Determinants of commercial banks performance: A case of Nepal

Ambu Gyawali, Anita K. Luitel, Ayush Nepal, Barsha Shrestha, BidurKoirala

Abstract

This study examines the determinants of financial performance Nepalese commercial banks. The
return on assets, return on equity and net interest margin are the dependent variables. The
independent variables are capital adequacy ratio, bank size, bank liquidity, shareholders equity
ratio, operating expense to interest income ratio, annual growth in gross domestic product and
inflation. This study is based on the secondary sources of data that are collected from 23
Nepalese commercial banks through 2010/11 to 2014/15, leading to a total of 115 observations.
The data were collected from the Nepal Stock Exchange, Security Exchange Board of Nepal,
Banking and Financial Statistics of NRB and annual reports of the selected commercial banks.
The regression models are estimated to test the significance and impact of different bank specific
and macro variables on the performance of Nepalese commercial banks.

The study reveals that return on assets is positively related to size, inflation, gross domestic
product and shareholders equity ratio. This shows that increase in size, inflation, gross domestic
product and shareholders equity ratio leads to increase in return on assets. However, capital
adequacy ratio is negatively related to return on assets. Similarly, the result also shows that
inflation and operating efficiency to interest income ratio are negatively related to return on
equity. However, size, inflation and shareholders equity ratio are positively related to net interest
margin. The regression result shows that the beta coefficients are positive for size, gross
domestic product and shareholders equity ratio with bank performance, whereas the beta
coefficients are negative for operating efficiency to interest income ratio.

Keywords: Return on assets, capital adequacy ratio, bank size, bank liquidity, annual growth in
gross domestic product and inflation.

Introduction
Banks, as financial institutions, play a vital role for bringing financial stability and economic
growth through their expected contribution by mobilizing financial resources across the economy
(Masood & Ashraf, 2012). A sound and profitable banking system is able to improve financial
system stability and economic growth as it makes the economy more endurable to negative and
external shocks (Athanasoglou et al., 2008). On the other hand, insolvency of the system leads to
economic crisis (Chaplinska, 2012). Moreover, profitability is considered as precondition for an
innovative, productive and efficient banking system (Chen & Liao, 2011). Therefore,
investigation of the determinants of profitability is vital for the growth and stability of the whole
economy.

After the financial crisis that began in 2008, banks are taking steps to improve their performance
measurement capabilities in light of changed economic and market conditions and new
management needs. Revenue growth continues to be difficult to achieve due to weak economic
conditions, low interest rates and regulatory restrictions (Karr, 2012).

Rose (1999) found that the net after-tax income of banks commonly measured by return on assets
and return on equity ratios. Numerous external factors that affect these ratios include; inflation
rate, real interest rate, real gross domestic product, imports and exports of a country, etc. The
determinants of bank profitability can be split between those that are internal and those that are
external. Internal determinants of bank profitability can be defined as those factors that are
influenced by the banks management decisions and policy objectives. Management effects are
the results of differences in bank management objectives, policies, decisions, and actions
reflected in differences in bank operating results, including profitability. Angbazo (1997)
examined net interest margin for a sample of US banks for the 1989-2003 time period and found
that management efficiency, default risk, opportunity cost of non-interest bearing reserves and
leverage are positively associated with banks net interest margin.

All the bank specific determinants with the exception of size affect the bank profitability.
Bennaceur & Naucer (2008) revealed that capital adequacy ratio has positive effect on
profitability and negative impact of size on profitability. There was no impact of macroeconomic
indicators on banks profitability. There are various factors that affect the profitability of banking
sector in any economy. Most studies divide the determinants of commercial banks performance
into two categories, namely internal and external factors (Khrawish, 2011). The performance of
the bank is mostly measured by, their earnings and how profitable they are. Profitability is
simply the difference between total revenue and total cost. Thus, the factors that affect the
commercial bank profitability would be those that affect the banks revenue and the costs.

Molyneux and Thornton (1992) found a significant positive association between the return on
equity and the level of interest rates, bank concentration and government ownership. Abreu and
Mendes (2002) revealed that well capitalized banks face lower expected bankruptcy costs and
this advantage translate into better profitability and inflation rate is also relevant. Demergu-
Kunt and Huizingha (1999) found that a larger ratio of bank assets to GDP and a lower market
concentration ratio lead to lower margins and profits.
Goddard and Wilson (2004) found that despite the growth in competition in European financial
markets, there was significant persistence of profit from one year to the next. Likewise, the study
found positive relationship between the ratio of capital to assets and profitability. Bhatti and
Hussian (2010) found that market concentration supports profitability of the commercial banks.

Liquidity risk, which is due to the possible inability of a bank to adapt itself to decrease its
liabilities or realize gains on the side of the balance sheet, is considered an important determinant
of bank profitability and net interest margin. The loan market, particularly credit to households
and companies is risky and has a higher expected profitability than other assets of the bank, such
as the safety of government. Demirg-Kunt & Huizinga (2001) found a significant negative
relationship between liquidity and profitability. Molyneux & Thornton (1992) also found a
negative relationship between bank profitability and the level of liquid assets held by the bank.
These results are in disagreement with those of Bourke (1989)who found a positive and
statistically significant relationship. Demirg-Kunt & Huizinga (2001) also found a statistically
significant positive relationship between liquidity and bank profits.

Berger (1995) revealed that the return of equity and capital to asset ratio tend to be positively
related. Neeley and Wheelock (1997) found that bank performance is positively related to the
annual percentage changes in the states per capita income. Angbazo (1997) found that default
risk, the opportunity cost of non-interest bearing reserves, leverage and management efficiency
are all positively associated with bank interest spread.
In the context of Nepal, Shrestha, (2015)found that that non-performing loan to total loan, capital
adequacy ratio, GDP and inflation are the major determinants of bank profitability. Adhikari
(2016) found that ROA is positively related to core capital to risk weighted assets ratio and GDP
growth rate, NPL, operating expenses ratio, liquidity ratio and total deposit to total assets ratio
was negatively related to ROA. Hakuduwal (2014) concluded that there is positive significant
impact of total assets, total deposits and loan and advance on profitability indicator ROA in
Nepalese finance companies. There is negative significant impact of total equity on profitability
indicator ROA. A study on evaluating the comparative financial performance of Nepal Arab bank
Indosuez bank revealed that the both banks are maintaining adequate liquidity to meet the short
term obligations (Acharya, 1992).
The purpose of this study is to analyze the impact of bank specific and macroeconomic variables
on the performance of commercial banks of Nepal. Specially, it examines the performance of
commercial banks through the micro and macro variables of capital adequacy ratio, bank size,
banks liquidity, shareholders equity ratio operating expenses to net income ratio, gross domestic
product and inflation rate.

The remainder of this study is organized as follows. Section two describes the sample, data and
methodology. Section three presents the empirical results and the final section draw conclusions
and discuss the implications of the study findings

Methodological aspects
This study is based on secondary data which were gathered from 23 commercial banks in Nepal
for the period of 2010/11-2014/15, leading to the total of 115 observations. The secondary data
have been obtained from data base maintained by Nepal Rastra Bank (NRB), Ministry of
Finance (MoF) and concerned banks. The pooled cross-sectional data analysis has been
undertaken in the study. Table 1 shows the number of commercial banks selected for the study.
Table 1: List of sample banks selected for the study along with the study period and number of observations

S.N. Name of the banks Study period Numbers of

observations
1 Nepal Bank Limited 2010/11- 5
2014/15
2 Nabil Bank Limited 2010/11- 5
2014/15
3 Nepal Investment Bank Limited 2010/11- 5
2014/15
4 Standard Chartered Bank Limited 2010/11- 5
2014/15
5 Himalayan Bank Limited 2010/11- 5
2014/15
6 Nepal SBI Limited 2010/11- 5
2014/15
7 Nepal Bangladesh Bank Limited 2010/11- 5
2014/15
8 Everest Bank Limited 2010/11- 5
 2014/15
9 NCC Bank Limited 2010/11- 5
2014/15
10 Machhapuchhre Bank Limited 2010/11- 5
2014/15
11 Kumari Bank Limited 2010/11- 5
2014/15
12 Laxmi Bank Limited 2010/11- 5
2014/15
13 Siddharth Bank Limited 2010/11- 5
2014/15
14 Agriculture Bank Limited 2010/11- 5
2014/15
15 Citizen's Bank International 2010/11- 5
Limited 2014/15
16 Prime Commercial bank Limited 2010/11- 5
2014/15
17 Sunrise Bank Limited 2010/11- 5
2014/15
18 NMB Bank Limited 2010/11- 5
2014/15
19 Janata Bank Limited 2010/11- 5
2014/15
20 Mega Bank Limited 2010/11- 5
2014/15
21 Civil Bank Limited 2010/11- 5
2014/15
22 Century Commercial Bank 2010/11- 5
Limited 2014/15
23 Sanima Bank Limited 2010/11- 5
2014/15
Total observations 115

Thus, the study is based on 115 observations.

The Model

The model estimated in this study assumes that the bank profitability depends on bank specific
and macro specific variables. Therefore, the model takes the following form:
Banks performance = f (capital adequacy ratio+ size +shareholders equity +operating profit to
net income ratio + inflation +annual growth in gross national product). More specifically, the
relationship between bank specific and country specific variables can be tested through following
models:
Model 1
ROA = + 1CAR + 2SIZE+ 3ETA + 4OPEFF + 5INF + 6 GDPGR + e (1)
Model 2
ROE = + 1 CAR + 2 SIZE + 3ETA + 4OPEFF + 5INF + 6GDPGR + e (2)
Model 3
NIM = + 1 CAR + 2 SIZE+ 3ETA + 4OPEFF + 5INF + 6GDPGR+ e (3)
 Dependent variables Description
ROA = Return on assets Net income/total assets
ROE = Return on equity Net income/Total equity
NIM = Net interest Net interest income to average earning
margin

The independent variables consist of bank specific and macroeconomic variables as under:

Bank specific variables

Independent variables
SIZE = Bank size
CAR = Capital adequacy ratio
ETA = Shareholders equity ratio
OPEFF = Operating expenses
ratio
Description
Natural logarithm of total assets
(Tier 1 capital+ Tier 2 capital)/Risk weighted exposures
Total shareholder equity/total assets
Operating expenses/net income

Macroeconomic variables
Independent variables
GDP= Gross domestic
product
INF = Inflation
Description
Rate of annual change in real GDP.
The rise in general price level of goods and services in an
economy.

Capital adequacy ratio (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. Capital is one of the bank specific factors that
influence the level of bank profitability. Capital is the amount of own fund available to support
the banks business and act as a buffer in case of adverse situation The study showed that there is
positive relationship between capital adequacy ratio and bank performance (Athanasoglou et.al.,
2005). Diamond & Rajan (2000) found that greater bank capital reduces the chance of bank
distress. Similarly, Dang (2011) concluded that capital adequacy ratio has positive relationship
with banks performance. Based on this, this study develops the following hypothesis:
H1: There is positive relationship between capital adequacy ratio and bank performance.

Banks size (SIZE)

Size refers to the bank size that is calculated by logarithm of total assets.(Beaver, 1966). This
implies that the probability of failure is more likely to strike a smaller company in recessionary
times. Baumol (1962) proposed that the large banks wish to keep their good ratings and therefore
have considerable market-determined excess capital reserves. Mitchell et al. (1994)concluded
that a banking organizations asset-size is an important determinant of its performance in an
positive direction, which means that larger banks have better performance. Based on this, this
study develops the following hypothesis:
H2: There is positive relationship between banks size and bank performance.

Shareholders equity ratio (ETA)

The ratio is calculated by dividing a company's total shareholder equity by its total assets.
Shareholders equity ratio indicates the importance of capital in the banking (Ongore & Kusa,
2013). A high level of capital is likely to reduce the probability that the bank act prudently in
granting credit. High magnitudes of capital induced losses for shareholders in the event of bank
failure (Repullo & Suarez, 2004). The higher capitalization may reflect the strength and
soundness of banks. Generally, the shareholders equity is positively related to the financial
performance of banks (Gull, 2011). There is a positive correlation between ROA and equity of
shareholders (Molyneux & Thornton, 1992). Based on this, this study develops the following
hypothesis:
H3: There is positive relationship between shareholders equity and bank performance.

Operating expense to interest income (OPEFF)

The operating expense ratio (OER) is a measure of what it costs to operate a piece of property
compared to the income that the property brings in. (Baumol, 1962). Karim et al. (1999) stated
that there exists a negative relationship between operating expense ratio and bank performance.
The operating expense ratio is calculated by dividing a property's operating expense by its gross
operating income and used for comparing the expenses of similar properties. Based on this, this
study develops the following hypothesis:
H4: There is negative relationship between operating expense ratio and bank performance.

Gross domestic product (GDP)

Nominal GDP is the total production of goods and services valued at current prices. The growth
of nominal GDP per capita has been used as a proxy for the economic growth. Shubiri
(2010)examined the relationship microeconomic factors with the stock price and firm
performance and found highly positive significant relationship between market price of stock&
firm performance and gross domestic product. Nisa & Nishat (2011) found that macroeconomic
indicators GDP growth has positive significant relationship with the stock prices and firms
performance. Based on this, this study develops the following hypothesis:
H5: There is positive relationship between annual growths in gross domestic products and return
on assets.

Inflation (INF)
Inflation refers to the measures changes in the price level of a market basket of consumer goods
and services purchased by households. Changes in INF are used to assess price changes
associated with the cost of living. Malaolu et al. (2013) stated that there is a negative relationship
between the inflation rate and firms performance. The higher the average inflation rate the
higher the uncertainty of firms performance (Clements and Galvao 2008). Based on this, this
study develops the following hypothesis:
H6: There is negative relationship between inflation and bank performance.

Results and discussion

Descriptive statistics
Table 2 presents the descriptive statistics of selected dependent and independent variables during
the period 2010/11 to 2014/15.
 Table 2: Descriptive statistics
(This table shows the descriptive statistics of dependent and independent variables of commercial banks for the
study period of 2010/11 to 2014/15.The dependent variablesarereturn on assets(return on assets defined as net
income to total assets), return on equity (return on equity defined as net income to total equity) and net interest
margin (net interest margin defined as net interest income to earning assets)and independent variables are CAR
= capital adequacy ratio, SIZE = bank size (defined as size of the bank measured by the log value of total assets),
ETA = shareholders equity ratio (shareholders equity ratio defined as total equity to total assets), OPEFF =
operating expense ratio (operating expense ratio defined as operating expenses to net income), INF = annual
inflation rate and GDPGR = annual growth in gross domestic product.

Variables Minimum Maximum Mean Std. Deviation

ROA (%) -0.99 4.01 1.38 0.84
ROE (%) -361.36 33.19 11.0 36.06
NIM (%) 1.50 6.73 3.20 0.89
SIZE (log) 21.70 25.55 24.22 0.72
CAR (%) -9.66 42.08 12.74 5.76
OPEFF -2.33 131.88 4.17 14.83
ETA -0.09 0.44 0.11 0.06
GDP (%) 3.40 5.40 4.22 0.78
INFLATION (%) 7.20 9.90 8.82 0.98

Correlation analysis
Having indicated the descriptive statistics, the Pearson correlation coefficient has been computed and the
results are presented in Table 3.

Table 3: Correlation matrix

(This result is based on panel data of 23 banks with 115 observations for the period of 2010/11 to 2014/15, by using
linear regression model. The model is, ROA = + 1 CAR + 2 SIZE + 3 ETA + 4 OPEFF + 5 INF + 6 GDPGR
+ eit, ROE = + 1 CAR + 2 SIZE + 3 ETA + 4 OPEFF + 5 INF + 6 GDPGR + eit, NIM = + 1 CAR + 2
SIZE + 3 ETA + 4 OPEFF + 5 INF + 6 GDPGR + eit, where, the dependent variable is return on assets(return
on assets defined as net income to total assets), return on equity (return on equity defined as net income to total
equity) and net interest margin (net interest margin defined as net interest income to earning assets)and independent
variables are CAR = capital adequacy ratio, SIZE = bank size (defined as size of the bank measured by the log
value of total assets), ETA = shareholders equity ratio (shareholders equity ratio defined as total equity to total
assets), OPEFF = operating expense ratio (operating expense ratio defined as operating expenses to net income),
INF = annual inflation rate and GDPGR = annual growth in gross domestic product.

ROA ROE NIM SIZE CAR OPEFF INF GDP ETA

ROA 1

ROE 0.225* 1

NIM 0.529** 0.034 1

SIZE 0.497** 0.063 0.347** 1

CAR -0.042 0.172 -0.058 -0.537** 1

 OPEFF -0.321** -0.076 -0.183 -0.368** 0.167 1

INF 0.018 -0.103 0.234* -0.238* 0.062 0.021 1

GDP 0.022 0.026 -0.065 0.061 -0.181 -0.014 0.162 1

ETA 0.007 0.094 0.074 -0.651** 0.804** 0.219* 0.122 -0.114 1

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

The table shows that the bank size is positively correlated to return on assets and net interest margin for
Nepalese commercial banks. This indicates that larger the bank size, higher would be return on assets and
net interest margin. Likewise, the operating expenses ratio is negatively correlated to return on assets
indicating increase in operating expenses ratio leads to decrease in the return on assets.

The table also reveals that inflation is negatively correlated to return on equity indicating higher the
inflation; lower would be the return on equity. Similarly, the result also reveals that capital adequacy ratio
is negatively correlated to net interest margin and return on assets. Also, gross domestic product is
negatively correlated to net interest margin but positively correlated to return on assets and return on
equity. This explains that higher gross domestic product leads to lower net interest margin and higher
return on assets and return on equity.

Regression

Having indicated the Pearson correlation coefficients, the estimated regression results of firms specific
and macroeconomic variables on return on assets is presented in Table 4.
Table 4: Results for the regression of bank specific and macroeconomic variables on return on
assets
(This result is based on panel data of 23 banks with 115 observations for the period of 2010/11 to 2014/15, by using
linear regression model. The model is, ROA = + 1 CAR + 2 SIZE + 3 ETA + 4 OPEFF + 5 INF + 6 GDPGR
+ eitwhere, the dependent variable is return on assets (return on assets defined as net income to total assets) and
independent variables are CAR = capital adequacy ratio, SIZE = bank size (bank size defined as size of the bank
measured by the log value of total assets), ETA = shareholders equity ratio (shareholders equity ratio defined as
total equity to total assets), OPEFF = operating expense ratio (operating expense ratio defined as operating
expenses to net income), INF = annual inflation rate and GDPGR = annual growth in gross domestic product.

Regression Coefficient of ROA

Intercept
Models SZ CAR OPEFF INF GDP ETA ADJ. R2 SEE F
s
0.581*
1 -12.62** * 0.24 0.72 37.02
(5.48) (6.09)
1.46** -0.006 0.17 0.83 0.204
2
(7.63) (0.452)
-
3 1.45** 0.018** 0.195 0.796 13.01
(8.85) (3.61)
1.24 0.015 0.209 0.84 0.056
4
(1.74) (0.19)
5 1.28** 0.024 0.078 0.84 0.057
 (2.96) (0.24)
1.37** 0.099 0.092 0.084 0.006
6
(8.53) (0.074)
-17.97** 0.77** 0.05** 0.305 0.69 26.05
7
(6.65) (7.19) (3.41)
0.045* 18.78
8 -16.28** 0.71** * -0.008 0.319 0.69 3
(5.73) (6.25) (3.37) (1.79)
0.005* 0.134 15.95
9 -18.91** 0.77** * -0.008 * 0.336 0.681 3
(6.1) (0.63) (3.57) (1.66) (1.99)
-18.95** 0.77** 0.05** -0.008 0.13 0.015 0.331 0.684 12.26
10 (0.179
(6.07) (6.59) (3.53) (1.65) (1.92) )
0.997* 0.129 16.65
-24.61** * -0.013 -0.008 * 0.001 9.19** 0.452 0.619 9
11
(0.017
(8.09) (8.69) (0.78) (1.82) (2.07) ) (5.01)
** Significance at 1 percent * Significance at 5 percent
The result indicates that the beta coefficient is negative for capital adequacy ratio. It reveals that
higher the capital adequacy ratio, lower would be the return on assets. This finding is
contradictory to the findings of Athanasoglou et.al. (2005). However, the beta coefficient is
positive for size. It reveals that higher the bank size, higher would be the return on assets. This
finding is similar to the findings of Mitchell et al. (1994). Likewise, the beta coefficient for
operating expense ratio is negative. It reveals that higher the operating expense ratio, lower
would be the return on assets. This finding is consistent with the findings of Karim et al. (1999).

In addition, the beta coefficient for gross domestic product growth rate is positive with return on
assets. It reveals that higher the gross domestic product growth rate, higher would be return on
assets. This finding is similar to the findings of Nisa & Nishat (2011) Likewise, the beta
coefficient for equity to total assets is positive with return on assets. It reveals that higher the
equity to total assets ratio, higher would be the return on assets. This finding is consistent with
findings of Gull (2011). Similarly, the beta coefficient for inflation rate is also positive with
return on assets. It reveals that higher the inflation rate, higher would be the return on assets.
This finding is contradictory to the findings of Malaolu et al. (2013).

The estimated regression results of bank specific and macro economic variables on return on
equity are presented in Table 5.

Table 5: Regression of bank specific and macroeconomic variables on return on equity

(This result is based on panel data of 23 banks with 115 observations for the period of 2010/11 to 2014/15, by using
linear regression model. The model is, ROE = + 1 CAR + 2 SIZE + 3 ETA + 4 OPEFF + 5 INF + 6 GDPGR
+ eitwhere, the dependent variable is return on equity (return on equity defined as net income to total equity) and
independent variables are CAR = capital adequacy ratio, SIZE = bank size (defined as size of the bank measured by
the log value of total assets), ETA = shareholders equity ratio (shareholders equity ratio defined as total equity to
total assets), OPEFF = operating expense ratio (operating expense ratio defined as operating expenses to net
income), INF = annual inflation rate and GDPGR = annual growth in gross domestic product.
Regression Coefficient of ROE
Models Intercepts SIZE CAR OPEFF INF GDP ETA ADJ. SEE F
 R2
-65.56 3.163 0.193 36.14 0.45
1
(0.0575) (0.672)
1.078*
2 -2.67 * 0.217 35.67 3.45
(0.33) (1.858)
11.82** -0.184 0.241 36.12 0.65
3
(3.38) (0.806)
44.65 -3.809 0.186 36.03 1.22
4
(1.466) (1.105)
5.91 1.220 0.084 36.21 0.08
5
(0.32) (0.281)
5.03 57.3 0.093 36.06 1.01
6 (1.005
(0.73) )
-277.44* 10.96* 1.81** 0.295 35.20 3.81
7
(2.03) (2.02) (2.67)
-252.81 9.97 1.79** -0.123 0.301 35.32 2.61
8
(1.74) (1.72) (2.64) (0.51)
-196.44 8.72 1.75** -0.138 -2.88 0.327 35.37 2.12
9
(1.22) (1.46) (2.56) (0.572) (0.821)
-208.58 8.69 1.85** -0.141 -3.418 3.851 0.313 35.41 1.85
10
(1.29) (1.45) (2.67) (0.584) (0.959) (0.879)
-212.27 8.841 1.83 -0.141 -3.421 3.843 5.93 0.305 35.57 1.52
11 (0.056
(1.213) (1.343) (1.84) (0.582) (0.955) (0.873) )
** Significance at 1 percent * Significance at 5 percent

Table 5 shows that beta coefficient is positive for capital adequacy ratio at 1 percent level of
significance for commercial banks in Nepal, indicating that larger the capital adequacy ratio,
higher would be the return on equity. This finding contradicts to the findings of Dang (2006).
The beta coefficient for bank size and shareholders equity are positive. This finding is similar to
the findings of Gull (2011). The beta coefficient for inflation is negative for return on equity
which indicates that higher the inflation, lower would be return on equity. This finding is
consistent with the findings of Osei et al. (2016).

Table 6: Regression results of bank specific and macroeconomic variables on net interest
margin
(This result is based on panel data of 23 banks with 115 observations for the period of 2010/11 to 2014/15, by using
linear regression model. The model is, NIM = + 1 CAR + 2 SIZE + 3 ETA + 4 OPEFF + 5 INF + 6 GDPGR
+ eitwhere, the dependent variable is net interest margin (net interest margin defined as net interest income to
earning assets) and independent variables are CAR = capital adequacy ratio, SIZE = bank size (defined as size of
the bank measured by the log value of total assets), ETA = shareholders equity ratio (shareholders equity ratio
defined as total equity to total assets), OPEFF = operating expense ratio (operating expense ratio defined as
operating expenses to net income), INF = annual inflation rate and GDPGR = annual growth in gross domestic
product.
 Regression Coefficient of NIM
Models Intercepts SIZE CAR OPEFF INF GDP ETA ADJ. R2 SEE F
-7.22** 0.43** 15.441
1 0.112 0.840
(2.72) (3.93)
3.32** -0.009 0.105 0.890 0.318
2
(16.32) (0.618)
3.25** -0.011 0.125 0.881 3.892
3
(38.05) (1.97)
1.33 0.231* 0.246 0.871 6.522
4
(1.79) (2.255)
3.52** -0.075 0.113 0.892 0.493
5
(7.66) (0.697)
3.09** 1.11 0.147 10.890 0.621
6
(18.1) (0.785)
-10.48** 0.55** 0.028 0.128 0.830 9.370
7
(3.24) (4.28) (1.74)
-9.79** 0.522** 0.028 -0.003 0.123 0.841 6.331
8
(2.85) (3.82) (1.71) (0.607)
-15.99** 0.66** 0.033* -0.002 0.317** 0.132 0.781 9.621
9
(4.5) (4.983) (2.158) (0.331) (4.09)
-15.55** 0.661** 0.029 -0.002 0.337** -0.1422 0.240 0.772 8.225
10
(4.38) (5.017) (1.899) (0.31) (4.304) (1.475)
-22.67** 0.95** -0.047* -0.002 0.333** -0.159 11.46** 0.407 0.681 14.041
11
(6.711) (7.471) (2.462) (0.342) (4.809) (1.872) (5.63)
** Significance at 1 percent * Significance at 5 percent

The result reveals that the beta coefficient is positive for size which reveals that higher the bank
size, higher would be the net interest margin. The finding is similar to the findings of Mitchell et
al. (1994).The result also reveals that the beta coefficient is negative for capital adequacy ratio
which reveals higher the capital adequacy ratio, higher would be the net interest margin. The
result is similar to the findings of Dang (2006). Likewise, the beta coefficient is positive for
operating expense which reveals higher the operating expense, higher would be the net interest
margin. The finding contradicts with the findings of Karim et al. (1999). Similarly, the beta
coefficient is positive for inflation which reveals higher the inflation, higher would be the net
interest margin. The finding is similar to the findings Malaolu et al. (2013).

Summary and conclusion

Banks overall performance is very important because it plays an important role in banks profit
as well as it impacts on competitiveness of banks profit and risk taking behavior, as well as it
impacts on competitiveness of banks. The financial sector development plays a vital role in the
growth of banking industry and its performance in future and affects the economy of the country
to great extent.

This study attempts to examine the impact of bank specific and macro-economic variables on
banks performance of Nepalese commercial banks in relation to the Nepalese commercial banks.
The study is based on secondary data of 23 commercial banks with 115 observations for the
period of 2010/11 to 2014/15.

The study shows that bank size and inflation are the major independent variables to influence the
banks performance of Nepal. The bank size and inflation have positive and significant impact on
banks performance. This indicates larger the bank size and inflation, higher would be the banks
performance. However, operating expenses ratio have negative impact on bank performance of
Nepal. This reveals that higher the operating expenses ratio, lower would be the banks
performance. Gross domestic product has positive impact on return on assets and return on
equity, whereas gross domestic product has negative impact on net interest margin. The study
also concludes that the bank specific variables are major determinants of banks performance in
comparison with macroeconomic variables.

References

Acharya, S. (1992). Evaluating the Comparative Financial Performance of Nepal Arab Bank and Indosuez
Bank. Journal of Finance, 12(2), 25-32.
Angbazo, L. (1997). Commercial Bank Interest Margins, Default Risk, Interest-rate Risk, and Off-balance
Sheet Banking. Journal of Banking and Finance, 22(3), 55-87.
Athanasoglou, P., S. Brissimis, & M. Delis (2005). Bank-specific, industry-specific and macroeconomic
determinants of bank profitability Bank of Greece.Economic Research Department. Greece:
Munich Personal RePEc Archive, 21(2), 12-21.
Baumol, W. J. (1962). On the theory of Expansion of the firm. The American Economic Review, 52 (5),
1078-1087.
Beaver, W. H. (1966). Financial Ratios as predictors of failure. Journal of Accounting Research
Supplement, 2(1), 71-102.
Bennaceur, M., & B. Naucer (2008). The determinants of commercial bank interest margin and
proftability: Evidence from Tunisia. Frontiers in Finance and Economics, 35(1), 106-130.
Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America
and Australia. Journal of Banking and Finance, 13(1), 65-79.
Chaplinska, A. (2012). Evaluation of the borrowers creditworthiness as an important condition for
enhancing the effectiveness of lending operations. Journal of Banking and Finance, 41(1), 60-69.
Chen, S., & C. Liao (2011). Are foreign banks more profitable than domestic banks? Home-andhost-
country effects of banking market structure, governance, and supervision. Journal of Banking &
Finance, 54(3), 819-839.
Dang, U. (2011). The CAMEL Rating System in Banking Supervision: a Case Study.Arcada University of
Applied Sciences, International Business, 63(2), 55-63.
Demirg-Kunt, A., & H. Huizinga (2001). Financial structure and bank profitability. Journal of
International Financial Markets, Institutions and Money, 89(3), 21-136.
Demirguc-Kunt, A., and H. Huizinga (1999) Determinants of commercial bank interest margins and
profitability: Some international evidence. World Bank Economic Review, 13(2), 379-408.
Diamond, D., & R. Rajan (2000). A Theory of Bank Capital. Journal of Finance, 78(1), 2431-2465.
Hakuduwal, K. (2014). Impact of Internal Factors on Profitability of Nepalese Finance Companies. The
KIC Journal of Management and Economic Review, 98(3), 88-97.
Karr, J. (2012). Performance measurement of banking industry. International Journal of Emerging
Markets, 87(1), 77-89.
Khrawish, H. (2011). Determinants of Commercial Banks Performance: Evidence from Jordan.
International Research Journal of Finance & Economics,81(1), 19-45.
Malaolu, V., J. Ogbuabor & A. Orji (2013). Determinants of Stock Price Movements in Nigeria: Evidence
from Monetary Variables. Journal of Economics and Sustainable Development,43(3), 61-66.
Masood, O. & M. Ashraf, (2012). Bank-specific and macroeconomic profitability determinants of Islamic
banks:. Qualitative Research in Financial Markets, 65(1), 255-268.
Mitchell, I., J. Shaver, & B. Yeung (1994). Foreign Entrant Survival and Foreign Market Share: Canadian
Companies' Experience in United States Medical Sector Markets. Strategic Management Journal,
15(7), 555-567.
Molyneux, P. & J. Thornton (1992). Determinants of European bank profitability: A note. Journal of
Banking and Finance, 16(6), 1173-78.
Nisa, M. & M. Nishat (2011). The Determinants of Stock Prices in Pakistan. Asian Economic and
Financial Review, 32(1), 276-291.
Ongore, V. & G. Kusa (2013). Determinants of Financial Performance of Commercial Banks in Kenya.
International Journal of Economics and Financial Issues, 82(1), 237-252.
Osei, B. A., T. A., Odonkor, and L. Amoah (2016). Determinants of Capital Adequacy in Ghanian Banks,
Journal of Management and Information Research, 1(1), 87-98.
Repullo, R. & X. Suarez (2004). Loan Pricing under Basel Capital Requirements. NYU Conference on
Recent Advances in Credit.98(2), 234-265.
Shrestha, P. (2015). Explanatory power of bank specific and macroeconomic variables as determinants of
bank performance: Evidence form Nepalese commercial banks.International Journal of Business
and Management, 52(1), 456-463.
Shubiri, F. (2010). Analysis the Determinants of Market Stock Price Movements: An Empirical Study of
Jordanian Commercial Banks. International Journal of Business and Management, 64(1), 138-
147.
Bhatti, G. A., and H. Hussain (2010). Evidence on structure conduct performance hypothesis in Pakistani
commercial banks. International Journal of Business and Management, 5(9), 174-187.
Berger, A. N. (1995). The relationship between capital and earnings in banking. Journal of Money, Credit
and Banking, 27(2), 432-456.
Angbazo, L. (1997). Commercial bank net interest margins, default risk, interest-rate risk, and off-balance
sheet banking. Journal of Banking and Finance, 21(1), 55-87.