A STUDY OF CAMELS ANALYSIS OF COMMERCIAL BANKS (EVEREST BANK LTD. AND HIMALAYAN BANK LTD.)
BY: BISHAM DULAL SIJAN POKHAREL RAKSHYA DHUNGANA PRATIK NATH PANTA SANJANA CHAUDHARI
Kathmandu, Nepal March 2017
TABLE OF CONTENT
Contents Acknowledgement ...................................................................................................................... i CHAPTER-I .................................................................................................................................. 1 INTRODUCTION .......................................................................................................................... 1 1.1 Background of the study .................................................................................................. 1 1.2 Introduction of the organization...................................................................................... 4 Everest Bank Limited.......................................................................................................... 4 Himalayan Bank Limited .................................................................................................... 6 1.3 Statement of the problem ............................................................................................... 8 1.4
Objectives of the study................................................................................................. 9
1.5 Significance of the study .................................................................................................. 9 1.6
Limitation of the Study ................................................................................................. 9
CHAPTER-II ............................................................................................................................... 11 LITERATURE REVIEW ................................................................................................................ 11 2.1 Introduction ................................................................................................................... 11 2.1.1Concept of CAMEL rating ......................................................................................... 11 2.1.2. Rating and description ........................................................................................... 12 2.1.3 Assessment in camel analysis ................................................................................. 13 2.1.4 BREAKING DOWN 'CAMELS Rating System' ............................................................ 15
Capital Adequacy ......................................................................................................... 15
Asset Quality ................................................................................................................ 15
Management................................................................................................................ 16
Earnings ........................................................................................................................ 16
Liquidity........................................................................................................................ 16
Sensitivity ..................................................................................................................... 16
2.2 Review of journals and articles ...................................................................................... 17 CHAPTER-III .............................................................................................................................. 20 RESEARCH METHODOLOGY ..................................................................................................... 20 3.1 INTRODUCTION .............................................................................................................. 20 3.2 Research design ......................................................................................................... 20 3.3 Population and sample of data .................................................................................. 20
3.4 Period covered ........................................................................................................... 20 3.5 Source of data ............................................................................................................ 20 3.6 Data analysis tools ......................................................................................................... 21 (C)Capital Adequacy Ratios (CAR) .................................................................................... 21 (A) Assets Quality ratios ................................................................................................... 21 (M) Management ............................................................................................................. 23 (E) Earning ....................................................................................................................... 23 (L) Liquidity....................................................................................................................... 24 CHAPTER - IV ............................................................................................................................ 26 DATA PRESENTATION AND ANALYSIS ...................................................................................... 26 4.1 Introduction ................................................................................................................... 26 4.2 Data presentation and analysis...................................................................................... 26 4.2.1 Capital Adequacy ........................................................................................................ 26 4.2.1.1 Capital Adequacy Ratios (CAR)............................................................................. 26 4.2.1.2 Core capital ratio.................................................................................................. 29 4.2.2 Asset quality ................................................................................................................ 32 4.2.2.1 Non-performing loan ........................................................................................... 32 4.2.2.2 Loan loss coverage ratio: ..................................................................................... 34 4.2.3 Management............................................................................................................... 39 4.2.4 Earnings....................................................................................................................... 41 4.2.4.1 Earning per share ................................................................................................. 41 4.2.4.2 Return on equity .................................................................................................. 43 4.2.4.3 Return on assets .................................................................................................. 45 4.2.5 Liquidity....................................................................................................................... 48 4.3.5.1 Cash reserve ratio ................................................................................................ 48 4.2.5.2 Cash and Bank balance ratio ................................................................................ 50 4.2.5.3 Investment in government securities ratio.......................................................... 52 4, 3 Major findings ............................................................................................................... 54 Chapter V ................................................................................................................................. 59 Summary, Conclusion and Recommendation .......................................................................... 59 5.1 Summary ........................................................................................................................ 59 5.2 Conclusion ...................................................................................................................... 60 5.3 Recommendation........................................................................................................... 60 References ............................................................................................................................... 62
List of tables
Table no
Title
pg no
Table 1: Table to show capital adequacy ratio (CAR) ______________________________ 28 Table 2: Tale to show Total core capital ratio (CCR) ______________________________ 30 Table 3: Table to show Non-performing ratio (NPR) ______________________________ 33 Table 4: Table to show Loan loss coverage ratio (LLCR) ___________________________ 35 Table 5: Table to show Loan loss Provision ratio (LLPR) __________________________ 37 Table 6: Table to show Management Efficiency Ratio (MER) _______________________ 39 Table 7: Table to show Earning per Share (EPS) _________________________________ 42 Table 8: Table to show Return on Equity (ROE)__________________________________ 44 Table 9: Table to show Return on Assets (ROA) _________________________________ 46 Table 10: Table to show Cash Reserve Ratio (CRR)_______________________________ 49 Table 11: Table to show Cash and Bank Balance Ratio (CBBR) _____________________ 51 Table 12: Table to show Investment in Government Securities ratio __________________ 53
List of figures
Fig no.
Title
pg no
Figure 1: figure to show Graphical Presentation of capital adequacy ratio ............................. 29 Figure 2: figure to show Graphical presentation of core capital ratio...................................... 31 Figure 3: figure to show Graphical presentation of Non-performing ratio .............................. 34 Figure 4: figure to show Graphical Presentation of Loan loss coverage ratio ......................... 36 Figure 5: figure to show Graphical Presentation of Loan Loss Provision Ratio ..................... 38 Figure 6: figure to show Graphical Presentation of Management Efficiency ratio ................. 40 Figure 7: figure to show Graphical Presentation of Earning Per Share ................................... 43 Figure 8: figure to show Graphical Presentation of Return on Equity ..................................... 45 Figure 9: figure to show Graphical Presentation of Return on Asset ...................................... 47 Figure 10: figure to show Graphical Presentation of Cash Reserve Ratio ............................... 50 Figure 11: figure to show Graphical Presentation of Cash and Bank Balance Ratio............... 52 Figure 12: figure to show Graphical Presentation of investment in Government Securities Ratio ......................................................................................................................................... 54
Acknowledgement This report entitled “A STUDY OF CAMELS ANALYSIS OF COMMERCIAL BANKS (EVEREST BANK LTD. AND HIMALAYAN BANK LTD.)” has been prepared to fulfill the special project report study and analysis request under treasury management course Firstly, we would like to express our deep gratitude to Mr. Deepak Adhikhari for providing the exciting opportunity of studying and analyzing various financial organizationand also giving us guidance and direction to move ahead with objectives. We would like to extend my heartily thanks to all who assisteddirectly and indirectly with their valuable suggestions and ideas while preparing the report
BISHAM DULAL SIJAN POKHAREL RAKSHYA DHUNGANA PRATIK NATH PANTA SANJANA CHAUDHARI
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CHAPTER-I INTRODUCTION 1.1 Background of the study In any economy, the important of financial sector in general and banking sector in particular cannot be undermined. Banking sector plays the significant role in overall development of the economy in all countries. Thus it is said that the banking sector mirrors the larger economy. It’s linkage to all sectors makes it a proxy for what is happening in the economy as awhile. As these aspects various financial institutions are growing rapidly on last decades. Commercial banks are one of the vital aspects of banking sector, which deals in process of analyzing the available resources in the needed sector. Bank plays the intermediary role inbetween surplus and deficit of financial sector. Banks motivate people to keep their surplus money as deposits in the bank then bank utilize the money by providing loan to these people who have deficit and need of that fund in other profitable sector. The word ‘Bank’ has been derived from the Italian word ‘Banco’ which means a place for keeping, lending and exchanging money. The bank is a financial institution, which deals with money. It accepts deposits from individuals and organization and grants loans to them. It allows interest on the deposits made and charges interest on the loans granted. Since, it accepts deposits and grants loans, it is regarded as the trader of money. Further, it creates credit and supports for the formation of capital and hence it is regarded as ‘’Manufacturer of Money’’.
The growth of financial sector in Nepal is much better as compare to other sectors. Deposits of conflict and political insurgency, banking and financial sector continued growing. Numbers of banks and financial institutions are
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increasing day by day. Similarly banking habit of people is also in increasing trend.
Single institutions cannot fulfill all the services demanded by the customers. So, different types of bank also emerged in the banking industry specializing indifferent function areas. There are different types of banks. Among them commercial bank is one.
Commercial banks represent a key financial intermediary because they serve all types of surplus and deficit units. They offer deposits accounts with the size and maturity characteristics desired by surplus units. They repackage the funds received from deposits to provide loans of the size and maturity desired by deficit units. They have the ability to assess the credit worthiness of deficit units that apply for loans, so that they can limit their exposure to credit (default) risk on the loans they provide.
The commercial bank has been a vital role for economic development. Banks are intermediaries, which mobilize funds through the prudential combination of investment portfolio in advanced countries. Nepal being a developing country requires joint venture. Banks are still to be realizing as an essential mechanism of mobilizing interval saving through various banking schemes in the economy they can accumulate and collect the capital among other prerequisite.
Commercial banks are suppliers of the finance for trade and industry as well as other sector, which plays the vital role for economic and financial development of the country. They help in the formulation of capital by investing the savings in productive areas.. In almost of the country’s banking facilities are concentrated into urban and semi-urban area, they want to stay far from rural area due to lower rate of return or higher risk. But in fact, without it, other sector of economy cannot be flourished.
Banking often perceived on milestone of economy growth of any country. The banking history is very much old because the first systematic public Banking history or institution goes to credit to Bank of Venice, Italy established in 1157 2
A.D. After about 250 years of establishment of bank of Venice, other two bank were founded and name as Bank of Barcelona and bank of Genoa in 1401 and 1407 AD. Respectively then after Bank of Amsterdam is established in 1609 AD. The Bank of England was established in 1694 AD. But the modern banking is started only after introducing banking Act 1883 AD in USA. When the government has liberalized economy policy and democracy in the country then the growth of commercial bank was very high. In current situation (Jan 2016) 32 commercial bank are operating and providing their services to customers. Nepal Rastra Bank (NRB) is the monitoring and regulating body of financial institutions (Viz commercial banks, development banks and finance companies). NRB poses the directive of maintaining Rs. 8000 million on paid up capital within dated of 31 July 2017 AD which is the mandatory rule of NRB.
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1.2 Introduction of the organization
Everest Bank Limited Everest Bank Limited (EBL) started its operation in 1994 with a view and objectives of extending professionalized and efficient banking services to various segments of the society. Its joint venture partner, Punjab National Bank (PNB), (holding 20% equity in the bank) is the largest nationalized bank in India having 112 years of banking history. The bank is providing customer friendly services through a network of 34 branches in Nepal.
The bank has Authorized Capital of Rs.1000, 000,000, Issued Capital of Rs.840, 620,000 and Paid up Capital of Rs 838,821,000. Out of paid up capital, local Nepalese promoters hold 50% stake in the Banks equity, while 20% of equity is contributed by the joint venture partner PNB whereas remaining 30% is held by the public. EBL was one of the first bank to introduce “Any Branch Banking system” (ABBS) in Nepal. It has introduced Mobil Vehicle Banking to serve the segment deprived of proper banking facilities through its Birtamod Branch, which is also the first of its kind. The bank was bestowed with the “NICCI Excellence award” by Nepal India chamber of commerce for its spectacular performance under finance sector. This bank has been conferred with “Bank of the Year 2006” by the banker, a publication of financial times, London.
The main features of this bank are: One of the Largest Network among private sector banks spread across Nepal and all connected with ABBS. Strong Joint Venture Partner providing Technical Support. Representative office in India to facilitate remittance from India. Direct Drawing arrangement with PNB and HDFC bank India whereby instant payment is done on presentation of the instrument. 4
Direct amount credit in PNB branches commented with central Banking System and RTGS member banks via speed remittance. More than 126 remittance payout location in Nepal. EBL in association with smart Choice Technology (SCT) is providing ATM service to its customers through more than 74 ATMs and over 850 point of sales across the country. ATM sharing arrangements with Punjab National Bank has facilitated usage of EBL Debt Card at more than 1000 PNB ATM outlets across the India at a nominal rate. Similarly, Indian tourist and businessmen having PNB cards will be able to use EBL ATM. While in Nepal. Services that the bank is providing currently
Deposits • Current Account • Saving Account • Saving premium account • Cumulative Deposits Sector • Sunaulo Bhavishya Yojana • Unfixed Fixed Deposit Scheme • USD Account • EBL NRN Deposit
Loan Retail Loan •Home Loan •Vehicle Loan •Education Loan •Future Lease Rental •Professional Loan •Loan Against Mortgage •Bike Loan •Loan Against Life Insurance •Share Loan •Tractor and Water Pump fianace
Corporate Loan •Working Capital Finance •Project Finance •Trade Finance •Consortium Finance
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Himalayan Bank Limited Himalayan Bank Limited (HBL) is one of the largest private banks of Nepal. The Bank was incorporated in 1992 by a few eminent individuals of Nepal in partnership with the Employees Provident Fund and Habib Bank Limited of Pakistan. The bank commenced its operations in January 1993. Himalayan Bank is also the first commercial bank of Nepal with most of its shares held by the private sector of Nepal. Besides commercial banking services, the bank also offers industrial and merchant banking service. Legacy of Himalayan lives on in an institution that's known throughout Nepal for its innovative approaches to merchandising and customer service. Products such as Premium Savings Account, HBL Proprietary Card and Millionaire Deposit Scheme besides services such as ATMs and Tele-banking were first introduced by HBL. Other financial institutions in the country have been following our lead by introducing similar products and services. Therefore, we stand for the innovations that we bring about in this country to help our Customers besides modernizing the banking sector. With the highest deposit base and loan portfolio amongst private sector banks and extending guarantees to correspondent banks covering exposure of other local banks under our credit standing with foreign correspondent banks, we believe we obviously lead the banking sector of Nepal. The most recent rating of HBL by Bankers’ Almanac as country’s number 1 Bank easily confirms our claim. All Branches of HBL are integrated into Globus (developed by Temenos), the single Banking software where the Bank has made substantial investments. This has helped the Bank provide services like ‘Any Branch Banking Facility’, Internet Banking and SMS Banking. Living up to the expectations and aspirations of the Customers and other stakeholders of being innovative, HBL introduced several new products and services. Millionaire Deposit Scheme, Small and Medium Enterprises Loan, Pre-paid Visa Card, International Travel Quota Credit Card, Consumer Finance through Credit Card and online TOEFL, SAT, IELTS, etc. fee payment facility are some of the products and services. HBL also has a dedicated offsite ‘Disaster Recovery Management System’. Looking at the number of Nepalese workers abroad and their need for formal money transfer channel; HBL has developed exclusive and 6
proprietary online money transfer software- HimalRemitTM. By deputing our own staff with technical tie-ups with local exchange houses and banks, in the Middle East and Gulf region, HBL is the biggest inward remittance handling Bank in Nepal. All this only reflects that HBL has an outside-in rather than inside-out approach where Customers’ needs and wants stand first. HBL is not only a Bank, It is committed Corporate Citizen Corporate Social Responsibility (CSR) holds one of the very important aspects of HBL. Being one of the corporate citizens of the country, HBL has always promoted social activities. Many activities that do a common good to the society have been undertaken by HBL in the past and this happens as HBL on an ongoing basis. Significant portion of the sponsorship budget of the Bank is committed towards activities that assist the society as large. With its head and corporate office at Kamaladi, Kathmandu, the bank has 44 branches. Eighteen of its branches are located inside the Kathmandu Valley while the rest are spread across the nation (Kathmandu Valley comprises Kathmandu, Lalitpur and Bhaktapur Districts). Besides, a branch looking exclusively at electronic cards and related products, is based in Patan, Lalitpur. The Bank’s Vision: Himalayan Bank Limited holds of a vision to become a Leading Bank of the country by providing premium products and services to the customers, thus ensuring attractive and substantial returns to the stakeholders of the Bank. The Bank’s Mission: The Bank’s mission is to become preferred provider of quality financial services in the country. There are two components in the mission of the Bank; Preferred Provider andQuality Financial Services; therefore we at HBL believe that the mission will be accomplished only by satisfying these two important components with the Customer at focus. The Bank always strives positioning itself in the hearts and minds of the customers. The Bank’s Objective:
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To become the Bank of first choice is the main objective of the Bank. Service that the bank is providing currently
•Normal Saving Account •Himal Saving Account •Premium Saving Account •Super Premium Saving Account •Himal Remit Saving Account •Bishesh Saving Account
DEPOSIT
•safe deposit locker service •SMSbanking service •SMS alert service •internet banking service •Himalayan ban bancaassurance
accesilary services
•personal loan •home loan •autol loan •subidha loan •small personal business loan •loan against fixed deposit receipt •HBL consumer financing
LOAN
1.3 Statement of the problem The overall performance of financial institutions may not reflect by financial statement, so a major question emerges, whether these are adequate to reflect the overall performance of company. Hence, there is needed to identify the overall conditions strengths, weakness, opportunity and threats of the banks. For these purpose, several financial and statistical tools and techniques are developed by different experts and financial institutions all over the world, one of them is CAMEL. This study aims to assess the financial conditions and overall performance of sampled commercial banks in the framework of CAMEL.
What are the capital Adequacy ratios of commercial banks?
What are the qualities of assets of banks?
What are the earning capacities of the banks?
What is the liquidity position of commercial banks? What are the management qualities of the banks?
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1.4
Objectives of the study The main objective of the study is to examine the financial performance through CAMEL test
of
selected commercial banks and compare each
other. To accomplish the main objective, specific objective of the study are:
To check the capital adequacy, assets quality, management quality and earning capability and liquidity position of selected banks.
To assess the organization investments, social corporate responsibility and services provided by selected commercial banks.
One of the basis of comparative analysis and conclusion drawn, recommend the related banks for the better improvement.
1.5 Significance of the study The study deals with different financial performance and its indicator as well as financial viability of the banks. The study also significance lies mainly in identifying and comparing the financial health of banks in the framework of CAMEL. This study also provide necessary information of performance capability of their banks to the management. It provide the real picture of performance which is beneficial to potential as well as existing shareholders, about risk return and utilizing fund. The study is also useful for depositors, member bankers as well as other stakeholders; they can identify the overall performance of the bank. It will be helpful to those who want to conduct further study in this field. Mainly, the purposed study will be significance for the researchers, research group and academicians for the future in the view of review.
1.6
Limitation of the Study
Out of twenty-six commercial banks here we only consider three banks and five fiscal years i.e from 2004/2005 to 2008/2009 for the comparative
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analysis of commercial banks. So this thesis shows the trend of commercial banks but not become whole mirror of all commercial banks.
In this tough competition, there can be other factors beside the financial factor which effects the overall positions of the bank. But all factors are not consider in this research because off limited time.
This study will be based on secondary data and information and by review of relevant literatures. Thus it may bias some extent.
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CHAPTER-II LITERATURE REVIEW 2.1 Introduction In 1979, the Uniform Financial Institutions Rating System (UFIRS) was implemented in U.S. banking institutions, and later globally, following a recommendation by the U.S. Federal Reserve. The system became internationally known with the abbreviation CAMEL, reflecting five assessment areas: capital, asset quality, management, earnings and liquidity. In 1995 the Federal Reserve and the OCC replaced CAMEL with CAMELS, adding the "S" which stands for (S)ensitivity to Market Risk. This covers an assessment of exposure to market risk and adds the 1 to 5 rating for market risk management. In simple sense the CAMELS rating system is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by the acronym "CAMELS." Supervisory authorities assign each bank a score on a scale, and a rating of one is considered the best and the rating of five is considered the worst for each factor.
2.1.1Concept of CAMEL rating: Analysist uses CAMEL rating as an internal rating system to evaluate:
The soundness of credit unions
Degree of risk to the share insurance fund and
Credit unions requiring special supervisory attention.
In addition Analysist use CAMEL rating to allocate examiner resources. Many more exam hour or budgetary supervise those credit union with poor composition of CAMEL rating of 4 AND 5 as supposed to string rating of 1and 2.
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2.1.2. Rating and description Rating Rating 1
Description
Indicates strong performance and risk management practices s
identifies all risks and employs compensating factors mitigating concerns
Rating 2
Rating 3
Reflects satisfactory performance and risk management practices
Management identifies most risks and compensates accordingly.
Represents performance that is flawed to some degree is of supervisory concern.
Risk management practices may be less than satisfactory relative to the bank's or credit union's size, complexity, and risk profile
Management may not identify and provide mitigation of significant risks
Rating 4
Refers to poor performance that is of serious supervisory concern.
Risk management practices are generally unacceptable relative to the bank's or credit union's size,
complexity and risk profile. Key performance measures are likely to be negative.
Such performance, if left unchecked, would be expected to lead to conditions that could threaten the viability of the bank or credit union.
There may be significant noncompliance with laws and regulations.
The board of directors and management are not satisfactorily resolving the weaknesses and problems.
A high potential for failure is present but is not yet imminent or pronounced.
Banks and credit unions in this group require close supervisory attention.
Rating 5
Considered unsatisfactory performance that is critically deficient 12
and in need of immediate remedial attention.
Such performance, by itself or in combination with other weaknesses, directly threatens the viability of the bank or credit union.
The volume and severity of problems are beyond management's ability or willingness to control or correct.
Banks and credit unions in this group have a high probability of failure and will likely require liquidation and the payoff of shareholders, or some other form of emergency assistance, merger, or acquisition.
2.1.3 Assessment in camel analysis Board member should be familiar with letter in term of CAMEL rating system and corresponding appendix. The letter includes detail description for each of the five component rating and detail profit of each composite rating 1 to 5.CAMEL is an aquanaut for the following five rating categories: C - Capital Adequacy A - Assets Quality M -Management E - Earning L- Liquidity and assets and liability management
The three high level aseismic the examiner use to determine individual CAMEL rating include 1. Risk management programs: What system are in placed to identify, measure, monitor and control risk for that rating factor.
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2. Financial Proxies: financial proxies are the four quantifiable rating sufficient for the type and size of credit union.
Is there enough capital or equity
Are the assets quality measure with the delinquency
Charge of ratio acceptable
Is the earnings ratio sufficient and
Is the liquidity sufficient
The analysist feel that whowork with management to establish a corrective action with a level of respective trends of these CAMEL components is considered unacceptable or insufficient 3. Management Assessment: management engagement and decision making placed into all of the rating. The management rating goes deeper into assessing effectiveness of the board and staff and running the credit in a safe and sound manner. The 7 risk area or CLICSTR helps to answer the high level questions that determinate the individual component rating. From there an examiner comes with single composition CAMEL rating for the credit union. Examiner consider the interrelationship between the CAMEL components when assigning the overall rating. Credit union with higher composite CAMEL rating 3, 4 and 5 will be monitor more frequently than those with lower composite CAMEL ratings 1 and 2. Frequent contest with high risk credit union have proving to be an effective strategy for reducing the risk to the share insurance fund. A CAMEL composite 1 rating indicate the least of risk to national credit share insurance fund as a lending institution a certain level of risk is necessary and expected in order to serve your member. Rating of one may suggest credit union has prioritize safety over service to the membership. Indicated by a portfolio launched only the highest five score. What is the level and type of risks you're willing to manage in order to serve your members? ANALYSIST expects credit union to take on risk and then manage that risk. What financial information does the examiner review?
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The ANALYSIST examiner report will include a summary of key financial trends and a discussion of having strength and key ratio factored into the risk assessments. The financial performance report (FPR) is generated from credit union quarterly corereport. The FPR will provide comprehensive Financial Summary of the balance sheet, income statement and key ratios. The FPR is generally the first tool examiner uses to make a preliminary assessment of risk. Board member should review the FPR to track Financial Trends, compare the Actualresults against budgets and to set future realistic financial goals. The FPR includes extensive Financial Summaries and many ratio for risk of categories. Some of the more important key ratio from the ratio analysis page includes:
Net worth to total assets
Return on average assets
Assets quality ratio: These includes the delinquency and net charge of ratio
Cash and short term investments compared to assets
2.1.4 BREAKING DOWN 'CAMELS Rating System'
The acronym CAMELS stand for the following factors that examiners use to rate bank institutions:
Capital Adequacy
Examiners assess institutions' capital adequacy through capital trend analysis. Examiners also check if institutions comply with regulations pertaining to risk-based net worth requirement. To get a high capital adequacy rating, institutions must also comply with interest and dividend rules and practices. Other factors involved in rating and assessing an institution's capital adequacy are its growth plans, economic environment, ability to control risk, and loan and investment concentrations.
Asset Quality
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Asset quality covers an institutional loan's quality which reflects the earnings of the institution. Assessing asset quality involves rating investment risk factors that the company may face and comparing them to the company's capital earnings. This shows the stability of the company when faced with particular risks. Examiners also check how companies are affected by fair market value of investments when mirrored with the company's book value of investments. Lastly, asset quality is reflected by the efficiency of an institution's investment policies and practices.
Management
Management assessment determines whether an institution is able to properly react to financial stress. This component rating is reflected by the management's capability to point out, measure, look after, and control risks of the institution's daily activities. It covers the management's ability to ensure the safe operation of the institution as they comply with the necessary and applicable internal and external regulations.
Earnings
An institution's ability to create appropriate returns to be able to expand, retain competitiveness, and add capital is a key factor in rating its continued viability. Examiners determine this by assessing the company's growth, stability, valuation allowances, net interest margin, net worth level and the quality of the company's existing assets.
Liquidity
To assess a company's liquidity, examiners look at interest rate risk sensitivity, availability of assets which can easily be converted to cash, dependence on short-term volatile financial resources and ALM technical competence.
Sensitivity
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Sensitivity covers how particular risk exposures can affect institutions. Examiners assess an institution's sensitivity to market risk by monitoring the management of credit concentrations. In this way, examiners are able to see how lending to specific industries affect an institution. These loans include agricultural lending, medical lending, credit card lending, and energy sector lending. Exposure to foreign exchange, commodities, equities and derivatives are also included in rating the sensitivity of a company to market risk
2.2 Review of journals and articles Baral (2005) study the performance of joint ventures banks in Nepal by applying the CAMEL Model. His study was mainly based on secondary data drawn from the annual reports published by joint venture banks. His report analyzed the financial health of joint ventures banks in the CAMEL parameters. His findings of the study revealed that the financial health of joint ventures is more effective than that of commercial banks. Moreover, the components of CAMEL showed that the financial health of joint venture banks was not difficult to manage the possible impact to their balance sheet on a large scale basis without any constraints inflicted to the financial health. Bodla&Verma (2006) examined the performance of SBI and ICICI through CAMEL model. Data set for the period of 2000-01 to 2004-05 were used for the purpose of the study. With the reference to the Capital Adequacy, it concluded that SBI has an advantage over ICICI. Regarding to assets quality, earning quality and management quality, it can be said that ICICI has an edge upon SBI. Therefore the liquidity position of both banks was sound and did not differ much. Gupta and Kaur (2008) conducted a research on the sole aim of examining the performance of Indian private Sector banks by using CAMEL model and by assigning rating to the top five and bottom five banks. They rated 20 old and 10 new private sector banks based on CAMEL framework. The study covered financial data for the period of 5 years i.e. from 2003-07. The research as determined by CAMEL Model revealed that HDFC was at its higher position of all private sectors banks in India
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succeeded by the KarurVyasa and the Tamilnad Mercantile Bank. However the Gobal Trust Bank and the Nedungradi Banks was considered as bad management The findings summarized that new private sector of banks have attained the higher position due to core banking, aggressive marketing strategies and high level of technology. To attain perfection banks should always concentrate on new financial assets, excellent service and customer loyalty. Wirnkar and Tanko (2008) analyzed the adequacy of CAMEL in evaluating the performance of bank. This empirical research was implemented to find out the ampleness of CAMEL in examining the overall performance of bank, to find out the importance of each component in CAMEL and finally to look out for best ratios that bank regulators can adopt in assessing the efficiency of banks. The analysis was performed from a sample of eleven commercial banks operating in Nigeria. The study covered data from annual reports over a period of nine years (1997-2005). The analysis disclosed the inability of each component in CAMEL to congregate the full performance of a bank. Moreover the best ratios in each CAMEL parameter were determined. Cinko&Avci (2008) noticed that globally all the banking supervisory authorities are using CAMEL rating system for many years. In this synthesis financial ratios were applied to calculate components of CAMEL ratings for the period of 1996-2000. The financial ratios were also employed to anticipate the delegation of commercial banks in 2001 to the SDIF by adopting discriminant analysis, logistic regression and neural network models. However the conclusion revealed that it was impossible to predict the transfer of a bank to SDIF by mode of CAMEL ratios. Hays, Lurgio& Arthur (2009) have utilized CAMEL model to examine the performance of low efficiency vs. high efficiency community banks in conjunction with the logistical regression analysis. The analysis used data which are based on quarterly reports by commercial banks. The discriminant model derived from the CAMEL parameters is tested among data for 2006, 2007, 2008. Its results concluded that the model accuracy floats from approximately 88% to 96% for both original and cross-validations data sets. Dash & Das (2009) have analyzed the Indian Banking Industry under CAMELS framework. The thesis compares the performance of public sector banks with that of 18
private/ foreign banks. The analysis was performed from a sample of 58 banks operating in India of which 29 were public sector banks and 29 were private/foreign sector. The data used were from the audited financial statement for the financial years 2003-2008. The findings concluded that private/foreign banks have an edge over the public sector banks. The two factors of the CAMEL parameters that contribute to the best performance of the private banking/foreign were the Management Soundness and Earnings and profitability.
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CHAPTER-III RESEARCH METHODOLOGY 3.1 INTRODUCTION Research methodology describes the method and process applied in the entire study. In other words, research methodology is a systematic process to approach any research problem and explore it objectively. Hence, this chapter includes research design, source of data, population and sample, data collection tools and data analysis tools.
3.2 Research design To fulfill the objectives of the study certain research design in essential so the analysis of the study is based on the nature of data and tools for analysis. To fulfill the objective of the study it emphasizes on the historical as well as descriptive and exploratory.
3.3 Population and sample of data The total number of commercial banks represent as the total population for the purpose of this study. Hence population consists of all commercial banks. Out of the total population two private sector commercial banks are used as sample These are Everest bank limited and Himalayan bank limited.
3.4 Period covered To do this research work four years annual report have been taken of respective banks which are published by bank after audit to general public in the form of annual report. It covers the fiscal year of 2013 to 2016
3.5 Source of data This research study basically is based on the secondary data. The required data for the study was collected in the following ways.
Library research study
Internet ,homepage and related links
Derivatives of NRB
Annual report of Himalayan bank limited and Everest bank limited 20
Published articles and journals from various researchers and lecturers
3.6 Data analysis tools Financial ratio analysis tools The financial analysis is a tools are used to determine the performance of the banks in the frame work CAMEL components. These ratios are categorized in accordance of the CAMEL.
(C)Capital Adequacy Ratios (CAR) Commercial bank holds adequate capital depending on their requirement .capital adequacy ratio is measure of the amount of a bank’s capital as a percentage of its risk weighted credit exposure.
Capital Adequacy Ratio (CAR) =
Core Capital Ratio (CCR) =
𝐓𝐨𝐭𝐚𝐥 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐅𝐮𝐧𝐝 𝐓𝐨𝐭𝐚𝐥 𝐫𝐢𝐬𝐤 𝐰𝐞𝐢𝐠𝐡𝐭𝐞𝐝 𝐚𝐬𝐬𝐞𝐭𝐬
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒓𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑭𝒖𝒏𝒅
x 100 %
X 100%
𝑻𝒐𝒕𝒂𝒍 𝑹𝒊𝒔𝒌 𝑾𝒆𝒊𝒈𝒉𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
Where, Total capital fund =core capital +supplementary capital Total risk weighted asset= on balance sheet risk weighted items + off balance sheet risk weighted items
(A) Assets Quality ratios Commercial banks collect funds in the form of capital, deposits etc. it mobilizes these funds to generate certain return by giving loans to the users of money to invest in various alternatives. A significant part of the banks income is through its lending activities. There are basically two types of loans and advances. Performing loans Loans on which payments of interest and principal are less than 90 days past due are called performing loan. Non preforming loan
21
A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. Substandard loan All loans and advances that are past due for a period of 3 months to 6 months shall be included in this categories.. Doubtful loans are usually non-performing loans on which interest
is
overdue
and
full
collection
of
principal
is
uncertain.
Doubtful loan All loans and advances that are past due for a period of 6 months to a year shall be included in this categories. They are none performing loan Bad/loss loan All loans and advances that are past due for a period of a year and more shall be included in this categories. They are none performing loan
Classification of loans
Provision required
Good Sub standard Doubtful Bad loan
Non-performing loan ratio =
𝑻𝒐𝒕𝒂𝒍 𝒏𝒐𝒏 𝒑𝒆𝒓𝒇𝒐𝒓𝒎𝒊𝒏𝒈 𝒍𝒐𝒂𝒏 𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒂𝒏 𝒂𝒏𝒅 𝑨𝒅𝒗𝒂𝒏𝒄𝒆𝒔
x 100
Where, Total non-performing loan (NPL) = substandard loan + doubtful loan+ bad loan Total loan and advances = total performing loan + total non-performing loan 𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒂𝒏 𝒍𝒐𝒔𝒔𝒆𝒔 𝒑𝒓𝒐𝒗𝒊𝒔𝒊𝒐𝒏 (𝑳𝑳𝑷)
Loan loss coverage ratio =
𝑻𝒐𝒕𝒂𝒍 𝒏𝒐𝒏 𝒑𝒆𝒓𝒇𝒐𝒓𝒎𝒊𝒏𝒈 𝒍𝒐𝒂𝒏
𝒙 𝟏𝟎𝟎%
Where, Total loan loss provision (LLP) = provision on (Pass loan + Reconstruction loan + Substandard loan + Doubtful loan + Bad loan) 22
Total non-performing loan = Substandard loan + Doubtful loan + Bad loan
Loan loss provision ratio =
𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒂𝒏 𝑳𝒐𝒔𝒔 𝑷𝒓𝒐𝒗𝒊𝒔𝒊𝒐𝒏 (𝑳𝑳𝑷) 𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒂𝒏 𝒂𝒏𝒅 𝑨𝒅𝒗𝒂𝒏𝒄𝒆𝒔
𝒙 𝟏𝟎𝟎%
Where, Total loan losses provision (LLP) = Provision on (pass loan + Reconstruction loan + Substandard loan + Doubtful loan + Bad loan) Total loans and Advances = Total performing loan + Total non-performing loan
(M) Management Management is a systematic arrangement of various thins is a systematic manner for the achievement of organization goals. An institution can take desired goals only when the management is capable, which is of strong and long term vision. For the achievement of the goals of the bank certain period of the time proper and efficient management is required, for which the bank should have the following qualities
Qualitative human resource management
Adequate management expenses
Perfect structure of management team
Fair decision making capacity
Perfect working environment
Management analysis can be done by using following formulas
Management efficiency ratio (MER) =
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝑻𝒂𝒙 𝑻𝒐𝒕𝒂𝒍𝒏𝒐 𝒐𝒇 𝑺𝒕𝒂𝒇𝒇
(E) Earning Earning means excess of revenue over cost, so excess revenue earned by any organization in the course of operation is known as profit. It is the ultimate result of any business. Generally, if the earnings are good then that the business is running well. Similarly the aggregate performance of the bank reflects from its earning. 23
Earning is the ultimate result of any business. Generally higher earnings reflects better financial position. Similarly the aggregate performance of the bank reflects from its earning.
Earnings per share (EPS) = Return on Equity (ROE) = Return on assets (ROA) =
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝑻𝒂𝒙 𝑵𝒐 𝒐𝒇 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒔𝒉𝒂𝒓𝒆𝒔 𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙
𝑻𝒐𝒕𝒂𝒍 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔 𝒇𝒖𝒏𝒅
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙 𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
𝒙 𝟏𝟎𝟎%
𝒙 𝟏𝟎𝟎%
(L) Liquidity A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this. Liquidity is the term which denotes the ability of the organization to meet its financial obligation or debts in cash in time. Liquidity refers to the short term financial position of the bank. Bank does not provide all its deposits at loans and advances, but certain percentage is kept as a liquidity in the bank itself or elsewhere. Basically bank measures liquidity through three methods. They are as follows:
Cash Reserve Ratio (CCR)
It is the minimum amount of reserve a bank must hold in the form account balance with NRB. This ratio ensures minimumlevel of the banks first line of defense in meeting depositor’s obligation. It is the mandatory reserve that the commercial bank has to keep in the form of cash in their accounts in NRB for depositor’s assurance and safety of the banks which also reflects the banks goodwill. It is calculated as
Cash Reserve Ratio =
𝑪𝒂𝒔𝒉 𝑩𝒂𝒍𝒍𝒂𝒏𝒄𝒆 𝒊𝒏 𝑵𝑹𝑩 𝑳𝑶𝒄𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒄𝒚 𝑫𝒆𝒑𝒐𝒔𝒊𝒕−𝑴𝒂𝒓𝒈𝒊𝒏 𝑫𝒆𝒑𝒐𝒔𝒊𝒕
Cash and bank balance ratio (CBR) The ratio measures the bank ability to meet immediate obligation. so, optimum balance should maintain in order to meet their pay obligation . Further, this ratio is employed to measure whether banks cash balance is sufficient to cover unexpected demand made by the depositors. It is calculated as follows. 24
Cash and bank balance ratio =
𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑩𝒂𝒏𝒌 𝒃𝒂𝒍𝒂𝒏𝒄𝒆 𝑻𝒐𝒕𝒂𝒍 𝒅𝒆𝒑𝒐𝒔𝒊𝒕
Investment in government security ratio (IGSR) Government securities are known as risk free assets, which are easily converted into cash to meet the short term obligation. That’s why every commercial banks has to invest their certain amount in government securities. This ratio calculated as
Investment in government security ratio =
𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝒊𝒏 𝒈𝒐𝒗𝒆𝒓𝒏𝒎𝒆𝒏𝒕 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒚 𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒐𝒔𝒊𝒕
𝒙 𝟏𝟎𝟎
25
CHAPTER - IV DATA PRESENTATION AND ANALYSIS 4.1 Introduction This chapter deals with the presentation and analysis of data collected from source with the focus on the camel components. As stated in the theoretical prescription the financial performance analysis of Everest bank limited and Himalayan bank limited are concentrated on the five components of CAMEL.
4.2 Data presentation and analysis. The data collected from the financial statement has been systematically documented and recorded in the excel sheet and are presented in the form of graph and diagram which are spread and distributed as per the CAMEL elements.
4.2.1 Capital Adequacy 4.2.1.1 Capital Adequacy Ratios (CAR) The capital adequacy ratio (CAR) is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures Also known as capital-to-risk weighted assets ratio (CRAR), it is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."
26
BREAKING DOWN 'Capital Adequacy Ratio - CAR' The reason why minimum capital adequacy ratios are critical is to make sure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose depositors’ funds. Capital adequacy ratios ensure the efficiency and stability of a nation’s financial system by lowering the risk of banks becoming insolvent. If a bank is declared insolvent, this shakes the confidence in the financial system and unsettles the entire financial market system. During the process of winding-up, funds belonging to depositors are given a higher priority than the bank’s capital, so depositors can only lose their savings if a bank registers a loss exceeding the amount of capital it possesses. Thus the higher the bank’s capital adequacy ratio, the higher the degree of protection of depositor's monies.
Tier One and Tier Two Capital Tier one capital is the capital that is permanently and easily available to cushion losses suffered by a bank without it being required to stop operating. A good example of a bank’s tier one capital is its ordinary share capital. Tier two capital is the one that cushions losses in case the bank is winding up, so it provides a lesser degree of protection to depositors and creditors. It is used to absorb losses if a bank loses all its tier one capital. When measuring credit exposures, adjustments are made to the value of assets listed on a lender’s balance sheet. All the loans the bank has issued are weighted based on their degree of risk. For example, loans issued to the government are weighted at 0 percent, while those given to individuals are assigned a weighted score of 100 percent.
27
Fiscal
Banks
Total capital fund
year
Total
risk Capital
weighted asset
ratio
adequacy
(tier1 +tier 2) 2013
2014
2015
2016
EBL
6422257000
56780161000
0.113107411
HBL
6414437452
55520649287
0.115532465
EBL
8457023000
63451114000
0.133284074
HBL
7155579476
63729135353
0.112281132
EBL
8457023000
63451114000
0.133284074
HBL
8041967083
72183721696
0.111409704
EBL
10094804000
79711762000
0.126641336
HBL
9815198969
90507189794
0.108446622
Table 1: Table to show capital adequacy ratio (CAR)
The Table shows capital fund, total risk weighted asset and capital adequacy ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016.Capital fund in other way can be obtained from summing up of tier I and tier II. It gives clear picture of the Capital fund of both the banks in the respective years. Similarly, we can also observe the total risk weigh asset of banks in the respective years. Obtaining these two the total capital fund is divided by total risk weighted assets to get the Capital adequacy ratio. Here we can see that capital adequacy ratio for Everest bank is 0.11310 and that of Himalayan bank is 0.11553 in 2013 respectively. This ratio is 0.126641 in 2016 for Everest bank and 0.1084466 for Himalayan bank in the year 2016.
28
Capital Adequacy ratio 0.14
0.133284074
0.133284074 0.126641336
0.13
capital ratios
0.12
0.115532465 0.113107411
0.112281132
0.111409704
0.108446622
0.11 0.1 0.09 0.08
2013
2014
2015
2016
average
EBL
0.113107411
0.133284074
0.133284074
0.126641336
0.126579224
HBL
0.115532465
0.112281132
0.111409704
0.108446622
0.111917481
Year / Banks EBL
HBL
Figure 1: figure to show Graphical Presentation of capital adequacy ratio
The above figure represents the graphical presentation of the Capital Adequacy ratio over the period of time. We can easily see here, that the capital adequacy ratio starts from 0.11310 and 0.11532 for Everest and Himalayan bank in the year 2013. It rises to 0.13328 for Everest in coming year and falls to 0.112281 for Himalayan bank. Similarly, this ratio falls and rises to 0.111409 and further to 0.10844 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which rises to 0.13328 and significantly further to 0.12664 in 2015 and 2016 respectively. This gives out an average of 0.12657 and 0.11191 for Everest and Himalayan bank respectively for a four year period
4.2.1.2 Core capital ratio Core capital is the minimum amount of capital that a thrift bank, such as a savings bank or savings and loan company, must have on hand in order to comply with Federal Home Loan Bank regulations. Core capital consists of equity capital and declared reserves. The minimum requirement was put in place to ensure that consumers
are
protected
when
creating financial
accounts.
In context of Nepal core or primary capital includes paid up capital, share premium, 29
non-redeemable preference share , general reserve fund , cumulative profit/loss, capital redemption reserve, capital adjustment fund/proposed bonus share and other fee reserve. Amount of goodwill, fictitious assets, investment in excess of prescribed limit specified by NRB and investment in the security of companies with financial interest is deducted from the sum of all elements of primary capital to arrive at the core capital.
Core Capital Ratio (CCR) = Fiscal
2014
2015
2016
X 100%
𝑻𝒐𝒕𝒂𝒍 𝑹𝒊𝒔𝒌 𝑾𝒆𝒊𝒈𝒉𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
Banks
year 2013
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒓𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑭𝒖𝒏𝒅
Total risk weighted Core
Capital
total core capital
asset
ratio
EBL
4639762000
56780161000
0.081714492
HBL
4972173697
55520649287
0.089555395
EBL
5307829000
63451114000
0.083652259
HBL
5754474636
63729135353
0.090295822
EBL
6624423000
63451114000
0.104401997
HBL
6841375523
72183721696
0.094777262
EBL
8240695000
79711762000
0.103381167
HBL
8537167898
90507189794
0.094325853
Table 2: Tale to show Total core capital ratio (CCR)
30
The Table shows core capital fund, total risk weighted asset and core capital ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the core Capital fund of both the banks in the respective years. Similarly, we can also observe the total risk weigh asset of banks in the respective years. Obtaining these two the total capital fund is divided by total risk weighted assets to get the core Capital ratio. Here we can see that core capital ratio for Everest bank is 0.0817144 and that of Himalayan bank is 0.08955 in 2013 respectively. This ratio is 0.10338 in 2016 for Everest bank and 0.0943253 for Himalayan bank in the year 2016
Core Capital ratio Core Capital ratio
0.11
0.104401997
0.103381167
0.094777262
0.094325853
0.105 0.1 0.095
0.089555395
0.090295822
0.09 0.085 0.08
0.081714492
0.083652259
2013
2014
2015
2016
average
EBL
0.081714492
0.083652259
0.104401997
0.103381167
0.093287479
HBL
0.089555395
0.090295822
0.094777262
0.094325853
0.092238583
Year / Banks
EBL
HBL
.
Figure 2: figure to show Graphical presentation of core capital ratio
The above figure represents the graphical presentation of the Core Capital ratio over the period of time. We can easily see here, that the core capital ratio starts from 0.08171 and 0.08955 for Everest and Himalayan bank in the year 2013. It rises to 0.08365 for Everest in coming year and rises to 0.09029 for Himalayan bank. Similarly, this ratio rises to 0.094777 and slightly falls to 0.094325 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which rises to fast to 0.104401 and significantly falls further to 0.103381 in 2015 and 2016 respectively. This gives out an average of 0.093287 and 0.092238 for Everest and Himalayan bank respectively for a four year period 31
4.2.2 Asset quality An asset quality rating is a review or evaluation assessing the credit risk associated with a particular asset. These assets usually require interest payments - such as a loans and investment portfolios. How effective management is in controlling and monitoring credit risk can also have an effect on the what kind of credit rating. In short it is the amount of income or turnover that a bank can generate from its asset and process of lending the asset if nothing eles.so this ratio is also known as activity ratio or turnover ratio. For identification of the asset quality we need to calculate three ratios. They are:
4.2.2.1 Non-performing loan A nonperforming loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. According to International Monetary Fund, "A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full". Higher non-performing loan indicates that the bank is not so conscious while giving loan and is not doing so well. So it must be low to become a model..
Non-performing loan ratio =
𝑻𝒐𝒕𝒂𝒍 𝒏𝒐𝒏 𝒑𝒆𝒓𝒇𝒐𝒓𝒎𝒊𝒏𝒈 𝒍𝒐𝒂𝒏 𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒂𝒏 𝒂𝒏𝒅 𝑨𝒅𝒗𝒂𝒏𝒄𝒆𝒔
x 100
Where, Total non-performing loan (NPL) = substandard loan + doubtful loan+ bad loan Total loan and advances = total performing loan + total non-performing loan
32
Fiscal
Banks
Non-performing
Total
loan
advances
ratio
EBL
276198772
44197762941
0.006249157
HBL
1186189950
41057397533
0.028891017
EBL
470404039
48450304601
0.009709001
HBL
911514998
46449329430
0.019623857
EBL
367164030
55363518834
0.006631877
HBL
1783952501
55428007254
0.032185038
EBL
264422150
68911543324
0.003837124
HBL
851375948
69100889341
0.012320767
year 2013
2014
2015
2016
loan
and Non performing
Table 3: Table to show Non-performing ratio (NPR)
The Table shows non-performing loan, total loans and advances and non performing ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the non-performing loans of both the banks in the respective years. Similarly, we can also observe the total loans and advances of banks in the respective years. Obtaining these two the non-performing loan is divided total loans and advances to get the non performing ratio. Here we can see that non performing ratio for Everest bank is 0.006249 and that of Himalayan bank is 0.028891 in 2013 respectively. This ratio is 0.003837 in 2016 for Everest bank and 0.012320 for Himalayan bank in the year 2016
33
Non performing ratio 0.032185038
Non performing ratio
0.035 0.03
0.028891017
0.025
0.019623857
0.02 0.012320767
0.015 0.01
0.009709001 0.006631877
0.006249157
0.003837124
0.005
0
2013
2014
2015
2016
average
EBL
0.006249157
0.009709001
0.006631877
0.003837124
0.00660679
HBL
0.028891017
0.019623857
0.032185038
0.012320767
0.02325517
Year / Banks EBL
HBL
Figure 3: figure to show Graphical presentation of Non-performing ratio
The above figure represents the graphical presentation of the non performing ratio over the period of time. We can easily see here, that the non performing ratio starts from 0.006249 and 0.028891 for Everest and Himalayan bank in the year 2013. It rises to 0.00970 for Everest in coming year and falls to 0.019623 for Himalayan bank. Similarly, this ratio rises to 0.032185 and falls to 0.012320 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which falls constantly to 0.0066318 and further to 0.003837 in 2015 and 2016 respectively. This gives out an average of 0.0066067 and 0.023255 for Everest and Himalayan bank respectively for a four year period
4.2.2.2 Loan loss coverage ratio: A loan loss provision is an expense that is reserved for defaulted loans or credits. It is an amount set aside in the event that the loan defaults. Loan loss coverage is the relationship between total loan losses provision and total non-performing loan .the 34
provision for loan covers the loan losses and bad or default loan if it occurs.so in that sense , it is better if the bank has higher provision to ensure its smooth operation even if default of loan occurs.
Loan loss coverage ratio =
𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒂𝒏 𝒍𝒐𝒔𝒔𝒆𝒔 𝒑𝒓𝒐𝒗𝒊𝒔𝒊𝒐𝒏 (𝑳𝑳𝑷) 𝑻𝒐𝒕𝒂𝒍 𝒏𝒐𝒏 𝒑𝒆𝒓𝒇𝒐𝒓𝒎𝒊𝒏𝒈 𝒍𝒐𝒂𝒏
𝒙 𝟏𝟎𝟎%
Where, Total loan loss provision (LLP) = provision on (Pass loan + Reconstruction loan + Substandard loan + Doubtful loan + Bad loan) Total non-performing loan = Substandard loan + Doubtful loan + Bad loan
Fiscal
Banks
year 2013
2014
2015
2016
total
loan
loss Non-performing
Loan loss coverage
provision
loan
ratio
EBL
705856854
276198772
2.555611848
HBL
1333591967
1186189950
1.124265104
EBL
804575876
470404039
1.710393214
HBL
1128970186
911514998
1.238564575
EBL
878280394
367164030
2.392065459
HBL
1951777381
1783952501
1.094074747
EBL
881053609
264422150
3.331996238
HBL
1354910397
851375948
1.591436075
Table 4: Table to show Loan loss coverage ratio (LLCR)
35
The Table shows total loan loss provision, total non-performing loan and loan loss coverage ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the total loan loss provision of both the banks in the respective years. Similarly, we can also observe the total non-performing loan of banks in the respective years. Obtaining these two, the total loan loss provision is divided total non-performing loan to get the loan loss coverage ratio. Here we can see that loan loss coverage ratio for Everest bank is 2.55561 and that of Himalayan bank is 1.12426 in 2013 respectively. This ratio is 3.33199 in 2016 for Everest bank and 1.59134 for Himalayan bank in the year 2016 .
loan loss coverage ratio 3.331996238
loan loss coverage ratio
3.58 3.08
2.555611848
2.392065459
2.58 2.08
1.710393214
1.58
1.238564575
1.124265104
1.591436075 1.094074747
1.08 0.58 0.08
2013
2014
2015
2016
average
EBL
2.555611848
1.710393214
2.392065459
3.331996238
2.49751669
HBL
1.124265104
1.238564575
1.094074747
1.591436075
1.262085125
Year / Banks EBL
HBL
Figure 4: figure to show Graphical Presentation of Loan loss coverage ratio
The above figure represents the graphical presentation of the loan loss coverage ratio over the period of time. We can easily see here, that the loan loss coverage ratio starts from 2.55561 and 1.71039 for Everest and Himalayan bank in the year 2013. It rises to 1.2385 for Himalayan in coming year and falls to 1.71039 for Everest bank. Similarly, this ratio rises to 2.3920 and to 3.33199 for Everest bank in 2015 and 2016 respectively. Unlike that of Himalayan bank which falls constantly to 1.0940 and then rises to 1.59143 in 2015 and 2016 respectively. This gives out an average of 36
2.49751 and 1.262085 for Everest and Himalayan bank respectively for a four year period 4.2.2.3 Loan loss provision ratio
Banks and credit unions are in the business of lending money to individuals, families and businesses. But not every loan is repaid in full; in fact, many banks lend to risky borrowers by charging high interest rates. To stabilize earnings and remain solvent in bad times, banks estimate losses and seek to hold enough capital to absorb future write-offs. The loan loss provision coverage ratio is an indicator of how protected a bank is against future losses. A higher ratio means the bank can withstand future losses better, including unexpected losses beyond the loan loss provision. Loan losses provision are deductible expenses.it is deducted from interest income. The ratio is calculated as follows
Loan loss provision ratio =
𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒂𝒏 𝑳𝒐𝒔𝒔 𝑷𝒓𝒐𝒗𝒊𝒔𝒊𝒐𝒏 (𝑳𝑳𝑷) 𝑻𝒐𝒕𝒂𝒍 𝑳𝒐𝒂𝒏 𝒂𝒏𝒅 𝑨𝒅𝒗𝒂𝒏𝒄𝒆𝒔
𝒙 𝟏𝟎𝟎%
Where, Total loan losses provision (LLP) = Provision on (pass loan + Reconstruction loan + Substandard loan + Doubtful loan + Bad loan) Total loans and Advances = Total performing loan + Total non-performing loan Fiscal year
Banks
total loan loss Total loan and Loan provision
advances
loss
provision ratio
2013
2014
2015
2016
EBL
705856854
44197762941
0.01597042
HBL
1333591967
41057397533
0.032481162
EBL
804575876
48450304601
0.016606209
HBL
1128970186
46449329430
0.024305414
EBL
878280394
55363518834
0.015863883
HBL
1951777381
55428007254
0.035212837
EBL
881053609
68911543324
0.012785283
HBL
1354910397
69100889341
0.019607713
Table 5: Table to show Loan loss Provision ratio (LLPR)
37
The Table shows total loan loss provision, total loan and advances and loan loss provision ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the total loan loss provision of both the banks in the respective years. Similarly, we can also observe the total loan and advances of banks in the respective years. Obtaining these two, the total loan loss provision is divided total loan and advance to get the loan loss provision ratio. Here we can see that loan loss provision ratio for Everest bank is 0.01597042and that of Himalayan bank is 0.032481162 in 2013 respectively. This ratio is 0.012785 in 2016 for Everest bank and 0.01960 for Himalayan bank in the year 2016
loan loss provision ratio loan loss provision ratio
0.04 0.035
0.035212837
0.032481162
0.03
0.024305414
0.025 0.02
0.019607713 0.01597042
0.016606209
0.015863883 0.012785283
0.015 0.01 0.005 0
2013
2014
2015
2016
average
EBL
0.01597042
0.016606209
0.015863883
0.012785283
0.015306449
HBL
0.032481162
0.024305414
0.035212837
0.019607713
0.027901782
Year / Banks EBL
HBL
Figure 5: figure to show Graphical Presentation of Loan Loss Provision Ratio
The above figure represents the graphical presentation of the loan loss provision ratio over the period of time. We can easily see here, that the loan loss provision ratio starts from 0.01597 and 0.0324811 for Everest and Himalayan bank in the year 2013. It falls to 0.024305 for Himalayan in coming year and rises to 0.016606 for Everest bank. Similarly, this ratio rises to 0.035212 and falls to 0.01960 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which rises slightly to 0.015863 and then falls to 0.0196077 in 2015 and 2016 respectively. This gives out an
38
average of 0.015306 and 0.02790 for Everest and Himalayan bank respectively for a four year period
4.2.3 Management Management (or managing) is the administration of an organization whether it be a business, a not-for-profit organization, or government body. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees or volunteers to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources. The term "management" may also refer to the people who manage an organization. It can be used to check the effectiveness and efficiency of the board of directors, employees, man [power and the officials dealing and handling the customers and other sectors. Management analysis can be done by using the following formula
Management efficiency ratio (MER) = Fiscal
Banks
2014
2015
2016
𝑻𝒐𝒕𝒂𝒍 𝒏𝒐 𝒐𝒇 𝑺𝒕𝒂𝒇𝒇
Net profit after tax Total no of Management
year 2013
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝑻𝒂𝒙
staffs
Efficiency ratio
EBL
147110000
643
228786.9362
HBL
943698000
830
1136985.542
EBL
154970000
696
222658.046
HBL
959107000
835
1148631.138
EBL
157430000
696
226192.5287
HBL
111228700
856
1299400.701
EBL
173020000
739
234127.1989
HBL
193590700
857
2258934.656
Table 6: Table to show Management Efficiency Ratio (MER)
The Table shows total net profit after tax, total no of staffs and management efficiency ratio of Everest and Himalayan bank limited over the time period of 2013
39
to 2016. It gives clear picture of the total net profit after tax of both the banks in the respective years. Similarly, we can also observe the total no of staff of banks in the respective years. Obtaining these two, the total net profit after tax is divided by total no of staff
to get the loan loss provision ratio. Here we can see that loan loss
provision ratio for Everest bank is 228786.93and that of Himalayan bank is 1136985.5 in 2013 respectively. This ratio is 234127.198 in 2016 for Everest bank and 2258934.6 for Himalayan bank in the year 2016
management efficiency ratio
management efficiency ratio 2258934.656
2500000 2000000 1500000
1299400.701
1136985.542
1148631.138
228786.9362
222658.046
226192.5287
234127.1989
2013
2014
2015
2016
average
1000000 500000 0 EBL
228786.9362
222658.046
226192.5287
234127.1989
227941.1775
HBL
1136985.542
1148631.138
1299400.701
2258934.656
1460988.009
Year / Banks EBL
HBL
Figure 6: figure to show Graphical Presentation of Management Efficiency ratio
The above figure represents the graphical presentation of the management efficiency ratio over the period of time. We can easily see here, that the efficiency ratio starts from 22878.9362 and 113698.5542 for Everest and Himalayan bank in the year 2013. It rises to 114863.1138 for Himalayan in coming year and falls to 222658.046 for Everest bank. Similarly, this ratio rises to 129940.0701 and to225893.4656 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which falls slightly to 226192.5287 and then rises to 234127.1989 in 2015 and 2016 respectively. This gives out an average of 227941.1775 and 146098.8009 for Everest and Himalayan bank respectively for a four year period
40
4.2.4 Earnings Earnings are the net benefits of a corporation's operation. Earnings are the amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA earnings before interest, taxes, depreciation, and amortization. Many alternative terms for earnings are in common use, such as income and profit. These terms in turn have a variety of definitions, depending on their context and the objectives of the authors. Every quarter, analysts wait for the earnings of the companies they follow to be released. Earnings are studied because they represent a direct link to company performance.
4.2.4.1 Earning per share Earnings per share is a commonly cited ratio used to show the company's profitability on a per-share basis. It is also commonly used in relative valuation measures such as the price-to-earnings ratio. The price-to-earnings ratio, calculated as price divided by earnings per share, is primarily used to find relative values for the earnings of companies in the same industry. A company with a high price compared to the earnings it makes is considered overvalued. Likewise, a company with a low price compared to the earnings it makes
is
undervalued.
It is calculated as follows
Earnings per share (EPS) =
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝑻𝒂𝒙 𝑵𝒐 𝒐𝒇 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒔𝒉𝒂𝒓𝒆𝒔
41
Fiscal
Banks
Net profit after tax
No of shares
EPS
EBL
147110000
18400000
7.9951087
HBL
943698000
40000000
2.359245
EBL
154970000
18800000
8.2430851
HBL
959107000
40000000
2.3977675
EBL
157430000
48800000
3.2260246
HBL
111228700
50000000
2.224574
EBL
173020000
98800000
1.7512146
HBL
193590700
85000000
2.2775376
year 2013
2014
2015
2016
Table 7: Table to show Earning per Share (EPS)
The Table shows total net profit after tax, total no of shares and Earning per share ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the total net profit after tax of both the banks in the respective years. Similarly, we can also observe the total no of shares of banks in the respective years. Obtaining these two, the total net profit after tax is divided by total no of shares to get the earning per share ratio. Here we can see that EPS ratio for Everest bank is 7.995 and that of Himalayan bank is 2.3592in 2013 respectively. This ratio is 1.7512 in 2016 for Everest bank and 2.277753 for Himalayan bank in the year 2016
42
earning per share ratio
earning per share ratio 9 8 7 6 5 4 3 2 1 0
7.9951087
8.2430851
2.359245
2.3977675
3.2260246 2.224574
2013
2014
2015
2016
EBL
7.9951087
8.2430851
3.2260246
1.7512146
5.30385825
HBL
2.359245
2.3977675
2.224574
2.2775376
2.314781025
2.2775376 1.7512146
average
Year / Banks EBL
HBL
Figure 7: figure to show Graphical Presentation of Earning Per Share
The above figure represents the graphical presentation of the earning per share ratio over the period of time. We can easily see here, that the EPS ratio starts from 7.995 and2.3592 for Everest and Himalayan bank in the year 2013. It rises to 2.3977 for Himalayan in coming year and to8.2430 for Everest bank. Similarly, this ratio falls to 2.2245 and torises to 2.27753 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which falls slightly to 3.2260 and then further to 1.7512 in 2015 and 2016 respectively. This gives out an average of 5.30385 and 2.31478 for Everest and Himalayan bank respectively for a four year period
4.2.4.2 Return on equity Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
It is calculated as follows
Return on Equity (ROE) =
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙 𝑻𝒐𝒕𝒂𝒍 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔 𝒇𝒖𝒏𝒅
𝒙 𝟏𝟎𝟎% 43
Fiscal
Banks
Net profit after tax shareholders fund
ROE
EBL
147110000
55342000
2.658198114
HBL
94369800
5299708
1.780660368
EBL
154970000
62613000
2.475045118
HBL
95910700
6083411
1.576594118
EBL
157430000
76513000
2.057558846
HBL
111228700
3332700
3.337495124
EBL
173020000
83939000
2.061258771
HBL
193590700
4499145
4.302833094
year 2013
2014
2015
2016
Table 8: Table to show Return on Equity (ROE)
The Table shows total net profit after tax, total shareholders’ equity andreturn on equity ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the total net profit after tax of both the banks in the respective years. Similarly, we can also observe the total shareholders’ equity of banks in the respective years. Obtaining these two, the total net profit after tax is divided by total shareholders’ equity to get the loan loss provision ratio. Here we can see that return on equity ratio for Everest bank is 2.658 and that of Himalayan bank is 1.78066in 2013 respectively. This ratio is 2.06125 in 2016 for Everest bank and 4.302833 for Himalayan bank in the year 2016
44
return on equity ratio
return on equity ratio 4.58 4.08 3.58 3.08 2.58 2.08 1.58 1.08 0.58 0.08
4.302833094 3.337495124 2.658198114 1.780660368
2.475045118 2.057558846
2.061258771
1.576594118
2013
2014
2015
2016
average
EBL
2.658198114
2.475045118
2.057558846
2.061258771
2.313015212
HBL
1.780660368
1.576594118
3.337495124
4.302833094
2.749395676
Year / Banks EBL
HBL
Figure 8: figure to show Graphical Presentation of Return on Equity
The above figure represents the graphical presentation of the return on equity ratio over the period of time. We can easily see here, that the ROE ratio starts from 2.658198 and 1.78066 for Everest and Himalayan bank in the year 2013. It falls to 1.57659 for Himalayan in coming year and to 2.4750 for Everest bank. Similarly, this ratio rises to 3.33749 and to rises to 4.3028 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which falls slightly to 2.05755 and then rises slightly to2.061258 in 2015 and 2016 respectively. This gives out an average of 2.3130 and 2.749 for Everest and Himalayan bank respectively for a four year period
4.2.4.3 Return on assets Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". It is calculated as
45
Return on assets (ROA) =
Fiscal
Banks
year 2013
2014
2015
2016
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙 𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
𝒙 𝟏𝟎𝟎%
Net profit after Total assets
ROA
tax EBL
147110000
65741150457
0.223771563
HBL
94369800
74718815
0.126299915
EBL
154970000
70445082845
0.219986965
HBL
95910700
74720031
0.128360091
EBL
157430000
99152806017
0.158775133
HBL
111228700
82801550614
0.134331663
EBL
173020000
113885046402
0.151925126
HBL
193590700
99863008080
0.193856267
Table 9: Table to show Return on Assets (ROA)
The Table shows total net profit after tax, total assets and return on assets ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the total net profit after tax of both the banks in the respective years. Similarly, we can also observe the total assets of banks in the respective years. Obtaining these two, the total net profit after tax is divided by total assets to get the return on assets ratio. Here we can see that return on assets ratio for Everest bank is 0.2237and that of Himalayan bank is 0.1262in 2013 respectively. This ratio is 0.1519 in 2016 for Everest bank and 0.1938 for Himalayan bank in the year 2016
46
return on asset ratio return on asset ratio
0.24
0.223771563
0.219986965
0.22
0.193856267
0.2 0.18
0.158775133
0.16
0.151925126
0.134331663
0.126299915
0.128360091
2013
2014
2015
2016
average
EBL
0.223771563
0.219986965
0.158775133
0.151925126
0.188614697
HBL
0.126299915
0.128360091
0.134331663
0.193856267
0.145711984
0.14 0.12 0.1
0.08
Year / Banks EBL
HBL
Figure 9: figure to show Graphical Presentation of Return on Asset
The above figure represents the graphical presentation of the return on asset ratio over the period of time. We can easily see here, that the ROA ratio starts from 0.2237715 and0.126299 for Everest and Himalayan bank in the year 2013. It rises to 0.12836 for Himalayan in coming year and falls to 0.21998 for Everest bank. Similarly, this ratio rises to 0.13433 and to rises to 0.193856 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which falls slightly to 0.158775 and then rises slightly to 0.15192 in 2015 and 2016 respectively. This gives out an average of 0.188614 and 0.14571 for Everest and Himalayan bank respectively for a four year period
47
4.2.5 Liquidity Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market, such as a country's stock market or a city's real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid. Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending finances investments in relatively illiquid assets, but it funds its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions.
4.3.5.1 Cash reserve ratio Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country. The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the central bank. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.
CRR specifications give greater control to the central bank over money supply. Commercial banks have to hold only some specified part of the total deposits as reserves. This is called fractional reserve banking. It is calculated as follws
Cash Reserve Ratio =
𝑪𝒂𝒔𝒉 𝑩𝒂𝒍𝒍𝒂𝒏𝒄𝒆 𝒊𝒏 𝑵𝑹𝑩 𝑳𝑶𝒄𝒂𝒍 𝑪𝒖𝒓𝒓𝒆𝒏𝒄𝒚 𝑫𝒆𝒑𝒐𝒔𝒊𝒕−𝑴𝒂𝒓𝒈𝒊𝒏 𝑫𝒆𝒑𝒐𝒔𝒊𝒕
48
Fiscal Banks
Cash balance in Local
year
NRB
and
currency Cash reserve ratio margin
deposit 2013
2014
2015
2016
EBL
8159754000
8476706444
0.96260901
HBL
2427014381
5528854464
0.438972376
EBL
8205090000
6972388653
1.176797567
HBL
3766154837
6297700232
0.598020658
EBL
9446922000
7524080766
1.255558293
HBL
5873158748
7678695619
0.764864117
EBL
17126156000
9278771471
1.845735295
HBL
5677702310
8690098111
0.653353074
Table 10: Table to show Cash Reserve Ratio (CRR)
The Table shows cash balance in NRB, local currency and marginal deposit andcash reserve ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the cash balance in NRB of both the banks in the respective years. Similarly, we can also observe local currency and marginal deposit in the respective years. Obtaining these two, the total cash balance in NRB is divided by local currency and marginal deposit to get the return on assets ratio. Here we can see that return on assets ratio for Everest bank is 0.96260 and that of Himalayan bank is 0.4389in 2013 respectively. This ratio is 1.845 in 2016 for Everest bank and 0.65335 for Himalayan bank in the year 2016
49
cash reserve ratio
cash reserve ratio 2.08 1.88 1.68 1.48 1.28 1.08 0.88 0.68 0.48 0.28 0.08
1.845735295
1.255558293
1.176797567 0.96260901
0.764864117
0.598020658
0.653353074
0.438972376
2013
2014
2015
2016
average
EBL
0.96260901
1.176797567
1.255558293
1.845735295
1.310175041
HBL
0.438972376
0.598020658
0.764864117
0.653353074
0.613802556
Year / Banks EBL
HBL
Figure 10: figure to show Graphical Presentation of Cash Reserve Ratio
The above figure represents the graphical presentation of the cash reserve ratio over the period of time. We can easily see here, that the CRR ratio starts from 0.96260 and 0.438972 for Everest and Himalayan bank in the year 2013. It rises to 0.59802 for Himalayan in coming year and to 1.17679 for Everest bank. Similarly, this ratio rises to 0.76486 and to falls to 0.653353 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which rises slightly to 1.2555 and then rises to 1.845735 in 2015 and 2016 respectively. This gives out an average of 1.310175 and 0.61380 for Everest and Himalayan bank respectively for a four year period
4.2.5.2 Cash and Bank balance ratio A higher ratio shows the higher and greater ability of the bank to meet unexpected demand of the depositors. On the contrary lower ratio indicates that bank might face liquidity crunch while paying obligations. It can be calculated as follows
Cash and bank balance ratio =
𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑩𝒂𝒏𝒌 𝒃𝒂𝒍𝒂𝒏𝒄𝒆 𝑻𝒐𝒕𝒂𝒍 𝒅𝒆𝒑𝒐𝒔𝒊𝒕
50
Fiscal Banks
Cash and Bank Total deposit
Cash
year
balance
balance ratio
2013
2014
2015
2016
and
EBL
11215794000
57720464632
0.194312261
HBL
3648199000
53072319487
0.068740146
EBL
13172782000
62108135754
0.212094307
HBL
5542590000
64674848295
0.085699312
EBL
25116482000
83093789957
0.302266656
HBL
8387412000
73538200185
0.114055171
EBL
23117394000
93735480708
0.246623731
HBL
7874984000
87335785849
0.09016904
Bank
Table 11: Table to show Cash and Bank Balance Ratio (CBBR)
The Table shows cash and bank balance, total deposit and cash and bank balance ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the cash and bank balance of both the banks in the respective years. Similarly, we can also observe total deposit in the respective years. Obtaining these two, the total cash and bank balance is divided by total deposit to get the cash and bank balance ratio. Here we can see that CaB ratio for Everest bank is 0.194312 and that of Himalayan bank is 0.06874in 2013 respectively. This ratio is 0.246623 in 2016 for Everest bank and 0.09016 for Himalayan bank in the year 2016
51
cash and bank balance ratio
cash and bank balance ratio 0.35
0.302266656
0.3 0.25
0.246623731 0.194312261
0.212094307
0.2 0.15 0.1
0.114055171 0.068740146
0.085699312
0.09016904
0.05
0
2013
2014
2015
2016
average
EBL
0.194312261
0.212094307
0.302266656
0.246623731
0.238824239
HBL
0.068740146
0.085699312
0.114055171
0.09016904
0.089665917
Year / Banks EBL
HBL
Figure 11: figure to show Graphical Presentation of Cash and Bank Balance Ratio
The above figure represents the graphical presentation of the cash and bank balance ratio over the period of time. We can easily see here, that the CaBratio starts from 0.194312 and 0.068740 for Everest and Himalayan bank in the year 2013. It rises to 0.085699 for Himalayan in coming year and to 0.212094 for Everest bank. Similarly, this ratio rises to 0.114055 and to falls to 0.090169 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which rises slightly to 0.302266 and then falls to 0.246623 in 2015 and 2016 respectively. This gives out an average of 0.2388 and 0.08966 for Everest and Himalayan bank respectively for a four year period
4.2.5.3 Investment in government securities ratio Government time to time offers to sell short and long term obligation papers and securities at a minimum rate of return and risk, which can be converted into cash to meet the short term obligation. That is why commercial banks have to invest in government securities to certain level. It is calculated as follows.
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Investment in government security ratio =
𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝒊𝒏 𝒈𝒐𝒗𝒆𝒓𝒏𝒎𝒆𝒏𝒕 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒚 𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒑𝒐𝒔𝒊𝒕
Fiscal Banks
investment
year
government
government
securities
security ratio
2013
2014
2015
2016
in Total deposit
𝒙 𝟏𝟎𝟎
Investment
EBL
6988310000
57720464632
0.121071617
HBL
7279759154
53072319487
0.13716678
EBL
2544737000
62108135754
0.040972684
HBL
10158618779
64674848295
0.15707217
EBL
8587725000
83093789957
0.103349781
HBL
8886096895
73538200185
0.120836475
EBL
10361766000
93735480708
0.110542624
HBL
5281324304
87335785849
0.060471481
in
Table 12: Table to show Investment in Government Securities ratio
The Table shows investment in government securities, total deposit and government security investment ratio of Everest and Himalayan bank limited over the time period of 2013 to 2016. It gives clear picture of the investment in government securities of both the banks in the respective years. Similarly, we can also observe total deposit in the respective years. Obtaining these two, the investment in government securities is divided by total deposit to get the investment in government securities ratio. Here we can see that IGR ratio for Everest bank is 0.1210 and that of Himalayan bank is 0.1371in 2013 respectively. This ratio is 0.1105 in 2016 for Everest bank and 0.06047 for Himalayan bank in the year 2016
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government securities ratio
investment in government securities ratio 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0
0.15707217 0.13716678 0.121071617
0.120836475 0.103349781
0.110542624
0.060471481
0.040972684
2013
2014
2015
2016
average
EBL
0.121071617
0.040972684
0.103349781
0.110542624
0.093984177
HBL
0.13716678
0.15707217
0.120836475
0.060471481
0.118886727
Year / Banks EBL
HBL
Figure 12: figure to show Graphical Presentation of investment in Government Securities Ratio
The above figure represents the graphical presentation of the investment in government securities ratio over the period of time. We can easily see here, that the IGS ratio starts from 0.12107 and0.137166 for Everest and Himalayan bank in the year 2013. It falls to 0.1570 for Himalayan in coming year and rises to 0.15707 for Everest bank. Similarly, this ratio rises to 0.120836 and to to0.11054 for Himalayan bank in 2015 and 2016 respectively. Unlike that of Everest bank which falls slightly to 0.103349 and then falls to 0.110542 in 2015 and 2016 respectively. This gives out an average of 0.093984 and 0.118886 for Everest and Himalayan bank respectively for a four year period
4, 3 Major findings The major findings of CAMEL analysis on Everest bank limited and Himalayan Bank
limited for four years are as follows.
Capital adequacy ratio is the measure of financial strength of financial institution. In particular it is the ability to cushion abnormal loss and operation default. So higher is always better here. Over the years of study Everest bank had the lowest level of capital adequacy ratio at0.113107411.and highest level of capital adequacy at 0.133284074. Giving average at 0.126579224 .similar 54
.was with Himalayan bank which had lowest limit at 0.108446622.and highest level at 0.115532465giving average at0.111917481. So, both were able to maintain the capital adequacy ratio.
Core capital ratio is the measure of proprietor’s contribution or back up of the financial institution.it is the ability to cushion abnormal loss and operation default by the proprietor’s contribution . The Everest bank limited has its lowest level of core capital ratio at 0.08171 on FY 2013 and highest in 0.104401 in FY 2015. Giving an average of 0.093287 of four years. Similarly the Himalayan bank has its lowest core capital ratio at 0.08955 in FY 2013 and highest at 0.09477 in FY 2015 giving average at 0.09223.
Non-performing loan ratio helps to study the efficient and effective lending of loans and advances. It shows how carefully and calculatedly the bank can do risk management. So here lower ratio is preferred and higher is not considered good. Everest bank limited has the lowest non performing ratio at 0.003871 in FY 2016 and highest at 0.009709 in FY 2014. It gives an average at 0.0066067 of four years. Similarly, Himalayan bank has lowest non performing ratio at 0.012320 in FY 2016 and highest at 0.032185 in FY 2015 giving average at 0.023255.
Loan loss coverage is the provision set aside of the total non-performing loan in case it goes default.so higher loan loss coverage ratio is preferred in the financial institution as it ensures little or no affect in the operation even in case of loss. Everest bank limited has the lowest limit of ratio at 1.7103 in the FY 2014. it has highest limit of non-performing loan at 3.3319 in the FY 2016. Giving out an average of 2.4975 of the study year. Similarly Himalayan bank had its lowest ratio at 1.0940 in FY 2015 and highest at 1.5914 in FY 2016 giving out the average of 1.2620 of the study period.
Loan loss provision ratio is the amount set aside for potential loss of the total lend amount or loan and advances. Higher provision banks maintains here lower fund it has to utilize as these also includes provision for good loan 55
which is just hold and unutilized.so lower loan loss provision is preferred in financial institutions. Everest bank has the lowest loan loss provision set at 0.01278 in FY 2016 and highest set at 0.016606 in FY 2014 giving average of study at 0.01530. Similarly Himalayan bank limited has lowest limit loan los provision set at 0.0196077 in FY 2016 and highest as 0.035212 in FY 2015 giving average at 0.02790.
Management ratio is concerned with the efficiency and effectiveness of the employees.in other words it shows how much income or profit an employee can generate. Everest bank has its lowest value at 222658.046 in the FY 2014 and highest at 234127.19 in FY 2016. Giving out average of 227941.1775 of study years. Similarly Himalayan bank has lowest value at 1136985.542 in FY 2013 and highest at 2258934.656 in FY 2016. Giving average of 1460988.009
Earnings per share is the reward to the shareholders for their contribution of the profit. Higher is always appreciated as it shows return to contributors as a whole. Everest bank limited has the highest EPS at 8.24308 in FY 2014 and lowest at 1.7512146 in FY 2016 giving average of 5.30385 .similarly Himalayan bank has highest EPS at 2.27753 in FY 2016 and lowest at 2.22457 in FY 2015 giving average of 2.31478 as a whole.
Return on equity is the income for the contribution to the promoters and proprietors. Higher ratio is considered better and lower is considered nonperformance. Everest bank limited has highest return ratio at 2.6581 in FY 2013 and lowest at 2.05755 in FY 2015 giving average at 2.313015. similarly Himalayan bank limited has lowest ratio at 1.57659 in FY 2014 and highest at 4.30288 in FY 2016 giving average at 2.7493
Return on assets is the study of the return or income from use of assets. In other words it is how much contribution the asset has made to the revenue generation process.so bigger is always better. Here, Everest bank limited has highest ratio at 0.22377 in FY 2013 and lowest at 0.1519 in FY 2016. Giving average of 0.18861. Similarly Himalayan bank limited has lowest value at
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0.126299 in FY 2013 and highest at 0.19388 in 2016 giving average of study at 0.145711.
Cash reserve ratio provides idea about the banks’deposit in NRB and ability to meet the liquidity. So higher ratio is considered appropriate. However, it must be to given limit and not excess to avoid useless holding of fund .here Everest bank limited has highest level of this ratio at 1.84573 in FY 2016 and lowest level at 0.9626 in FY 2013. Giving average of study at 1.310175. Similarly, Himalayan bank limited has lowest ratio at 0.438972 and highest at 0.7648 in FY 2015 giving average of 0.613802 of the study.
Cash balance ratio is the ratio describing the ability of the financial institution meet the unexpected withdrawal request by the depositors. If its higher it shows soundness of bank ability however lower ratio represents chances of liquidity crunch. Everest bank has the highest ratio at 0.302266 in FY 2015 and lowest at 0.1943122 in FY 2013. Giving average of the study at 0.2388.similarly, Himalayan bank has highest ratio at 0.114055 in FY 2015 and lowest at 0.068740 in FY 2013 giving an average of study at 0.089665.
Investment in government securityis a best way to ensure quick and safe change of securities into cash with involvement of minimum risk in it. So higher ratio is better in relation to lower ratio. Everest bank a lowest ratio at 0.0409 in FY 2014 and highest at 0.1219 in FY 2013 giving an average of study at 0.09398. similarly, Himalayan bank limited has highest ratio at 0.15707 in FY 2014 and lowest ratio is at 0.060471 in FY 2016 giving an average at 0.118886
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In summary all this data’s can be represented as follows:
Title
Capital Adequacy
Ratio
Capital Adequacy Ratios
5 Liquidity
Average EBL
Average HBL
Remarks
0.126579224 0.111917481
EBL
0.093287479 0.092238583
EBL
Non-performing loan
0.00660679
0.02325517
EBL
Loan loss coverage ratio:
2.49751669 1.262085125
EBL
Loan loss provision ratio
0.015306449 0.027901782
EBL
227941.1775 1460988.009
HBL
Earning per share
5.30385825 2.314781025
EBL
Return on equity
2.313015212 2.749395676
HBL
Return on assets
0.188614697 0.145711984
EBL
Cash reserve ratio
1.310175041 0.613802556
EBL
Cash and Bank balance ratio
0.238824239 0.089665917
EBL
Investment in government
0.093984177 0.118886727
HBL
Management 3 Management
4 Earnings
4 year
(CAR) Core capital ratio
Asset quality
4 year
securities ratio
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Chapter V Summary, Conclusion and Recommendation 5.1 Summary This study was conducted with objective to analyze and compare the financial position of the financial institution here, Everest bank limited and Himalayan bank limited ,over four year period of time from FY 2013 to FY 2016 . The study is based on secondary data over the period of time. For analysis of the financial a world recognized tool is used ieCAMEL. CAMEL is a abbreviation for 5 major type of ratio classes. Here C stands for capital adequacy ratio, A stands for asset quality, M stands for management, E stands for earning and L stands for liability analysis. We use these ratios for analysis because unlike for other production, manufacturing industries here most criteria’s and factors are not applicable. The various statistical tools have been used to make analysis meaningful and systematic and meet the research objective During the research the areas that formed the part of the conceptual review were historical development of financial institution and evolution of commercial banks in Nepal, concept of commercial bank, function of banks and its components Capital composition of the bank assures people of its inability to do any wrong and so these ratios are considered good when high. However it must be high to a mandatory level, as too much of it might direct bank towards single operation or too diverted operation and management There are various factors that contribute to low performance of banking and financial institution that can easily be seen in the earning per share ratio even to a rookie eyes. Some of these are high maintenance of provisions for loan by lavishly handing out of loan to the customers. High nonperforming provision loan and its effect makes bank hold large sum of fund in the institution without operation capabilities. This creates loss in the financial institution to operate and perform. Management must try to maintain the efficiency level by either earning more and giving much more target sectors to its staffs or by reducing costs in the institutions at base levels. This increase in efficiency helps to know about the productivity and efficiency. 59
Earning is a base of operation of any institution. Return on the investment of asset, equity and a share to the shareholders keeps an interest of all the potential investors to the company Similarly cash reserve in the NRB and investmeant in government securities helps the potential and organization itself to be sure of its investment and orher life operation and future itself.
5.2 Conclusion
The organization Everest bank limited has a long and prestigious history in operation and management and service to the people of Nepal. After such long operation and management and trial and error in every sector the bank has been able to reduce every potential error sector and perform with high efficiency effectiveness with high profit and productivity Himalayan bank in the present is one of the most prestigious banks and is operating and performing to serve the people of Nepal in an most effective and efficient way .it is a bank in its learning process and so comparing its datas and evaluating it with a elegant bank as Everest helps to make a unique and efficient benchmark for the organization to attain doing so it can make a unique and better image in the mind of the people
5.3 Recommendation
These banks and financial institution in the country has there unique and own way of operation and management. However some suggestions and opinions to change are always appreciated to grow and develop. Some so such suggestions are as follows.
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Everest bank can benefit much more if it can increase the net profit by reducing the costs and wastage. As unlike HBL ,EBL has a comparative lower management efficiency
HBL must work for increasing the earning per share as its too low in comparision to the Everest bank.
Comparision of a new bank with old and elegant helps the weak to find its sectoes of improvement and make necessary changes to gain est benefits form all sectors as a whole
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References about us : Himalayanbank limited. (2017, 04 12). Retrieved from himalayanbank: https://www.himalayanbank.com/ About us : Everest bank ltd. (2017, 04 05). Retrieved from everest bank ltd: http://www.everestbankltd.com/ Banks financial institution .wikipedia. (n.d.). Retrieved from wikipedia: https://www.wikipedia.org/ Everest Bank limited. (2016). 21st Annual Report 2014-2015 (English). kathmandu ,Nepal: Everest Bank limited. Everest Bank limited. (2017). 22nd Annual Report 2015-2016 (English). kathmandu, Nepal : Everest Bank limited. Himalayan Bank limited. (2014). Annual Report 2013-2014 (English). kathmandu Nepal: Himalayan Bank limited. Himalayan Bank limited. (2016). Annual Report 2014-2015 (English). kathmandu Nepal: Himalayan Bank limited. inquary: investopedi. (2017, 04 04). Retrieved from investopedia: http://www.investopedia.com/ RAI, E. (2010). A study of Camel analysis of commercial banks . Thesis report, 97.
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