 11. Labor Bank (Not in existence in Nepal)

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Commercial Banks: Commercial bank is an institution, which receives deposit of money through the extension & sale of its own credit. It is established to improve people’s economic welfare. According to Black’iaw dictionary, Commercial bank means a bank authorized to receive both demand &deposit to engage in trust services,to issue letter of set time deposit boxes & to provide similar services. As per commercial Bank Act 2031 “A commercial bank means a bank which deals in exchanging currency, accepting deposit, giving loans and doing commercial transaction.”3 Commercial bank occupy an important position in the banking structure of every country. These banks are organized on joint stock or joint venture basis and aim at making profit. The banks accept deposit from the public repayable on demand paying a fair amount of interest and advance credit to the individuals by charging a certain percentage interest. The difference of interest charge and interest granted is the net income of the commercial banks .In the Neplease context, Nepal Bank Ltd.established in 1994 B.S, is the first commercial bank . Other commercial banks in operation in Nepal are Rastriya Banijya Bank, Standard Chartered Bank Ltd. Bank of Kathmandu, Kumari Bank etc.

1.1.3 Profile of Banks Under Study 1.1.3.1 Profile of Nabil Bank Ltd. Nabil Bank Limited is the first foreign joint venture bank of Nepal, started operation in july 1984. Nabil was incorporated with the objective of extending international standard modern banking services to various sectors of the society. Pursuing its objectives, NBL provides a full rang of commercial banking services through its 19 points of representation across the kingdom and over 170 reputed correspondent banks across the globe. NBL, as a pioneer in introduction many innovative product and marketing concept in the domestic banking sector, represent a milestone in the banking history of Nepal as it start an era of modern banking with the customer satisfaction measures as a focal objective while doing business. Operation of the bank include day to day operation and risk management are managed by highly qualified and experience management team. Banks is fully equipped with modern technology which includes ATMs, credit cards, state-of-art, world-renowed software from Infosys Technologies System, Banglor, India, Internet banking system and tele-banking system. The capital structure of the NBL bank is shown below: Authorized Capital Issued Capital Paid up Capital

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1600000000 689216000 689216000 Sources: Profit copy of NBL

Commercial Bank Act 2031 quoted from “An Introduction to Banking ” by Bhuvan Dahal.

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An overview of the existing share owners and amount of shares held by them is as present below: S.N Share owners Percentage Share Capital(RS) 1 Promoter 70.00 482451200 2 Government of Nepal 3 Foreign entity 50.00 344608000 4 A Class licensed institution 5 Other licensed 6.15 42364600 institution 6 Other Entities 10.42 71787600 7 Individuals 3.44 23691000 8 Others 9 General Public 30.00 206764800 Total 100.00 689216000

1.1.3.2 Profile of Kumari Bank Limited. Kumari Bank Limited come into existanceas the 15 th commercial bank by starting its banking operations from Chaitra 21, 2057 B.S. (April 03, 2001) with an objective of providing competitive and modern banking services in Nepal. KBL has been providing wide-range of modern banking services through 5 points of representation across the country. Tha bank has adopted Giobous Banking software, developed by Temenos NV, Switzerland to provided centralized data base system to all the branches. The bank has also been providing Visa Debit Card, which has an access on ATMs (including 6 own ATMs) and POS (point of sale) terminals both in Nepal and India. Within 5 years of establishment the bank has been able to recognize itself as an innovation and growing institution striving to enhance customer value and satisfaction by backing transparent business practice, professional management, corporative governance and total quality management as the organization mission. It was the first ever commercial bank in the country to provide Internet Banking and Mobile banking services to its customers.Moreover, its also aims to be the preferred provider of financial services to target clients by embracing good governance, services excellence and professionals culture in order to achieve sound business growth and maximize shareholders value. KBL has been guided with the philosophy “We do it.” The capital structure of the bank is as shown below: Authorized Capital Issued Capital Paid up capital

Rs.1 billion Rs.500 million Rs.500 million Sources: Profit copy of KBL

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An over view of the existing share owners and amount of shares held by them is as presented below: S.N Share owners Percentage Share capital (%) (in rupees) 1 Nepal Government 2 Commercial Banks 3 Financial Corporation 16 79620000 4 Organized Institution 2 10390000 5 General Public 82 409990000 6 Other Total 100 500000000 Source:profit copy of KBL 1.2 Purpose of the study The primary purpose of this field work is to make a comparative analysis of profitability and liquidity position of NBL and KBL using various tools and techniques. Other objectives related to the study are: a) To know the historical background of NBL&KBL. b) To compare the financial performance of NBL&KBL. c) To make a comparative study of financial stability of NBL&KBL. d) To provide necessary suggestion and recommendation base on the analysis and conclusion of data. e) To make a comparative analysis of liquidity and profitability position of NBL&KBL. 1.3

Focus of the study Banks play an important part in the development of the economy of a country. They are not only dealers in money but also leader in the development process. They are considered as the store house of country’s wealth as well as reservoirs of resources of economic of development. However, economic progress can be achieved only through sound profitability and liquidity position of these banks in the country in fact, industrial revolution that took in European countries in the 18th and 19th centuries come out successfully to a great extent because of the existence and development of good banking system in them. In this context, it become necessary to adjust the profitability and liquidity position of the banking system and bank of our country in order to spot out the financial weakness to the suitable corrective action. Thus, it become necessary to evaluate, analyze and interpret the comparative profitability and liquidity position of banking of our country. The study is focus on to selected commercial bank of Nepal (Nabil Bank Limited and Kumari Bank Limited) by examining their financial statement in F/Y 2061/62, 2062/63, 2063/64 and 2064/65. The evolution and analysis of the liquidity and profitability position of the above selected banks is carried out by applying different analytical tools and techniques.

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1.4

Need and Importance of the study

The significant and important of the study can be highlighted from the following points: a) The finding and condition of the study will add to the literature of liquidity and profitability, participation in the Neplease context. b) The comparative interpretation derived from the study will be of great significance of each bank under study to know their respective position as compared to that of the competitor. c) The study will be open generally vistas for the general readers to broaden their knowledge about the liquidity and profitability position of the two renowned commercial banks of Nepal. d) The study will also be to great use to the individual investors in making comparison between the banks under study before making the investment decision. e) The study throws light on the degree of the management. Hence, the conclusion drawn form this study will be important to the management of banks under study in making their financial decision. f) The shareholders are the real owners of a bank. They are interested in a fair return on their investment through proper utilization of their funds. Hence, the present study will be of immense helps to the shareholders in adjudging, whether their funds are properly utilized and whether they are getting a fair share of return on their investment. g) The study will also be of immense helps to the policy makers (i.e. officials of government, concerned industry, Nepal Stock Exchange, Internal Revenue Office, etc.) in formulating policies, rules and regulation regarding the operation of the commercial banks. h) Last but not the least, the study will be helpful to the future management students in the course of preparation and reviewing of their research work. 1.5

Literature Survey Every ban presents its annual report to its stockholders. The information given in these reports are of two types. First, there is a verbal section, often presented in the form of descriptive essay from the chairman, which describes the banks liquidity and profitability position during the past years and discuss new developments that will affect the future operation. Second, the annual report presents the economic figures in the form of financial statements of the P/L a/c and Balance sheet. Taken together, these statements give and accounting picture of the banks operation and liquidity and profitability position of the bank. The P/L a/c reports the profit or loss earned during a period while Balance Sheet shows the assets and liabilities that stand on a particular date. Both these statements cannot fully report the real liquidity and profitability position of bank. If fails to provide useful financial data required for making decisions by the management.

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In the light of the foregoing discussion, the financial statement needs to be analyzed in order to determine the real financial position of the bank using various financial tools. The present study is promoted towards this objective. 1.5.1

Financial Statements Financial statements given the financial information of a bank. It is a statement through which accountant communicate to the management, owners, bankers, investors and other interested parties in a summary from on the financial position of the concern and how this position has been arrived as present. It is a summary of the accounts of assets, liabilities and capital period. “ The financial statement contains summarized information of the firms financial affairs organized systematically”4 The financial statements are prepared for the purpose of presenting a periodic review or report on the progress by the management and deal with the status of the investments in the business and results achieved under review. The financial statements or reports are prepared for the purpose of external and consistent according procedures.”5 The financial statements or reports are prepared for the purpose of external reporting to owners, investors and creditors, and its comprises of P/L a/c and Balance Sheet as describe below. Balance Sheet The balance sheet is also known as the statement of financial position, statement of assets, liabilities and capital and statement of worth. It is one of the most significant financial statements. It is a static statement as it shows the position of business at a certain moment of time. It is a summary of debt and credit balances of assets and liabilities to be carried forward which reflects the financial condition of the bank. “The Balance Sheet contains information about the resources and obligation of a business entity and about the owner’s interest in the business at a particular point of time.”6 The B/S provides a snapshot of the financial position of the bank at the close of the banks accounting period. It can be prepared either in account from or statement from. The B/S used for the present purpose was obtained form the annual report of the respective banks. Profit and Loss Account The second major statement of financial information is the P/L a/c the P/L a/c is also known as income statement, statement of earning, statement of operation and P/L statement. It is prepared to determine the operational position of the concern.

4

Pandey I.M. Financial Management, Bikash Publishing House Pvt. Ltd. New Delhi, 1988, P427. 5 Hampton, John, J Financial Decision Making Concepts, Problems and Cause, Prentice-Hall of India Pvt, Ltd. New Delhi, 1986, P-85. 6 Pandey I.M. Financial Management, Bikash Publishing House Pvt. Ltd. New Delhi, 1988, P438

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“The profit and loss portrays a flow, the operations over/during a particular period of time.”7 It is a scoreboard of the firm’s performance during a particular period of time. The P/L a/c is a statement of revenues earned and the expenses incurred for earning the revenue. If there is an excess of revenues over expenditures, it will show a profit otherwise loss. Moreover, as the P/L a/c presents the summary of revenue, expenditure and net income or loss of bank for a particular period of time, it serves as a measure of the banks profitability. 1.5.2 Financial Tools Financial statements must be made simple for any reader to analyze the profitability and liquidity position of a bank. This can be done by applying the financial tools such as comparative balance sheet and income statements, common size percentages, fund flow analysis, cash flow analysis, ratio analysis etc. However, only ratio analysis has been used for the present purpose of the study. Ratio Analysis Ratio analysis is the universally used technique of financial analysis, which was pioneered by Alexander Wall in 1919. It is the principal technique used in judging the condition portrayed by the financial statements. Ratio analysis is a systematic use for ratios to intercept the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current condition can be determined. A ratio is a yardstick that provides a measure of relationship between two accounting figures. It is defined as “The indicated quotient of two mathematical expressions and as the relationship between two or more things.”8 A ratio may also be defined as a fixed relationship in degree and number between two numbers. In finance ratios are used to point out relationships that are not obvious from the raw data. Ratio analysis is useful in making a rational decision not only for the enterprise itself but also for the outsiders, shareholders, investors, bankers depositors etc. It provides guides and clues especially in supporting trends towards better or poor performance and in finding important deviations from as average applicable standard. There are also several ratios that can be Employed but the type of ratio one would use depends on the purpose for which the analysis is made.

Various ratio that can be calculated form the accounting data includes. 7

Khan, M.Y. and Jain, P.K. Financial Management Text and Problems, Tata McGrow Hill Publication Company Ltd, New Delhi, 1992, P-166. 8 Pandey I.M. Financial Management, Bikash Publishing House Pvt. Ltd. New Delhi, 1988, P501.

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a. b. c. d. e. f.

Liquidity ratios Profitability ratio Structural ratio Turnover ratio Market Value ratio Other ratios

However, only liquidity and profitability ratios need to be calculated for our purpose. a.

Liquidity ratios Liquidity or solvency as it is often referred to be is the ability of bank to meet its current/short-term obligations when they become due for payment. Liquidity is the pre-requisite for the survival of a bank. The liquidity is measured with a help of liquid ratios. According to Khan and Jain, “Liquidity ratios measure the ability of a strength/solvency of the firm.”9 The lack of liquidity damages the credit standing of the bank and as a result the public lose trust in the bank. Higher liquidity means higher solvency, which shows sound short-term financial position of the bank. The ratio that indicate the liquidity position of the bank are:1. Current Ratio The current ratio measures the banks short-term solvency position. It is a ratio between current assets and current liabilities. It shows how many times the current assets is greater than current liabilities. Current assets consists of cash and bank balance, money at call and short notes, loans, cash, credit, overdrafts, bills purchased and discounted. The current liabilities include saving deposits, fixed deposits, current deposits, call and short deposit, bills payable, tax provision, staffs bonus, dividend payables, other deposits and short term loans including miscellaneous current liabilities. The current ratio is determined by dividing the current assets by the current liabilities. CurrentAssets Current ratio = CurrentLiabilities Note: In the absence of complete information about the classification of the fixed deposit according to their maturity, all the fixed deposits are taken as current liabilities. Higher the ratio, higher is the ability of the bank to pay its liabilities. The optimum current ratio should be 2:1.

9

Khan, M.Y. and Jain, P.K. Financial Management Text and Problems, Tata McGrow Hill Publication Company Ltd, New Delhi, 1992, P-81.

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2. Quick Ratio This ratio shows the relationship between quick or liquid assets and current liabilities. Quick Ratio =

LiquidAssets CurrentLiabilities

Liquid Assets = Total current assets – Inventory – Prepaid Expenses Higher quick ratio indicates, higher the firm’s capacity for paying its current liabilities.

b. Profitability Ratio Profitability ratios are concerned with measuring the operating efficiency of the bank. “Profitability ratio are designed to provide answer to basically to those questions: (i) Is the profit earned by the firm adequate? (ii) What rate of return does it represent? (iii) What is the rate of profit for various divisions and segments of the firms? (iv) What are the earnings per share? (v) What amount was paid on dividends? (vi) What is the rate of return to equity holders and so on?”10 Profit is the ultimate output of the bank and it will have no future if it fails to make sufficient profits. A profit is the difference between total revenue and total expenses over a period of time. The profit and obtained by successful administration management, credit management, operating management and risk management. Thus, a bank realize profit as long as interest-earning assets exceeds interest-bearing liabilities. The profitability of the bank is measured with a help of profitability ratio. Such profitability ratios include. 1. Return on assets (ROA) The ratio between net profit and total assets is known as return on assets. It shows the contribution of assets on profits. ROA =

NPAT TotalAssets

Higher return on total assets is reasonable. 2. Return on Share Holder’s Equity The ratio clarifies the relation between net profit and shareholders equity. 10

Khan, M.Y. and Jain, P.K. Financial Management Text and Problems, Tata McGrow Hill Publication Company Ltd, New Delhi, 1992, P-99

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NPAT ShareholderEquity Higher the ratio, better the use of capital. Return on Share Holder’s Equity =

3.

Return on capital Employed It informs the percentage of profit on capital employed Return on capital Employed =

NPAT CapitalEmployed

4.

Return on common equity After paying the interest on debenture and dividend on preference share, the remaining amount of profit is called return on common equity.

NPAT − Pr eferencedividend CommonShareholderEquity Higher the ratio, proper will be the utilization of investment

Return on common equity=

5.

Earning per share (EPS) The earning per share on EPS is determined by dividing the earnings available to the equity holders by number of equity holders or number of equity shares outstanding. EPS =

EarningAvailabletoEquityShareholders No.ofEquityShareouts tan ding

or EPS =

NPAT − Pr eferencedividend No.ofEquityshareouts tan ding

Earnings available to equity shareholders are the earning available after deducting the preference dividend. 6.

Dividend Per Share (DPS) DPS is determined by dividing the earning paid to the shareholder by the no. of equity share outstanding. DPS= 7.

Dividendpaidtoshareholders No.ofEquityshareouts tan ding

Dividend Payout Ratio (DPR)

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The DPR measures the relationship between earning of the firm belonging to the ordinary shareholders and dividend paid to them out of those earnings. It tells as to what proportion of the earnings per share has been paid as cash dividends and what proportion has been return to plough back for the banks expansion and growth. The DPR is calculated by dividing dividend per share by earnings per share. DPR =

Dividendpershare Earningpershare

8.

Dividend Yield The dividend yield evaluates the shareholder cash receipts in relation to the market price per share. It expresses the dividend per share as a percentage of the bank market price per share. The dividend yield is determined by dividing the cash dividends per share by the market price per share.

Dividend Yield =

Dividendpershare Marketpricepershare

Higher the growth potential, grater the retention of earning and hence forth, lower and dividend yield and vice-versa. 9.

Earning Yield The earning yield or earning price ratio may be defined as the ratio of earning per share to the market price per share. It indicates the shareholders return in relation to make market price per share. The earning yield is obtained by dividing earning per share by market price per share. Earning Yield=

Earningpershare Marketpricepershare

10.

Price Earning Ratio The price/earning ratio reflects the investors perception about the overall risk of the bank earnings and the growth in the bank earnings. It indicates the investors judgment about the bank performances. It also tells the price currently bargained by the market participant in common stock for each rupee of earning. The P/E ratio is determined by dividing market price per share by earning per share.

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Price Earning Ratio=

1.6

1.7

Marketpricepershare Earningpershare

Limitation of Study The study suffers from the following limitations 1. The study is confined to selected banks namely Kumary Bank and Nabil Bank Limited. 2. The study covers a period of only four years (F/Y 2061/062, 2062/063, 2063/064 and 2064/065). 3. The study is based on the historical data. So it only shows the liquidity and profitability position in the past but cannot forecast the future. 4. The data used in the study are of secondary nature, extracted from the financial statements of the banks. So all those limitation underlined in the financial statements are the limitation of the study too.

Research Methodology The basic objective of the study is to gain an insight into the liquidity and profitability position of selected commercial banks in Nepal. Hence, to accomplish this objective a good research methodology has to be followed. Research methodology basically describes the methods, processes tools and techniques applied in the entire process of a scientific research. The research methodology adopted in this study to accomplish the objective of liquidity and profitability analysis constitutes of : Sources of data, data collection technique and data analysis tools. 1.7.1 Sources of Data There are two sources from which data can be collected primary source and secondary source. The data that are originally collected by an investor for the first time for the purpose of statistical enquiry are knows as primary source data. Thus the data collected through the primary source is original in character while the data, which are not originally collected but obtained from published or unpublished source are secondary source of data. These types of data are not original in character. 1.7.2 Data Collection Technique In course of preparation of the research, the data though to be appropriate for the study was the secondary data which could be obtained from the annual reports of Nabil Bank and Kumari Bank. After the collection of data, the

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required data have been processed and recast in condensed forms. Therefore, they have been tabulated and presented, using the financial tools. 1.7.3 Data Analysis Tools The present study has used financial tools to access the liquidity and profitability position of the selected banks under study. The financial tools consist of ratio analysis under which liquidity and profitability ratios are calculated.

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CHAPTER-II 2. DATA PRESENTATION AND ANALYSIS This chapter presents the collected data from various sources and attempts to analyze and interpret the data in order to assess the liquidity and profitability position of the commercial banks in Nepal selected for the study in the F/Y 2061/062, 2062/063, 2063/064, and 2064/065.For this purpose, description analysis is carried out to make an inter-bank analysis of the liquidity and financial position of the banks under study using ratio analysis. Here, liquidity and profitability ratios are calculation.

2.1Presentation and Tabulation of Data Table No.1 NABIL BANK LIMITED SN. 1

Particulars Current Assets

2061/062 23984822900

2062/063 24369820110

2

Current Liability

19182390120

20118829660

3 4

Fixed Assets Total Assets

225180192 18119834900

240892618 22883902119

5

Total Debt

17182396182

20183669180

6 7 8

Shareholders Equity Net Profit No. of share outstanding Proposed Dividend

1546098120 450183176 2293183

1944097182 582196183 3183142

102118306

389001187 509417925 437373004 Source: Annual Report of NBL

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2063/064 2696649778 0 2468692536 0 286895224 2725339300 8 2468692536 0 2057049715 673959698 4916544

2064/065 36534720140 34018187140 598038998 37132759149 34018187140 2437198989 746468394 6892160

Table No.2

KUMARI BANK LIMITED SN. 1 2 3 4 5 6 7

Particulars Current Assets Current Liability Fixed Assets Total Assets Total Debt Shareholders Equity Net Profit

2061/062 7354897975 67924499589 82984150 7437882105 6792449589 645441536 87880557

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2062/063 8918343227 8146425627 91932957 9010276184 8146425627 863850557 103666767

2063/064 11728987680 10892681260 189323741 11918311429 10892681260 1025630159 170262909

2064/065 14801457520 13261713900 2220000872 15026599175 13261713900 1364885269 174930227


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No. of share 5000000 outstanding Proposed Dividend -

9

6250000

7500000

10700000

6578947 Sources: Annual Report of KBL

2.2 Analysis of Data: This part of the analysis deals with the inter- bank comparison of the banks performance using selected ratios pertaining to the liquidity 2nd profitability during the study period. 2.2.1 1.

Liquidity Ratio : Current Ratio This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are converted into cash in the near future. Current Ratio =

CurrentAssets CurrentLiabilities

Where, Current Assets = Cash and bank balance+ Money at call and advance + bills purchase = other assets + investment Table No. 3 Current Ratio of NBL and KBL For the F/Y 2061/062, 2062/063, 2063/064, and 2064/065 Bank NBL

KBL

2061/062 23984822900 19182390120

2062/063 24369820110 20118829660

2063/064 26966497780 24686925360

2064/065 36534720140 34018187140

= 1.25:1 7354897976 6792449589

=1.21:1 8918343227 8146425627

=1.09:1 11728987680 10892681260

=1.07:1 14801457520 13261713900

=1.08:1

=1.09:1

=1.08:1

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=1.12:1 Source: Table 1 & 2


The above table shows that the current ratio of KBL is higher than that of NBL in fourth year. NBL had current ratio of 1.25:1 in the F/Y 2061/062, 1.21:1 in the F/Y 2062/063, 1.09:1 in the F/Y 2063/064 and 1.07:1 in the F/Y 2064/065, while KBL had 1.08:1 in the F/Y 2061/062, 1.09:1 in the F/Y 2062/063, 1.08:1 in the F/Y 2063/064 and 1.12:1 in the F/Y year 2064/065. This proves that although the capacity of NBL to pay its liability is proved but current ratio has been decreased every year and that of KBL has decreased in F/Y 2063/064 but when compared with one another KBL has better capacity to pay its liabilities than that of NBL. 2.2.2

Profitability Ratio : I.

Return on Assets (ROA): The ratio of the net income to total assets provides an idea of overall earnings

of the firm. Return on Assets =

Bank NBL

KBL

Net Pr ofitAfterTax( NI ) TotalAssets

× 100

2061/062 450183176 18119834900

2062/063 582196185 22883902119

2063/064 673959698 27253395008

2064/065 746468394 37132759149

=2.48 % 87880557 7237882125

2.54% 103666767 9010276184

=2.47% 170262909 11918311429

=2.01% 174930227 15026599175

=1.18%

=1.15%

=1.43%

=1.16%

Table No. 4 ROA of NBL and KBL For the F/Y 2061/062, 2062/063, 2063/064 & 2064/065 Source: Table No. 1 & 2 The above table shows the percentage of profit earned on the assets employed by the business. The above table reflects that ROA of NBL was 2.48 % in the F/Y 2061/062, 2.54% in the F/Y 2062/063, 2.47% in the F/Y 2063/064 and 2.01% in the F/Y 2064/065. While that of KBL was 1.18% in the F/Y 2061/062, 1.15% in the

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F/Y 2062/063, 1.43% in the F/Y 2063/064 and 1.16% in the F/Y 2064/065. This shows that both the banks has decreased ROA in F/Y 2064/065 as compared to F/Y 2063/064.However, NBL has better ROA compared to KBL. This means NBL is able to utilize its resources more efficiently than that of KBL. II.

Return on Shareholder Equity (ROE) : The ratio of net profit to shareholder measures the ratio return on shareholders equity investment. Return on Shareholder equity =

Net Pr ofitAfterTax ×100 SharholdersEquity

Table No. 5 ROE of NBL and KBL For the F/Y 2061/062, 2063/063, 2063/064 and 2064/065 Bank NBL

KBL

2061/062 450183176 1546098120

2062/063 582196183 1944097182

2063/064 673959698 2057049715

2064/065 746468394 2437198989

=29.12% 87880557 645441536

=29.95% 103666767 863850557

=32.76% 170262909 1025630159

=30.63% 174930227 1364885269

=13.62%

=12%

=16.60% =12.82% Source: Table No.1 & 2

The ROE of NBL was 29.12% in the F/Y 2061/062, 29.95% in the F/Y 2062/063, 32.76% in the F/Y 2063/064 and 30.63% in the F/Y 2064/065. While that of KBL was 13.62% in the F/Y 2061/062, 12% in the F/Y 2062/063, 16.60% in the F/Y 2063/064 and 12.82% in the F/Y 2064/065.This shows that although the ROE of NBL has decreased in the F/Y 2064/065, and that of KBL has also decreased in the F/Y 2064/065, but the comparative analysis shows that ROE of NBL is higher than that of KBL in the Fourth year. This means NBL is able to utilize the owner funds in a better way than that of KBL.

18


III.

Earning per Share (EPS): Earning per share shows the amount of return earned on every outstanding share. Earning Per Share (EPS) =

Net Pr ofitAfterTax ( NI ) No.ofshareouts tan ding

Table No. 6 EPS of NBL and KBL For the F/Y 2061/062, 2062/063, 2063/064 and 2064/065 Bank NBL

KBL

2061/062 450183176 2293183

2062/063 582196183 3183142

2063/064 673959698 4916544

2064/065 746468394 6892160

=Rs. 196.31 87880557 5000000

=Rs. 182.89 103666767 6500000

=Rs. 137.08 170262909 7500000

=Rs. 108.31 174930227 10700000

=Rs. 17.58

=Rs. 15.95

=Rs.22.70 =Rs. 16.35 Source: Table 1 & 2

The EPS of NBL was Rs.196.31 in the F/Y 2061/062, Rs. 182.89 in the F/Y 2062/063, Rs. 137.08 in the F/Y 2063/064 and Rs. 108.31 in the F/Y 2064/065. The EPS of NBL is decreased every year comparing of past years and the EPS of KBL was Rs. 17.38 in the F/Y 2061/062Rs. 16.59 in the F/Y 2062/063 which is decrease in the F/Y 2061/062, Rs 22.70 in 2063/064 which increase in the F/Y 2062/063 and Rs 16.35 in 2064/065.Although the NBL have been able to provide more EPS than the previous year .But the EPS of NBL is decreased by it’s previous year EPS.However ,when compared with one another NBL has higher EPS than in fourth fiscal year. This reflects NBL has higher efficiency in it’s operation and has been able to provide higher earning to it’s shareholders than that of KBL.

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IV.

Dividend Per Share (DPS): The dividend per share shows the dividend carried by each year.

Dividend Per Share (DPS) =

Pr oposeDividend No.ofOuts tan dingShare

Table No:-7 DPS of NBL and KBL For the F/Y 2061/062,2062/063,2063/064 &2064/065 Banks 2061/062 BOK

KBL

102118306 293183 =Rs.348.31 =

_

2062/063

2063/064

389001187 3183142 =122.21 =

6578947 6250000 =Rs.1.05 =

509417925 4916544 =Rs.103.61 =

_

2064/065 437373004 6892160 = Rs.63.45 =

_

Sources: Table 1&2 The above table shows that NBL provides Rs.348.31 in the F/Y 2061/062, Rs.122.21 in the F/Y 2062/063, Rs.103.61 in the F/Y 2063/064 and Rs.63.45 in the F/Y 2064/065 as dividend to its equity shareholders .While KBL provides dividend Rs.1.05 only in the F/Y 2062/063 and fail to do in three years. This is because of KBL wants to expand its operation and want to invest it’s additional earnings in more productive sector that would produce more earnings in the future However, comparatively NBL will be more attractive to those investors who are interested in earning s dividend income. V.

Dividend Payout Ratio (DPR): Dividend pay out ratio shows the percentage of profit distribute to the shareholders as dividend Dividend Payout Ratio (DPR) =

Pr oposedividend ×100 Netincome

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Table No. 8 DPR of NBL For the F/Y 2061/062, 2062/063, 2063/064& 2064/065. Banks NBL

KBL

2061/062

2062/063

102118306 450183176 =22.68%

389001187 58196183 =66.82%

=

_

2063/064

2064/065

509417925 673959698 =75059%

437373004 746468394 =58.59%

=

=

=

6578947 103666767 =6.35%

_

_

=

Source :Table 1&2 It’s obvious from the above table that the dividend payout ratio of NBL has increase in the F/Y 2062/063 (66.82 %) compared to the F/Y 2061/062 (22.68%). The dividend payout of NBL increase in the F/Y 2063/064(75.59%) compared to the F/Y 2062/063 (66.82%) but DPR of NBL has decrease in the F/Y 2064/065 (58.59%) compared to the F/Y 2063/064. This shows the negative growth trend for NBL on the other hand DPR of KBL is 6.35% in the F/Y2062/063 and other year could not be calculated because it has not provided any dividend to its shareholders. 2.3 Graphical Presentation of Data

Net Profit in Rs

Diagram-1 Net Profit for Four Years 800000000 700000000 600000000 500000000 400000000 300000000 200000000 100000000 0

NBL KBL

2061/062 2062/063 2063/064 2064/065 Fiscal Year

21


Diagram-2 Return on Assets 3.00% Figure in %

2.50% 2.00% 1.50%

NBL

1.00%

KBL

0.50% 0.00% 2061/062

2062/063

2063/064

2064/065

Fiscal Years

Diagram-3 Return on Shareholders Equity

35

Figure in %

30 25 20 15

East

10

West

5 0

2061/062 2062/063 2063/064 2064/065 Fiscal Years

Diagram-4 Earning Per Share

22

Figure in rupees


200 180 160 140 120 100 80 60 40 20 0

NBL KBL

2061/062 2062/063 2063/064 2064/065 Fiscal Years

Diagram-5 Dividend per Share

350 Figure in rupees

300 250 200 150

NBL KBL

100 50 0 2061/062 2062/063 2063/064 2064/065 Fiscal Years

Diagram-6 Dividend Payout Ratio

23

Figure in %


80 70 60 50 40 30 20 10 0

NBL KBL

2061/062

2062/063

2063/064

2064/065

Fiscal Years

2.4 Study Result He following are the results obtained from the comparative study on liquidity and profitability position of NBL &KBL. 1) The historical background of NBL shows that right from its establishment is 1984 A.D.NBL has been able to mobilize domestic savings and channeling them to productive area. Similarly, NBL was established in 1984 A.D. and it has been providing competitive and modern banking services in Nepal. 2) The comparative study of financial performance shows that NBL is comparative ahead of KBL in its operation efficiency. However both the banks are getting more efficient each year. 3) The financial stability analysis shows NBL as more stable bank compared to KBL and has been showing higher level of consisting. 4) Necessary suggestion and recommendation based on the analysis and conclusion is shown in the next chapter. 5) The comparative analysis of liquidity position shows KBL has better capacity to pay its liability than NBL. However, NBL is head of KBL in profitability position and maintains a higher level of efficiency.

CHAPTER-III 24


SUMMARY, CONCLUSION AND RECOMMENDATION 3.1 Summary The report is a comparative study of liquidity and profitability position of Nabil Bank Limited and Kumari Bank Limited. The study is divided into 3 chapters.The first chapter deals with background, history of bank, purpose of the study, focus of the study, literature survey, and limitation of the study band research methodology. Similarly in the second chapter necessary dates are presented and various ratios are calculated. Various ratios that are calculated are current ratio, under liquidity ratio and return on assets. Return on shareholders equity, earning per share, dividend per share and dividend payout ratio under profitability ratios comparative graphical presentation in made for Net Profit, return on assets, return on shareholders equity and earning per share. Graphical presentation could not be shown for dividend per share and dividend payout ratio because they were nil for KBL. Finally, the third chapter deals with the summary, conclusion and recommendation. The study results have been summarized and various conclusions are out lined and then recommendation has been given to improve the liquidity and profitability position of NBL and KBL. 3.2 Conclusions Banks are the most important financial institutions that help in the commercial and economic development of a country. The sustainable commercial and economic development of a country demands a proper banking system. A smooth functioning of the banking system demands a sound liquidity and profitability position which can be judged by proper analysis of the financial statements. Thus, in order to tests the bank’s ability, Financial analysis has been an important task from the view point of all stake holders. Financial analysis helps in identifying the financial strengths and

25


weaknesses of a bank during a certain period of time, based on the published financial statements. Financial analysis provides an in depth and true understanding of the problems and the solutions there off. The present study is, concerned with the inter-bank analysis of the liquidity and profitability position of NBL and KBL. The major conclusions derived from the study are as follows: 1)

KBL is a better performer than NBL in terms of current ratio i.e. KBL has

more capacity to pay its liability than NBL. 2)

NBL has higher ROE than that of KBL which means NBL is able to

utilize the owners fund in a better way than KBL. 3)

The EPS of both the banks has decrease this year compared to the

preceding fiscal year. But comparatively NBL has higher EPS in both the years than that of KBL which means NBL has higher operating efficiency than KBL. 4)

The ROA of both the banks has decrease this year. However NBL has

better ROA compared to KBL and is able to utilize its resources more efficiently than KBL. 5)

NBL is more attractive to those investors who are interested in dividend

income than KBL because NBL Provided dividends to its shareholders in both the years and KBL did not provided any dividends to its shareholders. In conclusion, NBL appears a better performer than KBL. It has shown some significant results right from its establishment and is able to maintain a higher level of consistency. KBL, although comparatively behind has significant results in its short life time and the efforts made by the bank, to make its operation more efficient is praise worthy. Both the banks have a good liquidity and profitability position and have proved themselves as one of a pioneer bank of Nepal.

3.3 Recommendation

26


The following are some of the recommendation which could be considered for the improvement of liquidity and profitability position of NBL and KBL. a)

The inter- bank analysis of current ratio shows NBL as a poor performer

than KBL. Hence, the management of the bank should concentrate on its liquidity position. The liquidity position could be improved by diverting investment fund from long term investment fund to risk free securities and other short term investments. It should also maintain a higher cash reserve. b)

The inter- bank analysis of profitability ratios has shown the KBL has

lower overall profitability. Although it has been producing a good amount of net income, the profitability of the bank is low. Therefore, the reasons behind and low profitability should be examined by the management of the bank and the problems should be rectified. The ROA, ROE and EPS should be increased and appropriate amount of dividend should be provided to the shareholders in order to attract those investors who are interested to earn higher dividend incomes.

27

Financial Analysis Of Everest bank

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