Date: September 2, 2011

Research Proposal On Financial Performance Analysis of Commercial Banks in Nepal

(Nabil Bank Ltd., Nepal Investment Bank Ltd. & Everest Bank Ltd.)

As a partial fulfillment for internal evaluation Submitted to: Mr. Santosh B. Thapa Submitted by: Mamin Shakya BBA-IV A

Roll no. 13
Introduction and Background
Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business, subbusiness or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. Here we will discuss about the financial analysis of Commercial Banks in Nepal. Since I was always attracted to the banking sector, I am interested in conducting study on this topic. At present, there are 31 A listed Commercial Banks operating in Nepal. And I would be conducting the financial analysis of these banks with the help of financial ratios. The following are the various types of financial ratios: 1. 2. 3. 4. 5. Liquidity Ratio Asset management/activity ratio Debt management/leverage ratio Profitability ratio Market Value ratio

These ratios are ascertained from the information or records available from the financial statements like Income Statement, Balance Sheet, Statement of Retained Earning and Cash flow Statement. Therefore, after the analysis of these financial ratios, the financial position of a firm is determined in terms of the factors like profitability, efficiency, leverage, liquidity and market position.

Problem Statement
These days, the businesses (including Banking Sectors) in Nepal are facing problems due to political instability, worldwide economic crisis and many other such problems. And the main problem that the banks here in Nepal are facing right now is the problem of liquidity crisis. Thats why everyday we here the rumors, news and bulletins on the possibility of the banks being either insolvent or bankrupt in the near future. Therefore, I would like to conduct this study in relevance to the present situation of crisis faced by the banks so that we can know the financial position of the commercial banks and better be aware of their share and market value. In short, to analyze whether we can put, invest or deposit our money in a particular bank or not. In addition to this, even though many researchers have conducted study and literatures been cited on this hot topic earlier, this research needs to be conducted again to update the information till date and to make it more relevant to the present context.

Theoretical Framework
The financial ratios will be used as the main tool for evaluating the performance of the commercial banks throughout the research study. Therefore, the variables relevant to this study are the financial ratios itself, which helps to gain the information regarding liquidity, leverage, efficiency, profitability and market position of the commercial banks. Each of the variables (Financial Ratios) has been briefly explained below: 1. Profitability ratios Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return. There are 5 types of profitability ratios, which are as follows: i. ii. iii. Gross Profit Margin Ratio: It measures the percentage of each sales rupee remaining after the firm has paid for its goods. The higher the gross profit margin, the better and the lower the relative cost of merchandise sold. Operating Profit Margin: It measures the percentage of each sales rupee remaining after all cost and expenses other than interest and tax are deducted. Generally, a high operating profit margin is preferred. Net Profit Margin: It measures the percentage of each sales rupee remaining after all costs and expenses including interest and taxes have been deducted. The higher the net profit margin, the better. It is commonly cited measure of the firms success with respect to earning on sales. Return on Total Assets (ROA): The return on total assets also called return on investment (ROI), measures the firms overall effectiveness in generating with its available assets. The higher the firms return on total assets the better. Return on Equity (ROE): It measures the return earned on the owners investment in the firm.

iv. v.

2. Liquidity ratios Liquidity ratios measure the availability of cash to pay debt. The types of liquidity ratios are as follows: i. ii. Current Ratio: It measures the firms ability to meet its short-term obligations. Quick or Acid Test Ratio: It establishes a relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset.

3. Assets Management ratios (Efficiency/Activity Ratios) Activity ratios measure the effectiveness of the firms use of resources. The types of Asset Management Ratio are: i. Inventory turnover ratio: It indicates the efficiency with which a firm is managing its inventories. It measures how many times inventory is turned over into sales during the year. Higher turnover rates are desirable. A higher turnover rate implies that management does not hold onto excess inventories. A/C Receivable Turnover: It measures the number of times we were able to convert our receivables over into cash. Higher the turnover ratios are desirable. Average Collection Period (ACP) or Days Sales Outstanding (DSO): It measures the quality of debtors since it indicates the speed of their collection. The shorter the ACP, the better the quality of debtors as a short collection period implies the prompt payment by debtors. The ACP should be compared against the firms credit terms and policy to judge its credit and collection efficiency. Total Assets Turnover: It indicates the efficiency with which the firm uses its asset to generate sales. Generally, the higher a firms total assets turnover, the more efficiently its assets have been used. Fixed Assets Turnover: It indicates the contribution of companys fixed assets over its sales. Since net assets equals capital employed, Net Asset Turnover may also be called Capital Employed Turnover.

ii. iii.

iv. v.

4. Debt ratios (leveraging ratios) Debt ratios measure the firm's ability to repay long-term debt. Debt ratios measure financial leverage. There are 4 types of Debt management or leverage ratios: i. ii. iii. iv. Debt to Total Assets Ratio: It measures the proportion of total assets financed by the firms creditors. The higher this ratio, the greater amount of other peoples money being used in an attempt to generate profit. Long-term debt to total asset ratio: It measures the portion of total assets financed by long-term debt or permanent debt. Debt-Equity ratio: It describes the lenders contribution for each rupee of the owners contribution. Times interest earned ratio (TIE): It is also called Interest Coverage Ratio. It measures the firms ability to make contractual interest payment. It represents the margin of safety in making fixed interest payments. Hence, the better the value of this ratio, the better able the firm is to fulfill its interest obligation.

5. Market ratios Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in companys shares. There are 5 types of market ratios. They are as follows: i. ii. iii. iv. v. Earning per share (EPS): Growth in earnings is often monitored with Earning per Share. The EPS represents the rupees amount earned on behalf of each outstanding share of common stock. Dividend per share (DPS): It is the per unit earnings distributed to ordinary shareholers out of net profit. Book value per share: It expresses the total net assets of a business on a per share basis. Market Value/Book Value Ratio: It is the ratio of share price and its book value per share. Price Earning Ratio (PE): It measures the amount investors are willing to pay for each rupee of the firms earning. The higher the PE ratio, the greater the investors confidence.

Objectives of the research

Primary objectives
To find out whose performance is best among three samples taken from 31 Commercial Banks in Nepal. To generalize the financial position of all the Commercial Banks in Nepal through the analysis of the information obtained from the samples data.

Secondary objectives
To know the financial position of the commercial banks in terms of profitability, liquidity, efficiency, leverage and market position. To update the information gathered on this topic. Give full effort to provide genuine and relevant information to the shareholders, general public, organizations & managers and to the governmental bodies as well.

Research Questions
The research will be carried out to find the answers of the following questions: What is the current scenario of commercial banks in Nepal? Which commercial banks financial position is better?

Research Methodology
Research Design
The research design adopted for this study will be quantitative based on the financial ratio analysis.

Population, Sample Size and Sampling Method

The population of this study will include all 31 A listed Commercial Banks operating in Nepal right now. Judgmental sampling will be used to draw the sample, considering the same level of their position, goodwill and reputation in the market. However, their establishment date (or, the year of commencement of their operation) will also be considered as one of the important factor while drawing the sample. Therefore, the sample of 3 Commercial Banks (Nabil Bank Ltd., Nepal Investment Bank Ltd. & Everest Bank Ltd.) will be taken into consideration for this study to represent the population. The financial statements of the same fiscal year of each of these banks will be considered to make comparative analysis.

Sources of data
The data used in the study will be secondary in nature. Thus, the financial statements and other relevant information will be collected from the websites and annual reports of the respective banks. In addition to, the information will be collected from the newspapers, journals, periodicals, etc. as well.

Data Analysis
The collected data will be analyzed with the help of financial ratio analysis. Therefore, some of the formulas of financial ratios to analyze the data are mentioned below: 1. Liquidity Ratio Current ratio = Current Assets Current Liabilities Total Current Assets Inventory Total Current Liabilities

Quick/Acid Test ratio = 2. Asset Management

Inventory Turnover

Sales Inventory

OR (if sales figure is not given) = Cost of goods sold Average inventory Days in inventory = Days in a year Inventory turnover ratio = Net Sales Average a/c receivable

A/C receivable turnover

ACP / DSO

A/C receivables Average credit sales per day = Sales / Total Assets

Total asset turnover

3. Debt Management Ratio Debt ratio = Total debt / Total assets

Long-term debt ratio = Long-term debt / Total assets Debt-Equity ratio = Total debt / Net worth

Time interest earned ratio = Operating profit or EBIT / Interest 4. Profitability Ratios a. Profitability in relation to sales Gross profit margin = Gross Profit / Sales Operating profit margin = Operating profit or EBIT / Sales Net profit margin = Net profit after tax / Sales b. Profitability in relation to Investment Return on total asset = Net profit after tax Total assets Return on equity 5. Market Value ratios Earning per share = Earning available to common shareholders No. of outstanding shares of common stock = Dividend paid to shareholders No. of shares outstanding (NOS) = Net profit after tax Shareholders equity

Dividend per share

Book value per share = Net worth / NOS MV/BV ratio = MPS/BVPS PE ratio = MPS/EPS

References
Annual Report (Fiscal Year 08/09)- Securities Board of Nepal (SEBON) James C. Van Horne & John M. Wachowicz, Jr. (2009)- Fundamentals Of Financial Management Prem R. Pant (2010)- Social Science Research and Thesis Writing Rabin Hada (2011)- Handouts on Earnings and Cash Flow Analysis www.wikipedia.org/financial-ratio-analysis