Bank Specific and Macroeconomic Determinants of Bank Profitability: A Case of Nepal

Abstract

The profitability of commercial banks is becoming a major concern these days and is gaining increasing importance because, in its absence, banks may collapse. The banking sector these days has gone less secure, and hence, the studies devoted to profitability of commercial banks assumes a greater significance. The objective of this study is to determine the factors affecting profitability of Nepalese commercial banks. It considers both bank specific and macro-economic factors. The study is based on pooled cross-sectional analysis of secondary data of 22 banks with 154 observations for the period 2005/06 to 2011/12. As a first approximation to the theory, this study hypothesizes that the profitability of the banks depends on several firm specific and macro-economic variables such as, credit deposit ratio, market share, GDP, inflation, liquidity and non-performing loans. The study revealed that average return on equity was 16.18 percent while the average return on assets was 14.42 percent. The average ratio of non-performing loan to total loans was observed to be 4.23 percent. The beta coefficients for inflation, liquidity, and non-performing loans were negative, while they were positive for credit to deposit ratio, market share and GDP. However, the coefficients were significant for credit deposit ratio and liquidity only at 5 percent level of significance. Thus, this study concludes that credit to total deposit ratio and liquidity are the major determinants of profitability of Nepalese commercial banks.