A STUDY ON RATIO ANALYSIS OF NABIL BANK LIMITED

A Project Proposal

By

SUSHMITA BASKOTA

T.U Registration No: 7-2-830-33-2020

Providence College of Management, Birtamode.

Submitted to

Management Research Committee The Faculty of Management Tribhuvan University

In Partial Fulfillment of the Requirements for the Degree of BACHELOR OF BUSINESS

STUDIES (BBS)

Birtamode, Nepal Baisakh, 2080

TABLE OF CONTENTS ii
Title Page.................................................................................................................i

Table of Contents....................................................................................................ii

Abbreviations..........................................................................................................iii

Background of the Study.........................................................................................4

Profile of Nabil Bank Limited.................................................................................4

Objectives of the Study............................................................................................5

Rationale of the Study..............................................................................................5

Review of Literature................................................................................................6

Research Methodology............................................................................................7

Limitations of the Study..........................................................................................9

Chapter Plan............................................................................................................10

References..............................................................................................................12

ABBREVIATIONS iii

CAR - Capital Adequacy Ratio

 CRAR - Capital to Risk (Weighted) Assets Ratio

CIT - Citizen Investment Trust KAFL - Kamana Finance Limited

NAFCL - Nepal Finance Companies Limited NIM - Net Interest Margin

NPM - Net Profit Margin NRB - Nepal Rastra Bank

ROA - Return on Assets ROE - Return on Equity

TU - Tribhuvan University

UFCML - Upakar Finance Companies Limited

1. BACKGROUND OF THE STUDY 4

Ratio analysis is a crucial technique in financial management that allows for quantitative
assessment of an organization's performance. It involves calculating various ratios from financial
statements to evaluate different aspects of a company's operations, including profitability,
liquidity, leverage, and efficiency. These ratios provide insights into a company's financial health
by establishing numerical relationships between different financial variables.
In the banking sector, ratio analysis holds particular importance as banks operate on different
financial principles compared to typical businesses. Banks primarily deal with financial
intermediation, managing deposits and loans, while ensuring adequate reserves and maintaining
regulatory compliance. Ratio analysis helps in evaluating a bank's ability to manage these unique
aspects while maintaining profitability and financial stability.

The technique of ratio analysis is an essential component of financial statement analysis for any
business or industrial concern. Through this technique, comparative studies can be made between
different statistics concerning various aspects of a business unit. Just as vital signs measure an
individual's health, financial ratios measure the economic health of a business concern.
Therefore, ratio analysis is of considerable significance in banking management.

In the Nepalese banking context, commercial banks play a vital role in economic development
by mobilizing financial resources and extending credit facilities. Their performance significantly
impacts the overall economy. This study focuses on Nabil Bank Limited, the first private
commercial bank in Nepal, to analyze its financial performance through ratio analysis, which
will provide valuable insights into its operational efficiency, profitability, and financial stability.

2. PROFILE OF NABIL BANK LIMITED

Nabil Bank Limited, originally established as Nepal Arab Bank Limited in 1984, holds the
distinction of being the first private commercial bank in Nepal. Headquartered in Durbar Marg,
Kathmandu, the bank has expanded its presence nationwide with seven provincial offices and a
wide network of branches. Since its inception in July 1984, Nabil Bank has operated as an "A"
class commercial bank, aiming to deliver modern, international-standard financial services to
businesses and individuals alike.

As a trailblazer in Nepal's banking sector, Nabil Bank's mission is to become the preferred
choice for all its stakeholders, including retail customers, SMEs, corporate clients, state-owned
enterprises, non-profit organizations, multinational development agencies, employees, and
shareholders. The bank aspires to be a one-stop solutions provider, offering a comprehensive
range of commercial banking services such as branch banking, treasury operations, trade finance,
card services, remittance, and investment banking.

Nabil Bank boasts an extensive network of 248 branch offices, 271 ATMs, numerous POS
terminals, and remittance agents spread across the country. Additionally, the bank has
established over 200 international correspondent banking relationships, further strengthening its
global reach. Nabil Bank also operates its investment banking services through its subsidiary,
Nabil Investment Banking Limited. In a significant move to expand its footprint, Nabil Bank
acquired Nepal Bangladesh Bank in July 2022, reinforcing its position as a leading financial
institution in Nepal. Through its innovative services, customer-centric approach, and strategic
growth initiatives, Nabil Bank continues to play a pivotal role in shaping Nepal's banking
landscape.

3. OBJECTIVES OF THE STUDY

The main objective of the present study is to assess the financial performance of Nabil Bank
Limited through ratio analysis. The specific objectives are as follows:

● To evaluate the liquidity, profitability, and leverage position of Nabil Bank Limited.
● To analyze the financial strengths and weaknesses of Nabil Bank Limited.
● To examine the compliance of financial ratios with regulatory standards set by Nepal
Rastra Bank.
● To compare Nabil Bank's performance with industry benchmarks over the study period.

4. RATIONALE OF THE STUDY

This study on ratio analysis of Nabil Bank Limited has several significant implications for
various stakeholders. The rationale for conducting this research includes:

● Academic Contribution: The study will contribute to the existing literature on financial
performance analysis of commercial banks in Nepal, providing insights for researchers
and academicians.
● Investor Decision-Making: By analyzing the financial ratios of Nabil Bank, investors
can make informed investment decisions based on the bank's profitability, efficiency, and
stability.
● Management Insights: The findings will help Nabil Bank's management identify areas
of strength and weakness, enabling them to formulate strategies for improvement.
● Regulatory Perspective: The study will assess Nabil Bank's compliance with regulatory
requirements, which is crucial for maintaining financial stability in the banking sector.
● Economic Significance: As a leading commercial bank in Nepal, Nabil Bank's
performance has implications for the overall banking industry and economic
development.

● Stakeholder Information: The analysis will provide valuable information to depositors,

lenders, borrowers, and other stakeholders about the bank's financial health and
operational efficiency.
● Benchmarking Tool: By comparing Nabil Bank's performance with industry averages,
the study will establish benchmarks for performance evaluation in the Nepalese banking
sector.
● Educational Purpose: The study will serve as a reference for students and practitioners
interested in understanding the application of ratio analysis in banking performance
evaluation.

5. REVIEW OF LITERATURE

Conceptual Review

Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by studying its financial statements. It involves comparing line-item
data from financial statements to reveal insights regarding various aspects of financial
performance. The fundamental types of ratio analysis include:

1. Profitability Ratios: These measure a company's ability to generate profits relative to its
revenue, assets, or equity. Examples include Net Profit Margin (NPM), Return on Assets
(ROA), Return on Equity (ROE), and Net Interest Margin (NIM).
2. Liquidity Ratios: These assess a company's ability to meet short-term obligations.
Examples include Current Ratio, Quick Ratio, Cash Ratio, and Loan to Deposit Ratio.
3. Leverage Ratios: These evaluate a company's capital structure and financial risk.
Examples include Debt Ratio, Debt to Equity Ratio, and Total Assets to Equity Ratio.
4. Capital Adequacy Ratios: These measure a bank's capital relative to its risk-weighted
assets. Examples include Core Capital Ratio and Capital Adequacy Ratio (CAR).

Theoretical Framework

Several theoretical frameworks underpin the analysis of banking performance:

1. CAMELS Rating System: A supervisory framework evaluating Capital adequacy, Asset

quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk.
2. Basel Framework: International standards for banking regulation emphasizing capital
adequacy, risk management, and market discipline.
3. Efficiency Theory: Posits that banks with lower costs and higher revenues will
outperform less efficient banks.

4. Risk-Return Trade-off Theory: Emphasizes the relationship between risk and return in
banking operations.
5. Liquidity Preference Theory: Emphasizes the importance of maintaining adequate
liquidity to meet short-term obligations.

Review of Previous Studies

Khadka (2016) conducted a comparative ratio analysis of NABIL Bank and NIBL Bank, finding
that NIBL Bank had better liquidity, while NABIL Bank outperformed in leverage and
profitability ratios.

Sigdel (2019) studied the ratio analysis of listed finance companies in Nepal (CIT, KAFL,
NAFCL, and UFCML), revealing that their current ratios were below ideal benchmarks,
indicating liquidity challenges.

Maharjan (2020) explored the financial performance of commercial banks in Nepal, finding that
larger banks typically demonstrated better ROA and ROE compared to smaller banks.

Pandey (2021) examined the relationship between liquidity management and profitability of
commercial banks in Nepal, revealing a significant positive correlation between efficient
liquidity management and improved financial performance.
Sharma and Adhikari (2022) investigated the technical efficiency of Nepalese commercial banks,
finding that joint venture banks generally exhibited higher efficiency scores compared to
domestic banks.

6. RESEARCH METHODOLOGY

Research Design

This study will adopt a descriptive research design to analyze the financial performance of Nabil
Bank Limited using ratio analysis. Descriptive research helps describe the financial position,
business structure, and performance indicators of the bank through systematic analysis of
financial data.

Population and Sample

The population for this study comprises all 20 licensed commercial banks operating in Nepal, as
per Nepal Rastra Bank. Nabil Bank Limited has been selected as the sample using purposive
sampling technique, considering its historical significance as the first private commercial bank in
Nepal and its continued prominence in the banking sector.

Types of Data

This study will primarily use secondary data collected from audited financial statements of Nabil
Bank Limited for the fiscal years 2078/79, 2079/80, and 2080/81. The financial statements
include:

● Statement of Financial Position (Balance Sheet)

● Statement of Profit or Loss (Income Statement)
● Related notes and disclosures

Data Collection Procedure

Secondary data will be collected from the following sources:

● Annual reports of Nabil Bank Limited for the fiscal years 2078/79, 2079/80, and 2080/81
● Publications by Nepal Rastra Bank (NRB)
● Industry reports and banking sector analyses
● Previous research papers and journal articles related to financial performance of banks
● Websites of Nabil Bank Limited and Nepal Rastra Bank

Tools and Techniques of Analysis

Financial Tools:

1. Profitability Ratio Analysis:

 ○Net Profit Margin (NPM) = Net Income / Operating Income
○Return on Assets (ROA) = Net Profit after Tax / Total Assets
○Return on Equity (ROE) = Net Income / Shareholders' Equity
○Net Interest Margin (NIM) = (Interest Income - Interest Expense) / Average
Earning Assets
2. Liquidity Ratio Analysis:
○ Current Ratio = Current Assets / Current Liabilities
○ Cash Ratio = (Cash + Marketable Securities) / Current Liabilities
○ Quick Ratio = (Current Assets - Inventory) / Current Liabilities
○ Loan to Deposit Ratio = Total Loans / Total Deposits
3. Leverage Ratio Analysis:
○ Debt Ratio = Total Debt / Total Assets
○ Debt to Equity Ratio = Total Debt / Total Equity

○ Total Assets to Equity Ratio = Total Assets / Total Equity

4. Capital Adequacy Analysis:
○ Core Capital Ratio = Core Capital / Risk-Weighted Assets
○ Capital Adequacy Ratio (CAR) = (Tier 1 Capital + Tier 2 Capital) / Risk-
Weighted Assets
○ Risk-Weighted Assets Ratio = Risk-Weighted Assets / Total Assets

Statistical Tools:

1. Mean (X̄) = ∑X / n
○ Where, ∑X = Sum of all observations, n = Number of
observations
2. Standard Deviation (σ) = √(∑(X - X̄)² / n)
○ Where, X = Individual observation, X̄ = Mean of the observations, n = Number of
observations
3. Coefficient of Variance (C.V.) = (σ / X̄ ) × 100
○ Where, σ = Standard deviation, X̄ = Mean

7. LIMITATIONS OF THE STUDY

Despite efforts to ensure a comprehensive analysis, this study has several limitations:

1. Scope Limitation: The study focuses solely on Nabil Bank Limited and may not
represent the entire banking industry in Nepal.
2. Time Period: The analysis covers only three fiscal years (2078/79 to 2080/81), which
may not capture long-term trends or cyclical patterns.
 3. Data Source: The study relies entirely on secondary data from published financial
statements, which may have inherent limitations in terms of disclosure and accounting
policies.
4. Methodological Limitation: Ratio analysis has inherent limitations as it does not
consider qualitative factors, economic conditions, or non-financial performance
indicators.
5. Inflation Impact: The study does not adjust financial data for inflation, which may affect
the comparability of ratios over time.
6. Window Dressing: Financial statements can sometimes be subject to window dressing,
which may affect the accuracy of the calculated ratios.
7. Industry Comparison: While industry averages are used for benchmarking, differences
in size, operational scope, and market positioning among banks may affect the validity of
comparisons.

10

8. Exclusion of Qualitative Aspects: The study does not consider qualitative aspects such
as customer satisfaction, service quality, and corporate governance practices.

8. CHAPTER PLAN

The proposed research will be organized into five chapters as follows:

Chapter 1: Introduction

● Background of the Study

● Profile of Nabil Bank Limited
● Statement of the Problem
● Objectives of the Study
● Rationale of the Study
● Limitations of the Study
● Organization of the Study

Chapter 2: Literature Review

● Conceptual Review
○ Types of Ratio Analysis
○ Importance of Ratio Analysis in Banking Sector
● Theoretical Framework
○ CAMELS Rating System
○ Basel Framework
○ Efficiency Theory
○ Risk-Return Trade-off Theory
○ Liquidity Preference Theory
● Review of Previous Studies
Chapter 3: Research Methodology

● Research Design
● Population and Sample
● Types of Data
● Data Collection Procedure
● Tools and Techniques of Analysis
○ Financial Tools

11

○ Statistical Tools

Chapter 4: Results and Analysis

● Overview of Financial Position of Nabil Bank

● Profitability Ratio Analysis
● Liquidity Ratio Analysis
● Leverage Ratio Analysis
● Capital Adequacy Analysis
● Comparative Analysis
● Discussion of Findings

Chapter 5: Summary and Conclusion

● Summary of Findings
● Conclusion
● Recommendations
● Suggestions for Further Research
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9. REFERENCES

● Khadka, S. (2016). A Comparative Ratio Analysis of Commercial Banks. Tribhuvan

University.
● Sigdel, T. (2019). Ratio Analysis of Listed Finance Companies in Nepal. Tribhuvan
University.
● Maharjan, R. (2020). Financial Performance Analysis of Commercial Banks in Nepal.
Tribhuvan University.
● Pandey, S. (2021). Impact of Liquidity Management on Profitability of Commercial
Banks in Nepal. Nepal Rastra Bank.
● Sharma, P., & Adhikari, S. (2022). Technical Efficiency Analysis of Commercial Banks
in Nepal. Journal of Banking and Finance.
● Nepal Rastra Bank. (2078/79–2080/81). Annual Reports and Banking Supervision
Reports.
● Nabil Bank Limited. (2078/79–2080/81). Annual Reports.
● Basel Committee on Banking Supervision. (2010). Basel III: A Global Regulatory
Framework for More Resilient Banks and Banking Systems.