CHAPTER-1

INTRODUCTION

1.1 General Background

As survival, development and prosperity of any organization depend on number of
factors. Every organization should give prime concern to those factors. However one
of the major determinants for effective running of a business entity is its financial
operation system. Optimum utilization of the organizations financial resource, leads
the organization to the ultimate target fulfillment so it is very important to analyze the
accounting and financial statements to know whether the financial position is sound
and what kind of measures should be applied.

In recent years due to liberal economic policy of the Government many private banks
are coming into operation. The foreign joint venture banks are enjoying competitive
advantageous factors like highly skilled personnel, modern and advanced banking
technology, customer oriented modern banking services, management expertise and
global banking network.

Bank in general means an institution that deals with money. Concept of banking had
developed from the ancient history; with the effort of ancient Goldsmith who
practiced storing peoples gold and valuables. Bank was originated from French
word Banque. In the developing countries like Nepal, Banks play vital role for
domestic resource mobilization and economic development of a country. The first
commercial bank was Bank of England (1694), central bank of Britain. The first
commercial bank in Nepal is Nepal Bank Limited, which was, established in 1937
A.D. Commercial banks are the suppliers of finance for trade and industry and play a
vital role in the economic and financial life of the country. By investing the saving in
the productive areas they help in the capital formation.

According to Gillian and Soal,A sound banking system is important because of the
key roles it plays in the economy: intermediation, maturity, transformation,
facilitating payment flows, credit allocation, and maintaining financial discipline
among borrowers. Banks provide important positive externalities as gathering of
1
saving, allocation of resources and providers of liquidity and payment service.
Commercial Banks play the vital role in economic development of any nation. Capital
is the most important factor and foundation for not only the economic development
but also for the overall growth and prosperity of the nation.

Functions of Commercial Banks

Commercial banks perform different functions however some common functions listed
below.

Extension of Credit

The primary function of commercial bank is the extension of credit of worthy

borrowers. Bank lending contributes alot to the economy in terms of financial,
agricultural, commercial, social services, and industrial.

2. Creating Money

One of the major functions of commercial banks that differentiate them from other
institutions is their ability to create money through lending and investing activities.
The power of commercial banking system to create money is of great economic
significance as it helps to create and elastic credit system that is necessary for
economic progress. It creates money through payment mechanism i.e. through
cheque, credit cards and debit cards. It also use pooling and saving tool to create
money.

3. Facilitating Foreign Trade

The commercial bank efficiently arranges the amount of foreign exchange required
by business organizations. Moreover, the issue of letter of credit has facilitated
foreign trade transactions.

4. Safe keeping of valuables

Safekeeping of valuables is one of the oldest services rendered by commercial banks.

They provide locker facilities to keep valuables and they are accepted by commercial
banks.

Nepal Bank Limited: A Glance

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Nepal Bank Limited (NBL), a pioneer commercial bank is the oldest bank in the
history of modern banking system of Nepal. It was established on 30 Kartik 1994BS
(1937AD) in the technical assistance of Imperial Bank of India under "Nepal Bank
Act1993.

This marked the beginning of an era of formal banking in Nepal. Until then all
monetary transactions were carried out by private dealers and trading center. In that
era, very few understood or had confidence in the new concept of formal banking.
Raising equity shares were not easy and mobilization of deposits even more difficult.
This was evident when the bank floated equity shares worth NRs.25,00,000 but was
successfully only raise Rs.8,42,000 in 1994, has grown to Rs.38.04 crore as at 2060
Kartik. The total deposits for the first year was NRs.17,02,025 where current deposits
was about NRs.12,98,898 ; fixed was about NRs.3,88,964 and saving was
NRs.14,163. Loan disbursed and outstanding at the end of the first year was
1,985,000. From the very conception and its creation, Nepal Bank Limited was a joint
venture between the government and the private sectors. Out of 2500 equity shares of
NRs.100 face value 62.21% is owned by government and 37.79% by Public. It has
expanded its branches throughout the Kingdom including far remote areas having
very poor profitability and some of the parts having income not sufficient to meet
breakeven. The bank has given more priority to the service of common and poor class
people rather than to the profit and it has been able to achieve some objectives, which
were set at the time of its inception.
Accordingly, Nepal bank Limited was established to provide the services: to accept
deposits, to extend credit facilities for the promotion of trade, cottage industries and
agriculture, to render customer-related services, i.e. issue of bill of exchange, hundis
etc. to invest on government bond and securities, to carryout agency functions and to
act banker to the government.

OWNERSHIP STRUCTURE
The ownership structure of NBL has presented by the percentage of shares held by
respective shareholders.

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 Table 1.1

Ownership Percent
Government of Nepal 62.21
General Public
37.79

Fig:1.1
Diagrammatic Representation of Ownership Structure

General Public; 38%

Government of Nepal; 62%

NBL focuses on building the positive net worth and meeting minimum capital
requirement over the coming five years. It also focus on providing world class
business solutions and focus on increasing the sustainable profit.

NABIL BANK LIMITED: A Glance

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Nabil Bank Limited was the first foreign joint venture bank of Nepal which started
its operation from 12th July, 1984 under a technical service agreement with Dubai
Bank Limited, Dubai. The bank is managed by a team of qualified and highly
experienced professionals. It represents a milestone in the banking history of Nepal as
it started an era of modern banking with customer satisfaction measured as a focal
objective while doing business. Pursuing its objective, Nabil provides a full range of
commercial banking services through its 51 points of representation across the nation
and over 170 reputed correspondent banks across the globe.

OWNERSHIP STRUCTURE
The ownership structure of Nabil Bank has presented by the percentage of shares held
by respective shareholders.

Table 1.2 OWNERSHIP STRUCTURE

Name of share subscriber Percent holding

NB International Ltd. ( Ireland) 50.00%

Nepal Industrial Development Corp. (NIDC), Nepal 6.15%
Other Institution Investors 10.00%
Other Promoters Group 3.85%
Public Shareholders 30.00%

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 Figure 1.2 Diagrammatic Representation Of Ownership Structure

NB International Ltd.
30% ( Ireland)
Nepal Industrial
Development Corp.
50% (NIDC), Nepal
Other Institution Investors
4%
Other Promoters Group
10%
Public Shareholders
6%

The initial capital of Rs30million, Invested in 1984, has grown to Rs 1,314 million as
at mid-July 2003. During this period, the Bank has paid cash dividends totaling Rs
1,2768 million. Nabil Banks Capital Adequacy Ratio stood at 13.06% as at mid-July
2003 against the statutory minimum requirement of 10%. The Bank provides a
complete range of personal, commercial and corporate banking and related financial
services through its 15 branches and 2 counters- the largest number of branches
among any joint venture bank in Nepal. It also was the first to introduce consortium
finance in Nepal and has had the privilege of rendering comprehensive banking
services (including trade finance) to leading Government institutions. The Bank is a
major player in facilitating import export activities with modern and efficient Trade
Finance and International Trade support services, to large multinationals as well as
established business conglomerates in the private sector.

Nabil is the sole banker to a multitude of International Aid Agencies, non-government

6
Organization and embassies and Consulates in the Kingdom. For customers with
knowledge and access to their accounts using Nabil Net (Nabils Internet
Banking System). All the branches of Nabil Bank are connected through V-SAT &
radio links. It introduced Master card to the Nepalese market, in Nepalese Rupees and
Us Dollars and now also issues Visa Card. A growing network ATM Facilities are
available to account holders. Debit cards with PIN numbers are issued to enable
customers to available 24hour ATM facility. Nabil has 190 correspondent banking
relationships and has drawing arrangements with Banks in 47 countries. Nabil is the
sole principal Agent Bank in Nepal of Western Union Financial Services and
facilitates transfer of funds, through a non-line computer system, instantly to or from
more than 170,000 locations in 196 countries and territories. The bank was awarded
the title "Bank of The Year 2004".

The increasing competition & global challenges indicate that 21st century will be full
of challenges in every field. To counter these challenges every bank should have a
clear, rigid & specific mission to achieve. Nabil bank has the mission To be the Bank
of 1st Choice.

1.2 Statement of Problem

The current situation has brought a cut throat competition in banking business.
Especially the joint venture private banks are concentrating their business in more
profitable area. In this context the NBL is in critical situation because it has to give
service to the remote people where financial benefits are low at the same time they
have weaknesses also in their management and operational activities.

In Nepal, the profitability rate, operating expenses and dividend distribution rate
among the shareholders has been found different in the financial performance of the
two joint venture banks in different period of time. The problem of the study will
ultimately find out the reasons about difference in financial performance. A
comparative analysis of financial performance of the banks would be highly
beneficial for pointing out their strength and weakness. Although joint venture banks
are considered efficient, but how far are they efficient? This question does emerge in
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banking sector. At present we have twenty-six commercial banks. In spite of rapid
growth, some indicators show performance is not much encouraging towards the
service coverage. In such situation the study tries to analyze the present performance
of banks, which would give the answers of following queries:

i. Is return provided by NBL bearing risk level satisfied?

ii. Can NBL and Nabil meet its short-term obligation?

iii. What are the problems and prospect associated to NBL and Nabil?

iv. What are the competitive liquidity, profitability, leverage and activities ratio
of the two banks?

v. Are the trends of different ratios of these banks satisfactory?

1.3 Objective of the study

The main objective of the bank is to collect deposits as much as possible from the
customer and to mobilize into the most profitable and preferable sector. The present
study is basically carried out in order to look into the comparative weaknesses and
inefficiencies of NBL and Nabil Bank with the help of the comparative analysis of
their financial statements. In Nepal many banks and financial companies have opened
up within a span of few years. Although joint venture banks have managed to perform
better than other local commercial banks within the short period of time, they have
been facing a neck competition against one another. Therefore, it is necessary to
analyze the profitability position of NBL and Nabil.

Thus the basic objective of this study is to analyze the financial performance of the
two banks by conducting a comparative study between NBL and NABIL through the
use of different ratios. The specific objectives of this study are as follows:-
i. To analyze the risk and return of NBL in comparison to Nabil.
ii. To evaluate financial ratios to calculate efficiencies, valuation, profitability,
Capital structure ratios.
iii. To analyze the liquidity position of the selected banks.

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1.4 Significance of the study
This research study provides brief information about the comparative financial
performance between NBL and Nabil Bank Ltd. This comparative financial
performance analysis gives insight into the relative financial condition and
performance of these banks. This will provide guideline for improving its
performance to achieve the banks overall objectives and also to identify its hidden
weakness regarding financial administration. It also compels the management of
respective banks for self-assessment of what they have done in the past and guides
them in their future plan and programs.
Similarly, the study has also been carried out to fulfillment of the partial requirement
for the degree of Bachelor in Business Studies (BBS) to achieve the practical
knowledge of work, research skill and decision making skill for forth coming
professional life and this fieldwork may be useful for the library purpose so that any
student wanting to prepare a report can have some idea about it.

It can be summarized as:

i. Further researcher

ii. University students

iii. Financial congers and analysis

iv. All other interested individuals and parties

v. Library purpose

vi. Researcher (myself)

1.5 Limitation of the study

Fieldwork is a never ending process, in true sense, research is any field of knowledge
make the ground for more researchers and this process goes on and on. At the present
cutting throat commercialization is growing at the unexpected manner. And it is very
hazardous and challenging job to anticipate all aspect of the concerned factor due to
the certain financial, economical, logical and time bound constraints. So, because of
these constraints of time and resources, the study is likely to suffer from certain
limitations. Some of these are mentioned here under so that the findings of the study
9
may be understood in a proper perspective.
The limitations are:
i. This study is based on the secondary data collected from the website, annual
reports, magazines, related journals and previously conducted studies. So, it
is liable to have some limitations owing to inherent within financial sector of
NBL and Nabil Bank Ltd.
ii. The fieldwork report is only limited within the financial performance of the
two banks. It is not possible to study all activities of all departments in depth
iii. Large number of sample is not taken because of time and cost constraints.
iv. This study is based on a period of 5 years. So, study result obtained from it
may be partially or totally different from the one obtained by others taking
other 5 years of base period.
v. Due to the shortage of the time volume and budget, new method may not be
developed.
vi. Because of the banks secrecy they dont provide adequate information. Due
to availability of limited information this study will not cover part of the
performance aspects. And
vii. Time limitation i.e. the study is carried out in one month period.

1.6 Organization of the study

This study has been organized into five different chapters.

Chapter-1: Introduction

The first chapter of this study includes general background, statement of problems,
objectives of the study, significance of the study and limitation of the study.

Chapter-2: Literature Review

This chapter reviews the existing literature on the concept of financial performance
analysis. It also includes a discussion of the conceptual framework, review of previous
related studies and research gap.

Chapter-3: Research Methodology

This chapter describes the research methodology employed in the study. It consists of
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research design, types of data, Sources of data, population and sample, statistical and
financial tools used to analyze the data.

Chapter-4: Results and Findings

In this chapter collected and processed data are presented, and analyzed and interpreted
with using financial tools as well as present the findings of the research work.
Chapter-5: Discussion and Conclusion
In this chapter, discussion of whole study, conclusions and recommendation are
made.
At the end of the study, Bibliography and Appendices have also been incorporated.

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 CHAPTER-2

LITERATURE REVIEW

This chapter highlights and deals with the review of previous studies and the
conceptual framework on the topic. Review of literature is an essential part of all
studies. It provides the through understanding related to the present study by the
insight of previous research works and besides it avoids investigating problems that
have already been answered. In other word, it is the analysis of previous studies for
knowing the research in detail. The purpose of the literature review is to develop
some expertise in ones area, to see what new contribution can be made and to
review some idea for developing research design. This portion has been divided into
three parts:

i. Conceptual Review

ii. Review of previous work

iii. Research Gap

2.1 Conceptual Review of financial Analysis

According to M.Pandey,Financial analysis is the process of identifying the financial

strengths and weaknesses of the firm by properly establishing relationship between
the items of the balance sheet and the profit and loss account. Management of the
firm can undertake it or by parties outside the firm. The focus of the financial
analysis is on the key figure contained in the financial statement and significant
relationship existed. Management of the firm is generally interested in every aspect of
the financial analysis; they are responsible for the overall efficient and effective
utilization of the available resources and financial position of the firm.

The vertical and horizontal analysis could be done for the financial analysis. The
vertical analysis consists of financial Balance sheet, profit and loss Account of a
certain period time only, which is known as static analysis. Likewise, the horizontal
analysis consists of a series of statement relating to the number of years are reviewed
12
and analyzed. It is also known as dynamic analysis that measures the change of the
position or trend of the business over the number of years. In this study, the horizontal
analysis has been adopted to find out the financial indicator of the NBL and NABIL
over the period of FY 2013/2014 to 2016/2017.The steps of analysis are as follows.
1. Selection of the information relevant to the decision.

2. Arrangement or the selected information to highlight the significant

relationship of the financial yardsticks.
3. Interpretation and drawing of inferences and conclusions.
To evaluate the financial performance of a firm, the analyst needs a certain parameters
of the company by which the quantitative relationship and its position come out. The
most widely and effective used tool of the financial analysis is the ratio analysis. The
financial ratio is the measurement of relationship between two accounting figures,
expressed in mathematical way or the numerical relationship between two variables
expressed as:
i. percentage or,
ii. fraction or
iii. in proportion of numbers.

Ratio Analysis

Ratio analysis is the systematic use of financial information of the firms strength
and weakness as its historical performance, and current financial condition can be
determined.

After calculating various ratios, we need to compare with the certain standard and
draw out the conclusion of the result. The comparison classified by Weston and
Brigham into six types i.e.:

(i)Liquidity ratios (ii) Leverage ratios, (iii) Activity ratios (iv)profitability ratios
(v)Growth ratios and (vi)Valuation ratios .
In this study the following ratios are analyzed.

1. Profitability Ratio

2. Liquidity Ratio
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 3. Efficiency Ratio

4. Capital structure Ratio

5. Investment ratio

The details of the ratios will be discussed in detail in the next chapter.

2.2 Review of Previous work

Review of Previous work helps to identify issues on which researches were conducted
in the past. By providing information in these researches, it helps the researcher to
identify the issues that have remained untouched. In doing so, it prevents the
duplication in research work. Prior to the study, various report works have done in
different aspects of commercial banks such as lending policy, interest rate structure,
investment policy, resource mobilization, and capital structure etc. as well as several
researcher has found various studies regarding financial performance of commercial
banks. In this study only relevant subject matters are reviewed which are as follows:

Mr. Gurungs study on A Comparative financial study of NGBL and NIBL. In this
study, he has analyzed financial position of the banks measuring various ratios to
elaborate the financial performance. The liquidity, profitability and dividend payout
ratio of two banks are on favorable position. But NIBL seems to be slightly better
position in terms of liquidity, profitability and capital structure compared to the
NGBL. In this evidence he has concluded that the NIBL promises a better future than
NGBL.

A research work conducted by Sumnima Lama. entitled, A Comparative study of

Financial Performance of HBL, NSBIBL and NBBL concludes that the liquidity
position of two banks i.e. NSBIBL and NBBL are always above the normal standard
and HBL is always below the than normal standard. Total debt with respect to
shareholders fund and total assets are slightly higher for HBL than NSBIBL and
NBBL. The researcher has from the analysis that NBBL has been successfully
utilized their total deposits in terms of extending loan and advances for profit
generating purpose on compared to NSBIBL and HBL. But NSBIBL is also better

14
than HBL. It has concluded that net profit to total assets ratio in case of HBL is found
better performance by utilizing overall resources but the generated profit is found
lower for the overall resources in three banks.

Pradip Shrestha conducted a study on Comparative study on Financial Performance

of Nepal SBI bank and Nepal Bangladesh Bank. In the study he highlights various
aspects of relating to financial performance of Nepal SBI and Nepal Bangladesh Bank
through the use of appropriate financial tools. He suggested NBBL to increase its
current assets because the bank is not maintaining adequate liquidity position in
comparison with NSBI. As a capital structure of both the bank are recommended to
maintain and improve mix debt and owners equity by increasing equity shares. Going
through the net profit to total deposit ratio, it can be said that NBBL seems to be more
successful in mobilizing its customers saving in much more productive sectors,
NBBL has slightly riskier debt financing position in comparison to NSBI Bank.

The review of the above mentioned bunch of research writes have definitely enriched
my vision to elaborate analysis, to come to the meaningful conclusion in realistic in
term and thereby come with few suggestions that help in improvement of commercial
banks

2.3 Research Gap

Research Gap refers to the areas of contradiction in a particular sector. The present
study tries to focus on financial performance of NBL and NABIL Bank Limited, it is
clear from the above review that there was no research work on comparative study of
these banks. This is the comparative study of commercial banks which were not
cleared in previous studies.

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 Chapter-3

RESEARCH METHODOLOGY

Research methodology refers to the various sequential steps to be adopted by a

researcher in studying a problem with certain objectives in view. It is a way to
systematic solve the research problem, it may be understood as a science of studying
how search is done scientifically. This study aims at evaluating the financial
performance of the selected banks in a micro level and to highlight the efforts of the
financial decisions of these banks in the economy at the macro level forms. It
includes the various steps that are generally adopted by a researcher in the research
problem along with the logic behind them. This chapter explains the methodology
used for this research in the following order:

3.1 Types of Research

Keeping in mind the objective of the study, descriptive and analytical research design
has been followed. The study is based on the wide range of variables and factors
influencing financial decisions of the banks. Comparative data banks are presented in
such away so as to make the report informative to the reader. Financial tools (Ratios)
have been used to analyze and interpret the balance sheet, income statement and
other accounting information.

3.2 Population and Sampling

Among 31 commercial banks, Nepal Bank Limited and NABIL Bank Limited have
been selected for the present study. Financial statements of latest 5year have been
taken as sample for the comparative analysis of financial performance. The
recommendation and suggestions, which are derived from the study by taking the
above commercial banks as samples will be equally useful for the other commercial

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banks in Nepal.

3.3 Types of Data

3.4 Data Collection Process

The research is based on primary as well as secondary data. Primary data collected
are personally collected through direct observation and interviews which have
conducted with the concerned staffs and customer of the concerned banks.
The secondary data are collected from annual reports of banks, broachers, balance
sheet and from the web-sites. All the secondary data are complied, processed and
tabulated in the time series as per the need and objectives of the study.

3.5 Techniques of Analysis

The term data analysis refers to the computation of certain measures along with
searching for patterns of relationship that exist among data group, thus in the process
of analysis, relationship of different supporting or conflicting with original or new
hypothesis and should be subjected to statistical test of significant to determine with
what validity can be said to indicate any conclusion.
Analysis may be categorized as descriptive analysis and inferential analysis. To
achieve the predetermined objective of the research, certain tools are used:

3.5.1 Financial Tools

Financial tools are those, which are used for the analysis and interpretation of
financial data. The considerable assistance of Financial Ratios and Income and
Expenditure analysis has been taken to measure the strength and weaknesses of the
NBL and NABIL.

Ratio Analysis
Ratio analysis is one of the most commonly used techniques in the analysis of the
17
financial statement and evaluation of the managerial performance. Ratio analysis
points out the problems in any operational areas and provides a basis to recommend
corrective actions. Ratio analysis satisfies the interests of creditors, government
institutions and other to form their opinion or enable them to have guide line towards
effective decision- making.

There is variety in ratio calculation. Data contained in financial statement as the

requirement of the types of ratios are as follows:

Liquidity Ratio

Activity or Turnover ratio

Leverage or Capital Structure Ratio

Profitability Ratio

Valuation ratio

Liquidity Ratio

Liquidity Ratio reflects the short-term obligation of the firm. This ratio shows that
if firm need cash amount in short period without any notice, can firm fulfill its
need or how it manage the need.
Commercial banks need liquidity to meet loan demand and deposit withdrawals.
Liquidity is also needed for the purpose of meeting Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR) requirements prescribed by the central Bank. The
following ratios are calculated under the liquidity ratios.

a) Current Ratio

It is the ratio of total current assets to current liability. Lower current ratio creates
difficulties in meeting short run commitments as they mature. If the ratio is too high,
the bank has an excessive investment in current assets or is under utilizing short- term
18
credit.It can be computed by using formula method:

Current Ratio= Current Asset

Current Liabilities

b) Cash and Bank Balance to Total Deposit Ratio

The proportion of the bank's idle money with total funds collected is indicated by this
ratio. High ratio means high idle money, which shows the inefficiency of management,
as well as increased cost of capital.
It can be expressed as:
Cash and bank balance
Cash and Bank Balance to Total Deposit Ratio =
Total Deposit

c) Cash and bank balance to Non-interest Bearing Deposit Ratio: -

This ratio indicates the proportion of liquid assets to meet non-interest bearing
liabilities, which are free cost of source of NBL and RBB. This ratio is calculated
as:
Cash & bank balance to Non-interest Bearing Deposit Ratio= Cash & bank balance
Non-interest being deposit

d) Cash and bank balance to interest Bearing Deposit Ratio: -

Cash & bank balance to interest Bearing Deposit Ratio = Cash & bank balance
Non-interest being deposit
Interest bearing fixed deposit is excluded being long-term liabilities. It is appropriate
to use current assets to meet long term high interest bearing liabilities i.e. fixed
deposit.

Activity or Turnover Ratio

Activity ratio is a function of the efficiency with which the various assets components
are measured. It measures the degree of effectiveness in use of resources or funds by

19
an enterprise.
a) Loan and Advances to Total Deposit ratio:

Loan and advances are the major resources of investment to generate income in the
commercial banks. Deposits are used to grant loans and advances. Therefore, the
bank should manage its deposits efficiently. This ratio is calculated to determine the
utilization of deposits for profit generating purpose on the loans and advances. This
ratio is calculated as;
Loan and Advances to Total Deposit ratio= Loan and Advances
Total Deposit
b) Total Investment to Total Deposit Ratio
Investment is one of the major forms of credit created to earn return. It measures the
utilization of deposits in investment. Higher the ratio, better the utilization of collected
fund and generates regular income to the banks. This ratio is calculated as:
Total Investment to Total Deposit Ratio= Total Investment
Total Deposit

Leverage / Capital Structure Ratio

Leverage ratio shows the proportion of debt capital and equity capital. It shows the
long-term solvency of the firm. It judges the long-term financial position of the
firm. Hence the leverage ratios are calculated to measure the financial risk and the
firms ability if using debt for the benefit of shareholders. Following ratios are
calculated here:
a) Long term Debt to Net Worth (Shareholders equity) Ratio
It measures the proportion of long-term debt and equity used in the
capitalization of the banks. It is calculated as:
Long term Debt to Net worth Ratio= Long term Debt
Net Worth

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 b) Total Debt to Total Assets Ratio:
This ratio expresses the relationship between creditors fund and owners
capital. This ratio measures the share of the total assets financed by
outsider fund. This ratio is calculated as:

Total Debt to Total Assets Ratio= Total Debt

Total Assets

c) Capital Adequacy Ratio:

To operate the firm effectively and efficiently in the modern competitive

environment adequate capital is required. This ratio is one of the most
significant ratio used specially to assess the banks strength of the capital
structure of the adequacy of the capital. So capital adequacy is determined
as:

Capital Adequacy Ratio= Total Debt

Total Assets

d) Total Debt to Net Worth Ratio:

This ratio measures the proportion of interest bearing debt and owners fund. This
relationship describing the lenders contribution for each rupee of owners contribution
is called debt equity ratios .It is calculated as:

Total Debt to Net Worth Ratio= Total Debt

Net Worth

Profitability Ratio

This ratio measures the capacity of generating revenue and search for the
incomes of the firm. The operating efficiency of the bank and its ability to
ensure adequate return to its shareholders depends ultimately on the profit
earned by the bank. To measure the efficiency of the banks following
21
major profitability ratios are calculated.

a) Return on Investment Ratio (ROI)

This is an appropriate base for the assessing the effectiveness of the

operating management. Return on investment is also called return on asset. It
seeks to measure the effectiveness with which the firm has employed it total
resources.
b) Commission and Discount Income to Personnel Expenses Ratio

This ratio measures the efficiency of the staff or cost paid for taking services from
staff to earning come by providing services to the customers.
c) Interest Income to Interest Expenses Ratio

This ratio measures the effective use of deposit to earn revenue in proportion of the
expense accrued on collected deposits. Bank has to pay interest on interest bearing
deposits and receive interest through its investment on loans, advances and others.

d) Return on Common Equity Ratio( ROCE)

This ratio is also called Investors Ratio'. It measures the effectiveness of the
management with respect to both its operating and financial decision.

Valuation Ratios

These ratios result the overall performance of the bank measuring the combined effect
of risk and return. The valuation ratios indicate the market value of the firm as
compared to the book value and measure the stock price relative to earnings.The
following ratios are calculated.

a) Price Earning Ratio (P/E Ratio)

Price earning Ratio is widely used by the security analyst to value the firms
performance as expected by investors. It shows how much investors are willing to
pay per dollar of reported profits. This ratio is calculated as:
Earning per share is calculated by dividing profit after tax by total number of common
shares outstanding.

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 b) Dividend Payout Ratio (DPR)

The Ratio measures the relationship between earnings belonging to the ordinary
shareholders and dividend paid to them. It can be calculated as:

Dividend per share is calculated by dividing the earning paid to shareholder by

number of common shares outstanding.

c) Market Value Per Share to Book Value Per Share Ratio

The ratio measures the price; the outsiders are paying for each rupee reported by the
balance sheet of the banks. It can be calculated as:

The book value per share is net worth divided by the number of shares outstanding.

After reviewing the relevant Literatures and highlighting the Research Methodology
now the Analysis part of the research is gong to be undertaken.

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