Hari's Blog: SUMMER PROJECT: A Study on Financial Performance of Global IME Bank Limited

A STUDY ON FINANCIAL PERFORMANCE

GLOBAL IME BANK LIMITED

Submitted By:

Hari Raj Bajracharya

Shanker Dev Campus

Exam Roll no.: 11794/13

T.U. Registration No.: 7-2-39-1442-2013

A Summer Project Report Submitted To:

Office of Dean

Faculty of Management

Tribhuvan University

In the partial Fulfillment of the requirements for the Degree of

Bachelor of Business Administration (BBA)

Putalisadak, Kathmandu

May, 2017

DECLARATION

I hereby declare that I have completed the Summer Project entitled “A Study on Financial Performance of Global IME Bank Limited” under the guidance of “Associate Prof. Achyut Bhattarai and Mr. Kiran Thapa” in partial fulfillment of the requirements for the degree of Bachelor of Business Administration at the Faculty of Management, Tribhuvan University. This is my original work and I have not submitted it elsewhere.

Date: 4^th May, 2017 Signature: _______________

Name: Hari Raj Bajracharya

ACKNOWLEDGEMENT

This thesis entitled “A Study on Financial Performance of Global IME Bank Limited” has been prepared in partial fulfillment for the degree of Bachelor for Business Administration (BBA) under the course designed by the Faculty of Management, T.U. This study is based on the prescribed research format involving the use of financial ratios in banking sector. For easier study the data has been presented by graphs, tables and have been interpreted using various statistical methods. This study tries to focus on the financial performance of Global IME Bank only.

At the time of preparing this study, I consulted with various personalities. So, I would like to extend my sincere thanks to all, whose works and ideas helped me in conducting the study. Similarly, I would like to pay my sincere gratitude to my thesis supervisor Mr. Achyut Bhattarai and Mr. Kiran Thapa of Shanker Dev Campus who guided through research work providing valuable suggestions, guidance, supports and supervision.

Finally, I would like to offer my profound gratitude to my family members, my friends, colleagues, and well-wishers for their encouragement and support during the entire period of my study. I fondly acknowledge all those people who helped and contributed to the project for their endurance and encouragement.

Many thanks also, to those whom I had the opportunity to interact and for their commitment and sharing experiences that enriched this study.

Hari Raj Bajracharya

TABLE OF CONTENTS

CERTIFICATE FROM THE SUPERVISOR

DECLARATION i

ACKNOWLEDGEMENT ii

TABLE OF CONTENTS iii

LIST OF TABLES v

LIST OF FIGURES vi

LIST OF ABBREVIATIONS vii

EXECUTIVE SUMMARY viii

CHAPTER I: INTRODUCTION

1.1 Context Information 1

1.2 Statements of the Problems 3

1.3 Purpose of the Study 4

1.4 Significance of the Study 4

1.5 Limitations of the Study 5

1.6 Literature Survey 5

1.7 Research Methods used for data collection and analysis 13

1.7.1 Research Design 14

1.7.2 Population and Sample 14

1.7.3 Sources of Data 14

1.7.4 Data Presentation and Analysis 15

1.7.5 Tools for Data Analysis 15

I. Financial Tools 15

II.Statistical Tools 22

CHAPTER II: DATA PRESENTATION AND ANALYSIS

2.1 Organization Profile 24

2.2 Data Presentation and Analysis 26

2.2.1 Financial tools 26

i) Liquidity Ratios 27

ii) Solvency/Leverage Ratio 29

iii) Turnover Ratio 32

iv) Profitability Ratio 33

2.3 Major Findings and discussions 36

CHAPTER III: CONCLUSIONS AND ACTION IMPLICATIONS

3.1 Conclusions 41

3.2 Action Implications 42

REFERENCES

APPENDICES

LIST OF TABLES

Table no. Title Page number

1 Capital Structure of Global IME Bank 25

2 Shareholders structure 26

3 Cash and Bank Balance to Total Deposit Ratio 27

4 NRB Balance to Current and Saving Deposit Ratio 28

5 NRB balance to fixed deposits ratio 28

6 Fixed Deposit to Total Deposit Ratio 29

7 Loan and advances to Total Deposit Ratio 32

8 Investment to Total Deposit Ratio 33

9 Return on Equity (ROE) 34

10 Return on Assets (ROA) 34

11 Net Interest Margin 35

12 Overhead Efficiency 36

LIST OF FIGURES

Figure no. Title Page number

1 Capital Structure of Global IME Bank ltd. 25

2 Shareholders structure 26

3 Debt Equity Ratio 30

4 Debt Assets Ratio 31

5 Interest Coverage Ratio 32

6 EPS 36

7 BPS 37

LIST OF ABBREVIATIONS

BPS Book Value per Share

C.V Coefficient of Variations

EPS Earnings per Share

F/Y Fiscal Year

GBIME Global IME Bank Limited

NBL Nepal Bank Limited

NEPSE Nepal Stock Exchange

NRB Nepal Rastra Bank

PM Profit Margin

RBB Rastriya Banijya Bank

ROA Return on Assets

ROE Return on Equity

S.D. Standard Deviation

TU Tribhuvan University

EXECUTIVE SUMMARY

An efficient banking system is recognized as basic requirement for the economic development of any economy. There is no second opinion in the fact that banks are to economies what blood is to human beings. So, a sound banking system has immense importance to strengthen an economy. Without a sound banking system the economy of a country will be frozen in no time and the country cannot march towards the path of growth and development. Hence a sound banking system has immense importance to strengthen an economy. For a sound banking system, banks must be financially sound. Financially soundness of a bank is an amalgam of different factors like growth of assets, increase of interest income and income along with operational profit and profit. It also takes in to account the return on net worth, capital adequacy ratio etc. A sound banking system depends upon the performance of banks. Financial performance plays an important role in bank performance.

In this context, The First Chapter highlights the Introduction to the financial sector of the economy with main emphasis on the financial Performance Analysis tools such as Liquidity, Solvency, Turnover and Profitability. The primary function of banks is to convert liquid deposits (liabilities) to illiquid assets such as loans which make them inherently vulnerable to liquidity risk. Lack of liquidity in bank’s statement of financial position is an indicator of a liquidity crisis in a banking system. On the other hand, illiquidity, unless remedied, will give rise to insolvency and eventually bankruptcy as the business’s liabilities exceed its assets. The fact that it is impossible for banks to survive without making profits cannot be over emphasized. The study uses Historical and descriptive research design. The population of this study comprised of only one commercial banks of Nepal out of the 28 Commercial Banks. Five year secondary data is collected for the banks from their annual reports. This study sought to examine the Liquidity, Solvency, Turnover and Profitability Position of Global IME Bank limited. Different types of Financial and Statistical tools are used for the purpose of studying the financial performance of the bank.

Further Data are presented and analyzed by using different tables, charts and ratios. It deals with the Organization’s Profile, Data presentation and analysis, findings and discussions following the researcher methodology. In the course of analysis, data gathered from the various sources have been inserted in the tabular form according to nature. The various tables prepared for the analysis purpose have been shown in annexes. Using financial and statistical tools, the data have been analyzed the result of the analysis has been interpreted keeping in mind the conventional standard with respect to ratio analysis, directives of NRB and other factors while using other tools. Moreover, financial performance of the sampled banks has especially been analyzed in cross-sectional manner.

It should be noted that while the liquidity, solvency, turnover and profitability levels of banks are not found to influence bank performance, it is important to keep them at manageable levels in relation to the industry. The study concludes that bank managers should take note of the fact that the size of the banks influences their performance. As such, Commercial Banks should strive to have higher asset base in the industry in order to record better performance in terms of profitability. The study further implicates that since growth in bank revenues may have a positive impact on the performance of banks in Nepal, banks should focus on improving their revenue sources in order to record better performance.

CHAPTER I

INTRODUCTION

1.1 Context Information

Financial sector is the backbone of economy of a country. It works as a facilitator for achieving sustained economic growth by providing efficient monetary intermediation. A strong financial system promotes investment by financing productive business opportunities, mobilizing savings, efficiently allocating resources and makes easy the trade of goods and services. Several studies (McKinnon, 1973; Levine, 1997) have reported that the efficacy of a financial system to reduce information and transaction costs plays an important role in determining the rate of savings, investment decisions, technological innovations and hence the rate of economic growth.

Banking has become an important feature, which renders service to the people in financial matters, and its magnitude of action is extending day by day. It is a major financial institutional system in Nepal, which accounted for more than 70% (Poudel, 2005) of the total assets of all the financial institutions. A profitable and sound banking sector is at a better point to endure adverse upsets and adds performance in the financial system (Athanasoglou et al., 2008).

A competitive banking system promotes the efficiency and therefore important for growth, but market power is necessary for stability in the banking system (Northcott, 2004). Commercial bank holds a large share of economic activities of a country. The function of the commercial banks has been enhanced in Nepal to sustain the increasing need of the service sector and the economy in general (Economic Survey, 2008).

Stock market has been dominated by the commercial banks since a decade. Not only the stock market, but the commercial banks have also been major contributors to the revenue of the country. They have been paying a large amount of tax every year. Performance evaluation is the important approach for enterprises to give incentive and restraint to their operators and it is an important channel for enterprise stakeholders to get the performance information (Sun, 2011). The performance evaluation of a commercial bank is usually related to how well the bank can use its assets, shareholders’ equities and liabilities, revenues and expenses. The performance evaluation of banks is important for all parties including depositors, investors, bank managers and regulators. The evaluation of a firm’s performance usually employs the financial ratio method, because it provides a simple description about the firm’s financial performance in comparison with previous periods and helps to improve its performance of management (Lin et al., 2005).

Different ratios are used to study the Financial Performance Global IME Bank limited.

a. Liquidity

The Economic Times, (2014) defines Liquidity as “Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it”. It refers to the ability of the bank to fulfill its obligations, mainly of depositors. As such, liquidity is a prime concern for banks and a short fall in liquidity would result into bank failure. The most common financial ratios that reflect the liquidity position of a bank are customer deposit to total asset and total loan to customer deposits. Others are cash to deposit ratio, Ongore and Kusa (2013).

b. Solvency

Solvency is one of the bank specific factors that have an influence on the performance of a bank. A company whose total liabilities exceed total assets is said to be technically insolvent. A bank can become insolvent if it is unable honor its long term financial obligations. This means that it may be impossible for the bank to repay its depositors. This may arise when customers default on their loans for a sustained period of time, a situation which may result into a bank run. One of the key financial ratios that are used to measure the solvency of a bank is ratio of debt to equity. The ratio indicates the degree of financial leverage being used by the bank and includes both short term and long term debt.

c. Turnover

Turnover, also known as utilization ratios or activity ratios are employed toevaluate the efficiency with which the firm manages and utilizes its assets. They measure how effectively the firm uses investment and economic resources at its command. Investments are made in order to produce profitable sales. Unlike other manufacturing concerns, the bank produces loans, advance and other innovation. High ratio depicts the managerial efficiency in utilizing the resources they show the sound profitability position of the bank. Low ratio is the result of insufficient utilization of resources. However, too high ratio is also not good enough as it may be due to the insufficient liquidity.

d. Profitability

Profitability is a measure of the net revenue and expenses. Revenue refers to increases in owner’s equity resulting from sale of goods or performance of services in the ordinary course of business. It consists of cash, or a promise to receive cash in the future (accounts receivable). Expenses are decreased in owners’ equity resulting from the costs incurred in order to earn revenue. They may involve immediate cash payment or promises to pay in the future. Profitability is a key measure of a successful business. A business that is not profitable may not survive while a business that is highly profitable has the ability to reward its owners with large returns on their investment (Kithii, 2008).

Profitability is the ultimate objective of all business ventures, both in the short-run and in the long-run. A business has to remain profitable in order to withstand negative shocks and survive in the long-run. Therefore, it is important to measure current and past profitability as well as project future profitability.

1.2 Statement of the Problems

The development of the commercial banks in Nepal is quite difficult and challenging. The commercial banks to be successful must govern itself along with the business environment surrounding Nepal. Since, most people are illiterate; many people do not use banking system as they don’t seem to understand about it. So, it is a major challenge for the banks to change the attitude of the people towards the banking systems of the country.

The competition too is the burning issue of the time in the country due to emergence of number of finance companies and about a dozen of rural banks and co-operative societies in a short span of time. It has threatened the entire banking system. With so many Financial Institutions prevalent in the country, it is crucial to concentrate better on productivity management of the securities and growth of the bank in environment off tough competition.

The research seeks to fit out inefficiency and weakness of Global IME Bank with the analysis of the bank’s financial statement. Attempts are made shortly to answer the following questions:

· How far has Global IME Bank been able to transfer monetary resources from savers to users?

· How has Global IME bank been managing their position in relation to liquidity, solvency, Turnover and profitability?

· How sound are operational results in relation to their profitability?

1.3 Purpose of the Study

The main purpose of the project is a study on Financial Performance of Global IME Bank limited through the use of different ratios.

Other objective of this study includes the following:

· To evaluate the Liquidity position of Global IME Bank Limited.

· To analyze the Solvency Position of the sampled bank.

· To examine the Turnover position of the sampled bank.

· To define the profitability position of the selected bank.

· To highlight various aspects of relating to financial performance Global IME Bank limited.

1.4 Significance of the Study

Commercial banks are one of the major core components of modern economy. They give greater contribution to GDP too. The production of finance and real-estate subsector is increasingly comparatively. At this situation, the commercial banks should be more competitive. They should become financially healthy and must have growth potential. In such a situation, this study tries to analyze and indicate the overall financial health whether they are capable to compete the challenges and grab to opportunities or not.

This will provide guideline for improving its performance to achieve the banks overall objectives. Similarly, these studies will help the bank to identify its hidden weakness regarding financial administration.

This study has following significance:

a) This study will help compare the financial results with past records and trends.

b) The study also compels the management of respective banks for self-assessment of what they have done in the past and guides them in their future plan and programs.

c) Future studies can be based on the present study especially by taking advantage of the limitations of the present study and the recommended future research directions.

1.5 Limitations of the Study

Of all the 28 Commercial Banks, Only one is selected for the study. So, it possesses some sorts of limitations of its own. Having only one bank under the study makes it quiet lonesome as the comparisons with similar businesses cannot be made. Besides this, it has other limitations too.

The following are the limitation of the present study:

· This study is limited to the liquidity, Turnover, solvency and profitability position of Global IME Bank limited.

· This study is based on secondary data.

· This study has analyzed and evaluated of data to the latest five years period i.e. since 2010/11 to 2014/15 ( i.e. 5 years historical data; The annual report of 2015/16 was not made available by the bank)

· In this study, only selected financial and statistical tools and techniques are used.

· This research has been conducted on the requirement of partial fulfillment of Bachelor of Business administration only.

1.6 Literature Survey

Literature Survey comprises upon the existing literature and research related to the present study with a view to find out what had already been studied. The purpose of the reviewing the literature is to develop some expertise in One’s area, to see what new contribution can be made and to review some idea for Developing research design. This portion has been divided into two parts: -

i) Conceptual Framework

ii) Review of Related Studies

i) Conceptual Framework

The modern financial evaluation has greatly affected the role and importance of financial performance. Nowadays, finance is best characterized as ever changing with new ideas and techniques. Only efficient manager of the company can achieve the set up goals. If a bank does not maintain adequate equity capital, it makes the bank more risky. So, any firm must have adequate equity capital in their capital structure.

The main objectives of the bank are to collect deposits as much as possible from the customers and to mobilize into the most profitable sector. If a bank fails to utilize its collected resources then, it cannot generate revenue. Resource mobilization management of bank includes resource collection, investment portfolio, loans and advances, working capital, fixed assets management etc. It measures the extent to which bank is successful to utilize its resources. To measure the bank performance in many aspects, we should analyze its financial indicator with the help of financial statements.

The book of M.Y. Khan and P.K. Jain (1997) is considered to be a useful book in the financial management. The modern approach of Khan and Jain views the term financial management in broad sense and provides a conceptual and analytical framework for financial decision making. According to them, “The finance function covers both acquisitions of funds as well as their allocation; hence, apart from the issues of acquiring external funds, the main concern of financial management is the efficient and wise allocation of funds to various uses.” The major financial decisions according to Khan and Jain are: -

· The investment decision

· The financial decision and

· The dividend policy decision.

Financial analysis is the process of identifying the financial strength and weakness of the concerned bank. It is the process of finding strength and weakness of the concerned bank. It is the process of finding details accounting information given in the financial statement. It is performed to determine the liquidity, solvency, efficiency and profitability position of an organization. The function or the performance of finance can be broken down into three major decisions i.e. the investment decision, the financing decision, and the dividend decisions. An optional combination of the three decisions will maximize the value of the firm.

a. Banking: An Introduction

The Lexis “Banking” is a derivative of terminology “Bank”. Bank itself is an organizational engaged in any or all the various functions of banking viz. receiving, collecting, transferring, paying, lending, investing, dealing, exchanging and servicing (safe deposit, trusteeship, agency, custodianship) money and claims to money both domestically and internationally. This is a board concept under which different types of bank are included. There are several popular modalities of banking. It may differ country to country. Commercial banking is one of them. Banking and Financial Institutions are also the transmission channels of monetary policy, it is important for the effective monetary policy management to ensure that their financial health is sound and overall financial sector is stable.

b. Commercial Banks in Nepal (Historical Development) Brief Review

Banking system occupies an important role in the economic development of a country. A banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and focus the core of the money market in an advance country. The basic function of the bank is to collect deposits as much as possible from customers and mobilize it into the most preferable and profitable sector like industry, commerce, agriculture, entertainment etc. Like other countries, Goldsmiths, merchants and moneylenders were the ancient bankers of Nepal. Tejarath Adda established during the tenure of the Prime Minister Ranoddip Singh (B.S.1993) was the first step towards the institutional development of banking in Nepal. Tejarath Adda did not collect deposits from the public but gave loans to employees and public against the bullion.

But the concept of modern banking institution in Nepal was introduced when the first commercial bank, Nepal Bank Limited (NBL) was established in 1994 B.S. under Nepal Bank act 1993 B.S. Being a commercial bank, it was natural that NBL paid more attention to profit generating business and preferred opening branches at urban areas. Nepal Rastra Bank (NRB) was set up in 2013 B.S. as a central bank under NRB act 2012 B.S. Since then it has been fluctuating as the government’s bank and has contributed to the growth of financial sector. After this, government set up Rastriya Banijya Bank (RBB) in B.S.2022 as a fully government owned commercial bank. As the name suggests, commercial banks are to carry out commercial transaction only. But commercial banks had to carry out the function of all type of financial institutions.

Hence, Industrial Development Center (IDC) was set up in 2013 B.S. for industrial development. In 2016 B.S., IDC was converted to Nepal Industrial Development Corporation (NIDC). Similarly, Agricultural Development Bank (ADB) was established in 2024 B.S. to provide finance for agricultural produces so that agricultural productivity could be enhance by introducing modern agriculture techniques. The commercial bank have been established gradually after the commercial bank act 2013 B.S. with the passage of time so many commercial banks have been established gradually because of the liberal and market friendly economic policy of Nepal government. The banking activities are getting very much dynamic as well as complex. Because of the higher return on investment, entrepreneurs were interested in setting of new bank including branches of foreign banks. However, current political and economic scenario of the country coupled with new prudential norms of Nepal Rastra Bank and stiff competition may make the entrepreneurs give a second thought to the idea of establishing banks. As of start of 2017, there are 28 commercial banks in Nepal of which the liquidity, Solvency and profitability position of Global IME Bank limited is sampled for analysis.

c. Concept and Definition of Commercial Bank

A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.

An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses.

The banking sector is an important part of the national economy. Banks take deposits, support the payment system and provide the largest source of funds in the market. Safe and sound banking system is of crucial importance for the financial stability and sustainable development. Nepal has a special characteristic of bank dominated financial sector. As the domestic capital and stock markets are in the initial stage of development, the banking sector largely dominates the entire financial sector. The financial performance of the commercial banks can be categorized on the basis of Assets, composition of assets, composition of liabilities, capital, deposit, loans and advances, non-banking assets, investment, earnings, and liquidity.

The role of commercial banks

Normally Commercial banks engaged in the following activities:

· Accepting money on term deposit.

· Lending money by way of overdraft, installment loan or otherwise.

· Inward remittance through online services

· Processing of payments by way of telegraphic transfer, internet banking or other means.

· Issuing bank drafts and bank cheques,

· Providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off-balance sheet exposures.

· Safe keeping of documents and other items in safe deposit boxes (lockers)

· Foreign currency trading

ii) Review of Related Studies

Finance is a broad field and there are various books are written in this subject. The trend of commercial banking is changing rapidly. Competition is getting stiffer and, therefore, banks need to enhance their competitiveness and efficiency by improving performance. Normally, the financial performance of commercial banks and other financial institutions has been measured using a combination of financial ratios analysis, benchmarking, measuring performance against budget or a mix of these methodologies (Avkiran, 1995).

Gopinathan, T. (2009) has presented that the financial ratios analysis can spot better investment options for investors as the ratio analysis measures various aspects of the performance and analyzes fundamentals of a company or an institution. Furthermore, Ho and Zhu (2004) have reported that the evaluation of a company’s performance has been focusing on the operational effectiveness and efficiency, which might influence the company’s survival directly. The empirical results of the researches (Raza et al., 2011; Tarawneh, 2006) explained that a company, which has better efficiency, it does not mean that always it will show the better effectiveness. Alam et al. (2011) study concludes that ranking of banks differ as the financial ratio changes.

The finance statement provides a summarized view of the financial operation of the firm. Therefore, something can be learnt about a firm and careful examination of the financial statements as invaluable documents or performance reports. Thus, the analysis of financial statement is an important aid to financial analysis or ratio analysis is main tool of financial statement analysis. (Pandey, 2000)

Financial Performance analysis is a study or relationship among the various financial factor in business a disclosed by a single set of statement and a study of the trend of these fact as shown in a series of statements. By establishing a strategic relationship between the item of a balance sheet and income statements and other operative data, the financial analysis unveils the meaning and signification of such items.(Ahuja, 1998)

A study of financial performance is a basic process, which provides information on profitability, liquidity position, earning capacity, efficiency in operation, sources and use of capital, financial achievement and status of the companies. This information will help to determine the extent of efficiency and effectiveness of the company in respect of deploying financial resources in the profitable manner.

a. Review of Thesis

Abera, A. (2012) studied, “Factors affecting profitability; an empirical Study on Ethiopian banking industry”. This study examined the bank-specific, industry-specific and macro-economic factors affecting bank profitability for a total of eight Commercial Banks in Ethiopia, covering the period of 2000-2011 using a mixed methods research approach by combining documentary analysis and in-depth interviews. The study noted that despite the findings of the regression analysis that the impact of liquidity was negligible, liquidity of banks was one of the major determinants of Ethiopian banks profitability. The study concluded that the impact of Ethiopian banks liquidity on their performance remains ambiguous and further research is required.

A thesis conducted by Oli, J.B. (2007) entitled, “A Comparative Study of Financial Performance of HBL, NSBIBL and NBBL” concludes that the liquidity position of two JVBs i.e. NSBIBL and NBBL are always above than non-standard and HBL is always below than normal standard. Total debt with respect to shareholders fund and total assets are slightly higher for HBL than NSBIBL and NBBL. The researcher has found from the analysis that NBBL has been successfully utilized their total deposits in terms of extending loan and advances for profit generating purpose on compared to NSBIBL and HBL. But NSBIBL is also better than HBL. It has concluded that net profit to total assets ratio in case of HBL is found better performance by utilizing overall resources but the generated profit is found lower for the overall resources in three JVBs.”

Lartey, V., Antwi, S., & Boadi, E. (2013) sought, “A Study to find out the relationship between the liquidity and the profitability of banks listed on the Ghana Stock Exchange”. The study sought to describe the relationship between the liquidity and the profitability of banks listed on the Ghana Stock Exchange using a target population of 9 Commercial Banks listed on the Ghana Stock Exchange and a sample of 7 banks. Purposive sampling technique was used. In conclusion, both the liquidity and the profitability levels of the listed banks were decreasing within the period 2005-2010. There was a very weak positive relationship between the liquidity and the profitability of the listed banks. These findings support Munther and Omari (2013) in the case of Jordanian banks. When banks hold adequate liquid assets, their profitability would improve. Adequate liquidity helps the bank minimize liquidity risk and financial crises. The bank can absorb any possible unforeseen financial position. However, if liquid assets are held excessively, profitability could diminish because they have no or little interest generating capacity. The opportunity cost of holding low return assets would eventually outweigh the benefit of any increase in the bank’s liquidity resiliency as perceived by funding markets.

A thesis conduct by Shakya, S. (2010) in “Financial Performance Of Nepal SBI Bank Limited and Everest Bank Limited.” analyzed different ratio of NSBIBL and EBL for the period of five years till fiscal year 2008. Here, in some cases the liquidity position of EBL is slightly stronger where as in some cases the ratio of NSBIBL is higher. It concludes that liquidity position of these two banks is sound. NBBL has better utilization of resource in income generating activity than EBL. They are on decreasing trends while interest earned to total assets and return or net worth ratio of EBL is better than NSBIBL. It seems overall profitability position of EBL is better than NSBIBL and both banks are highly leveraged.”

Joshi, A. (2008) conducted a study on “A Comparative Study on Financial Performance of Nepal SBI bank ltd & Nepal Bangladesh bank Ltd.” with the following objectives.

· To highlight various aspects of relating to financial performance of Nepal Bangladesh bank and Nepal SBI bank.

· To analyze various aspects of relating to financial performance through the use of appropriate financial tools.

· To show the cause of change in cash position of the two banks. Through her research she has presented the following findings of the study:

The analysis of liquidity of these commercial banks shows different position here; the average current ratio of NSBI is greater than that of NBBL. Therefore, the liquidity position of SBI is in normal position. From the analysis of turnover of these banks, NBBL has better turnover than NSBI in terms of loans and advances to total deposit ratio. The analysis of profitability of these two commercial banks is also different. The overall calculation seems to be better for NBBL though certain ratios like dividend per share, dividend payout ratios etc. are better for NSBI bank. From the calculation, NBBL seems to tackle their investors more efficiently. Going through net profit to total deposit ratio, it can be said that NBBL seems to be more successful in mobilizing its customers saving in much more productive sectors. NBBL has slightly riskier debt financing position in comparison to NSBI bank.

b. Research Gap

In this study, the major areas are to disclose the financial performance of single commercial banks. These types of researches are done rarely. This study shows that the unique feature of findings. Previous researches were on the basis of comparative financial performance analysis of commercial banks in Nepal.

But this research is about financial performance of Global IME Bank limited with the study undertaken for just five years. The latest data’s were not available so, the data up to 2014/15 are used in the project. In the previous research, Comparative analysis was done mainly by taking sample banks. In this research, Study is made regarding the financial performance of Global IME Bank limited. This research can help the people who wanted to know about the overall financial standard and performance of Global IME Bank Limited.

1.7 Research Methods used for data collection and analysis

Research Methods focuses on the procedures for collection and analysis of data. The researcher’s attention to the methods of data collection and analysis is called methodology. Research methods according to Baridman (1990:20) should wage a detailed statement of methods used in collection of data; why those methods were chosen and not others.

1.7.1 Research Design

Research design is the conceptual structure within which research is conducted. In other words, a plan of study or blue-prints for study is called research design or research strategy. It facilitates the smooth sailing of the various research operations, thereby making research as efficient as possible. Research design is a plan, structure and strategy to obtain the objectives of the study.

This research is based mainly on secondary data. Hence, the historical and descriptive research design is used to conduct the study on financial performance of Global IME Bank Limited. This study uses data collected from various periods. In the view of finding the fact, the objectives of this study involves making inferences based on the findings. It deals with the liquidity, solvency, and turnover and profitability position on the basis of financial statements of various time frames. The data collected is placed into useable form through editing, tabulating and analysis. In editing, non-relevant data is discarded and the relevant data is only tabulated so that statistics could be developed from them. The Datas are subject to analysis and interpretation of the result.

1.7.2 Population and Sample

The term Population denotes the entire collection of all observations of the interest for the research. To make the data collection easier and feasible, representative portion of the population is selected for the study which is known as sampling. In the Study, The list of all the commercial banks of Nepal is regarded as Population and selection of a specific bank among those banks represents Sampling.

The Study on Financial performance of Global IME Bank is based on the data from various time periods. The Study depends on the data collected from various editors of the various issues of Nepal Rastra Bank, Financial Reviews, Annual Reports, Economic Surveys, Statement of Accounts, and Reports from Security exchange boards of Nepal (SEBON), Reports from Nepal Stock Exchange (NEPSE) etc.

1.7.3 Sources of Data

The required data is collected from the various sources; but mainly from the annual reports of the Company covering a certain available period. The main Datas are obtained from annual report, various bulletins available, Banks websites etc. Other forms of data are obtained from the central office of Nepal Stock Exchange (NEPSE), Securities Boards office, Kathmandu and Economic Survey published by Ministry of Finance.

Although present study is on secondary data, However, necessary suggestion are also taken from various experts both inside the bank whenever required the necessary data is obtained from the staffs and other concerned members of the bank , published balance sheet, profit and loss account and other related statement of accounts as well as the annual reports of the respectively banks. Moreover, Different books from library, periodicals, newspaper cuttings, company’s magazines etc. are used. Guidelines and unpublished thesis, research work that directly relates to the financial performance and stock market forms secondary data for the purpose of this study. Significant information is also collected from Internet and various websites.

1.7.4 Data Presentation and Analysis

Presentation and analysis of the available data is the major task of the study. Every results of the study are tabulated and clear interpretations are given to it simultaneously. Data’s are presented in tabular, graphical and chart wherever necessary and possible. The analysis with careful study of available facts is made so that one can understand and draw conclusion from them on the basis of established principles and sound logic. This study is mostly based on the analysis of mainly secondary data with the help of different statistical tools and financial tools that meets the objectives of the study.

1.7.5 Tools for Data Analysis

Data Analysis depends on Datas collected from the annual reports, published books, journal and interviews with different financial and non-financial expert and staff as well as officers of NEPSE and SEBON. So, effective analysis of data needs to be done on effective manner. To draw the conclusion by analyzing the collected data simple statistical tool and financial tools can be used for the purpose of study of liquidity and solvency issues. Some of them are as follows:

I. Financial Tools

Financial tools are those, which are used for the analysis and interpretation of financial data. These tools can be used to get the precise knowledge of a business, winch in turn, are fruitful in exploring the strengths and weaknesses of the financial policies and strategies. For the sake of analysis, following various financial tools have been used in order to meet the purpose of the study:

i) Liquidity Ratios

Liquidity ratios are used to judge the firm's ability to meet short-term obligation. These ratios give insights into the present cash solvency of the firms and its ability to remain solvent in the event of adversities.

The following ratios are developed and used for our purpose to find the liquidity positions of the Global IME Limited:

a) Cash and Bank Balance to Total Deposit Ratio

The ratio is calculated using following formula:

Cash and bank balance to total deposit ratio =

The ratio shows the proportion of total deposits held as most liquid assets. High ratio shows the strong liquidity position of the bank. Too high ratio is not favorable for the bank because it produces adverse effect on profitability due to idleness of high-interest bearing fund.

b) NRB Balance to Current and Saving Deposit Ratio

The ratio is computed by dividing the balance held with Nepal Rastra Bank by saving deposits. i.e.

NRB balance to current saving deposit ratio =

Commercial banks are required to hold certain portion of current and saving deposits in Nepal Rastra Bank's account. It is to ensure the smooth functioning and sound liquidity position of the bank. As per the directive of Nepal Rastra Bank, the required ratio is 8% .Therefore the ratio measures whether the bank is following the direction of NRB or not.

c) NRB balance to fixed deposits ratio

The ratio is computed by dividing the balance held with Nepal Rastra Bank by fixed deposits accepted. i.e.

NRB balance to fixed deposit ratio =

It shows the percentage of amount deposited by the bank in Nepal Rastra Bank as compared to the fixed deposits. According to the direction of NRB, this ratio should be maintained 6%. Hence, the ratio so calculated finds whether the bank has obeyed the direction of central bank or not.

d) Fixed Deposit to Total Deposit Ratio

It is calculated as follow:

Fixed Deposit to Total Deposit Ratio =

The ratio shows what percentage of total deposit has been collected in form of fixed deposit. High ratio indicates better opportunity available to the bank to invest in sufficient profit generating long-term loans. Low ratio means bank should invest the fund of low cost in short-term loans.

ii) Solvency Ratio / Leverage Ratios

Leverage or capital structure ratios are used to judge the long-term financial position of the firm. It evaluates the financial risk of long-term creditors greater the proportion of the owner's capital structure, lesser will be the financial risk borne by supplier of credit funds.

Debt is more risky from the firm's point of view. The firm has legal obligation to pay interest to deft holders irrespective of the profit made or losses incurred by the firm. However, use of debt is advantageous to shareholders in two ways:

· They can retain control on the firm with a limited stake

· Their earning in magnified when rate of return of the firm on total capital is higher than the cost of debt.

However, the earning of shareholders reduces if the cost of debt becomes more than the overall rate of return. In case, there is the threat of insolvency. Thus, the debt has two folded impact-increases shareholder earning-increase risk. Therefore, a firm should maintain optimal mix of investors and outsiders fund for the benefit owners and its stability.

Under this group, following ratios are calculated to test the optimality capital structure:

a) Debt Equity Ratio

The ratio is calculated by dividing total debt by shareholder's equity.

We calculate,

Debt Equity Ratio =

Total debt consists of all interest bearing long-term and short-term debts. These include loans and advances taken from other financial institutions, deposits, carrying interest etc. Shareholder's equity includes paid-up capital, reserves and surplus and undistributed profit.

The ratio shows the mix of debt and equity in capital. A high ratio shows that the creditors' claims are greater than those of owners are. A low ratio implies a greater claim of owners than creditors. Therefore, the ratio should be neither too high nor too low.

b) Debt-Asset Ratio

The ratio shows the contribution of creditors in financing the assets of the bank. It is computed as:

Debt-Asset Ratio =

High ratio indicates that the greater portion of the bank's assets has been financed through outsider's fund. It should not be too high or too low.

c) Debt to Total Capital Ratio

The ratio is obtained by dividing total debt by total capital of the firm.

Total capital refers to the sum of interest-bearing debt and net worth/shareholder's equity. It shows the proportion of debt in total capital employed by the bank. High ratio indicates greater claim of creditors. Contrary to it, low ratio is the indication of lesser claim of outsiders. For the sound solvency position, the ratio should not be too high or too low.

d) Interest Coverage Ratio

The ratio is calculated by dividing net profit before deduction of interest and tax by interest charges.

Where,

Net profit before interest and tax = Net Earnings (Before extraordinary items) + Income Taxes + Interest Charges

The ratio, also known as times interest-earned ratio is used to test the debt servicing capacity of the bank. It shows the number of times the interest charges are covered by funds that are ordinarily available for their payment. It indicates the extent to which the earning may fall without causing any embarrassment to the firm regarding the payment of interest. Higher ratio is desirable, but too high a ratio indicates the firm is very conservative in using debt. A lower ratio indicates excessive use of debt or insufficient operation.

iii) Turnover Ratio

Turnover ratio measures how efficiently the bank has been able to manage its assets. It includes the following ratios:

a) Loan and Advances to Total Deposit Ratio

The ratio is computed by dividing total loans and advances by total deposit liabilities.

Loan and advances consist of loans, advances, cash credit overdraft, foreign bills purchased and discounted. The ratio indicates the proportion of total deposits invested in loans and advances. High ratio means the greater use of deposits for investing in loans and advances. However, very high ratio shows poor liquidity position and risk in loans on the contrary; too low ratio may be the causes of idle cash or use of fund in less productive sector.

b) Investment to Total Deposit Ratio

The ratio is obtained by dividing investment by total deposits collection in the bank. i.e.

Investment comprises investment in Government’s treasury bills development bonds, company shares and other type of investment. The ratio shows how efficiently the major resources of the bank have been mobilized. High ratio indicates managerial efficiency regarding the utilization of deposits. Low ratio is the result of less efficiency in use of funds.

c) Total Assets Turnover

The total Assets Turnover, also known as the Asset Utilization ratio measures the extent to which the bank’s assets generate revenues. It is calculated as:

iv) Profitability Ratio

Profitability ratios have been employed to measure the operating efficiency of the sampled banks. Profitability is the net result of a large number of policies and decisions. The ratios examined thus provide some information about the way bank is operating. The profitability ratios show the combined effects of liquidity, assets management and debt management on operating results. In the study of Global IME Bank limited, following ratios are use:

a) Return on Equity (ROE)

ROE measures the Net Income after taxes earned for each rupee of capital contributed. High ROE is generally preferable.

It is computed using following formula:

ROE=

b) Return on Assets (ROA)

Return on Assets (ROA) measure the profitability in terms of asset size of the bank i.e. net income produced per unit of asset investment. Higher ROA is generally preferable.

ROA =

c) Net Interest Margin

Net Interest margin measures the income generate by each investments and loans and leases. Higher Net Interest Margin is generally preferable. It is calculated by following formula:

Net Interest Margin =

d) The Spread Rate

The Spread is determined in order to measure the difference between average yield on earning assets and average cost of Interest bearing liabilities. Higher the spread means the more profitable the bank and vice versa.

Following formula is used to generate spread rate:

Spread Rate =

e) Overhead Efficiency

Overhead efficiency is the measure of the ability of the firm to cover its non-interest expenses through its non-interest income. Higher Overhead efficiency is generally desirable by the banks. Following formula is used to calculate overhead efficiency:

Overhead Efficiency =

Other Indicators:

a) Earnings Per Share (EPS)

Earnings per share measures the per share income after the tax have been deducted from Net income. The Company with high EPS is generally preferable. It is computed as:

EPS =

b) Book value per share (BPS)

Book Value per Share denotes the net worth of the company which is reported by the balance sheet. Investors prefer the company whose market value does not exceed thrice of the Book Value.

It is computed by following formula:

BVPS =

II. Statistical Tools

Various statistical tools can be used to analyze the data available. These tools are used in research in order to draw the reliable conclusion through the analysis of financial data.

The Statistical tools include the following:

a) Arithmetic Mean

An arithmetic mean is the value, which represents the group of values and gives an idea about the concentration of values in the central part of the distribution. An average gives us a point, which is most representative of the data. It depicts the characteristic of the whole group. The value of arithmetic mean lies in between the two extreme observations of the entire data. It is an envoy of the mass of homogeneous data.

The Value of the AM is obtained by adding together all the items and by dividing this total by the number of items.

Mathematically,

Arithmetic Mean (AM) is given by,

AM=

Where, ΣX = Sum of all the values of the variable X.

N= Number of observations

b) Standard Deviation (S.D.)

It is the square root of the variance standard deviation. It is a statistical measure of the variability of s set of observations. It is the measure of total risk. Lower the standard deviation, the less the risk of the stock and vice versa.

It is calculated as:

S.D. =

c) Coefficient of Variations (C.V)

According to Prof. Karl Pearson, coefficient of variation is the percentage variation in mean, standard deviation being considered as the total variation in the mean. It is one of the relative measures of dispersion that is useful in comparing the amount of variation in data groups with different mean.

It is computed as:

C.V. =

CHAPTER II

DATA PRESENTATION AND ANALYSIS

This chapter deals with the Organization’s Profile, Data presentation and analysis, findings and discussions following the researcher methodology dealt in previous chapter. In the course of analysis, data gathered from the various sources have been inserted in the tabular form according to nature. The various tables prepared for the analysis purpose have been shown in annexes. Using financial and statistical tools, the data have been analyzed. The result of the analysis has been interpreted keeping in mind the conventional standard with respect to ratio analysis, directives of NRB and other factors while using other tools. Moreover, financial performance of the sampled banks has especially been analyzed in cross-sectional manner. Specifically, the chapter includes Organization Profile, Presentation and analysis, Findings and discussions.

2.1 Organization Profile

Global IME Bank limited was established in 2007 as an ‘A’ class commercial bank providing entire commercial banking services. The bank was established with the largest capital base at that time with a paid up capital of Rs. 1 Billion. The paid up capital of the bank has since been increased to NPR 6.16 billion. The bank’s shares are publicly traded as an ‘A’ category company in the Nepal Stock Exchange.

The bank has been maintaining correspondent relationship with 74 different international banks from various countries to facilitate the trade, remittance and other cross border services. It is now operating 92 branches and 6 extensions counters spread throughout Nepal. The bank also operates 105 ATMs throughout the country with full service outlets. The bank has been able to earn the trust and confidence of the public, which is reflected in the large and ever expanding customer base with more than 550,000 numbers of accounts in deposit base and above 16,000 in credit. Through all this the bank has been able to truly achieve its vision of being “The Bank for all”. Even with all this success, the bank remains internally focused towards manpower development, product innovation and process innovation etc., to have a strong and solid foundation, which are ongoing and continuous improvement initiatives undertaken by the management and staff alike.

GIBL has been conferred with “The Bank of the Year Award 2014” for Nepal by the Bankers Magazine (Publication of the Financial Times, UK).GIBL has been appointed as handling bank unit of CREF (Central Renewable Energy Fund) under AEPC (Alternative Energy Promotion Center). GIBL has been the first ever bank selected for such purpose by AEPC.

2.1.1 Capital Structure of Global IME

The Global IME Bank limited has been prospering ever since its establishment. The Share Capital Structure of Global IME Bank limited is as follows:

Table 1: Capital Structure of Global IME Bank

Capital	Amount (Rs)
Authorized Capital	10,000,000,000
Issued Capital	5,011,599,623
Paid-up Capital	5,011,599,623
Proposed Bonus Share	1,152,667,913

(Note: Annual Report 2014/15)

The Above Capital structure can be presented in graph as follows:

Figure 1: Capital Structure of Global IME Bank ltd.

Also, the shareholder’s structure can be shown as belows:

Table 2: Shareholders structure

Shareholders	Contribution
Institutional Shareholders	17.49%
Individual Promoters	33.51%
Public Shareholders	49%
Total	100%

(Note: Annual Report 2014/15)

The above given data can be presented as follows:

Figure 2: Shareholders structure

2.2 Data Presentation and analysis

The data that are used in this study are firstly collected from the balance sheet and income statement of Global IME bank that are provided throughout their financial annual reports for the concerning period, secondly put in excel spreadsheet in order to calculate the ratios needed for the empirical study. It is important to underline that the data are annual data. Instead of analyzing all the local commercial banks, this study will focus on just Global IME bank.

Specifically, the chapter includes Presentation and analysis by using the following tools:

2.2.1 Financial Tools

Various Ratio Analysis tools have been used in order to analyses and interpret the Datas. Mainly, Financial Ratio analysis tools have been used.

The analysis, presentations and interpretation of the Datas are discussed below:

i) Liquidity Ratios

Liquidity ratios have been employed to test the ability of the banks to pay immediate liabilities. These include cash and bank balance to total deposit ratio, NRB balance to current and saving deposit ratios, NRB balance to fixed deposit ratio and fixed deposit ratio and fixed deposit to total deposit ratio.

a) Cash and Bank Balance to Total Deposit Ratio

The computed Cash and Bank Balance to Total Deposit Ratio (A/B) are as follows:

Table 3: Cash and Bank Balance to Total Deposit Ratio

From the Table-3, the fluctuating trend of Cash and Bank Balance to Total Deposit Ratio can be seen. It is 11.64% for 2010/11. Then, it reaches its highest point of 18.46% in 2011/12. Afterwards, it is 16.25%, 14.80%, and 12.72% in the respective years. The Mean of the past five years is 14.78% with standard deviation of 2.72 and C.V. of 18.47%.

The ratio shows the proportion of total deposits held as most liquid assets. High ratio shows the strong liquidity position of the bank. However, the decreasing trend of the ration after 2011/12 shows decreasing liquidity position for the bank.

b) NRB Balance to Current and Saving Deposit Ratio

The Calculated NRB Balance to Current and Saving Deposit Ratio as denoted by A/B are as follows:

Table 4: NRB Balance to Current and Saving Deposit Ratio

From the Table-4, it can be see that there are variations in the NRB Balance to Current and Saving deposits ration of Global IME Bank over the years. As per the directive of Nepal Rastra Bank, the required ratio is 8%. So, by Comparing with the Datas obtained in the table with the required ratio of NRB, we can say that the bank has been able to satisfy the requirements of the Nepal Rastra Bank quiet convincingly.

c) NRB Balance to Fixed Deposits Ratio

The Computed NRB balance to fixed deposits ratio as denoted by A/B is shown by table as follows:

Table 5: NRB balance to fixed deposits ratio

From the Table-5, we can see the NRB Balance to Fixed deposits Ratio in the respective years. According to the direction of NRB, this ratio should be maintained 6%. So, Comparing the Values obtained in the table with the direction of the NRB, We can say Global IME Bank has been able to meets its requirement in a convincing manner.

d) Fixed Deposit to Total Deposit Ratio

It is denoted by A/B and shown by following table:

Table 6: Fixed Deposit to Total Deposit Ratio

The above Table highlights the percentage of total deposits has been collected in form of fixed deposit. The Year 2010/11 has the highest percentage which has been reduced to lowest of 32.264% in the Year 2014/15. High ratio indicates better opportunity available to the bank to invest in sufficient profit generating long-term loans. Low ratio means bank should invest the fund of low cost in short-term loans.

ii) Solvency/Leverage Ratios

Leverage ratios have been analyzed and interpreted to judge the long-term financial health of the sampled banks. These include debt-equity ratios, debt-asset ratio, debt to total capital ratio and interest coverage ratio.

a) Debt Equity Ratio

Annex-2 depicts that the Debt to equity ratio of Global IME Bank were 9.21, 11.00, 11.08, 8.77, and 8.45 in the respective years. The Mean of the ratio stood at 9.70 with standard deviation of 1.25 and C.V. of 12.89%. The higher Debt to equity ratio represents the higher riskiness. Low debt equity ratio provides the cushion of protection to creditors against losses.

So, the debt equity has risen to 11.08 till 2012/13 after which it is decreasing in trend which shows the banks decreasing use of leverage.

The Trends of the debt to equity ratio can be shown as belows:

Figure 3: Debt Equity Ratio

b) Debt-Asset Ratio

Annex-3 highlights the trend of debt asset ratios. It depicts 89.79%, 91.01%, 91.71%, 89.52% and 89.41% respective of the following years. It has average equal to 90.29% with standard deviation 1.02 and C.V. 1.13%.

The lower Debt Ratio is generally preferred as it protects the creditors in the event of liquidation. The mean of 90.29% indicates that on average debt is used to finance 90.29% of the Bank’s assets. The calculated Debt ratio is pretty high for the likes of commercial banks.

The trend of the debt ratio can be shown as follows:

Figure 4: Debt Assets Ratio

c) Debt to Total Capital Ratio

Annex-4 shows different trends of debt to total capital ratios. It is 9.21%, 9.50%, 9.85%, 8.23% and 8.01% for the respective years. It has slight rise up until 2012/13 after which it is in decreasing trend. The average of the ratio over the year is 8.96% with s.d. 0.805 and C.V. of 8.99%.

High ratio indicates greater claim of creditors. Contrary to it, low ratio is the indication of lesser claim of creditors. As a whole, it must not be too high as well as too low for the banks. As for the given study, it is slightly in decreasing trend which is the indication of lesser claims of the outsiders.

d) Interest Coverage Ratio

Annex-6 reveals 1.27, 1.32, 1.37, 1.61, and 1.66 ratios for the respective banks. The Interest Coverage is in increasing trend which is quite good. Also, the mean ratio of 1.45 times indicates the bank has operating income of Rs. 1.45 for every Rs.1 of interest expenses.

Interest Coverage Ratio shows the banks’ ability to cover the earnings through the earnings. Generally, High ratio is preferable as it shows banks’ ability to pay interest easily.

The trend of Interest Coverage Ratio can be shown as follows:

Figure 5: Interest Coverage Ratio

From the analysis of leverage/Solvency ratios, the sampled bank seems quiet levered. Debt servicing capacity of Global IME Bank limited remained poor in the beginning years with some slight improvements in later years. However, the Solvency/Liquidity position of the bank does not appear significant.

iii) Turnover Ratio

For the purpose of evaluating the turnover ratio, Loan and advances to Total deposit ratio, Investment to total deposit ratio, Total Assets are computed.

The Turnover ratios are shown as:

a) Loan and Advances to Total Deposit Ratio

It is denoted by A/B and shown as follows:

Table 7: Loan and advances to Total Deposit Ratio

From the Table-7, the fluctuations in the ratios can be observed. It is highest in year 2010/11 and lowest in year 2011/12. The ratio should be neither too high nor too low. The average of the ratio was 78.28% over the course of the year with the standard deviation of 3.07 and C.V. of 3.92%.

b) Investment to Total Deposit Ratio

The computed Investment to Total Deposit Ratio as denoted by A/B is shown in table as follows:

Table 8: Investment to Total Deposit Ratio

The above Table-8 depicts the higher ratio at year 2010/11. Then, it decreases in the following year of 2011/12. Then, it begins increasing for respective years, which is good as it is favorable for bank to maintain increasing ratio. The mean ratio is 17.16% with S.D. of 1.45 and C.V. of 8.47%.

c) Total Assets Turnover

From the annex-5, The Total Assets Turnover of the Bank has slightly increased at the beginning with the highest being 12.25% at the start of the sampled year. Afterward, it has decreased to 8.16%, 9.399%, 7.37% and 8% in the following respective years. Its average was 9.04% through the sampled years with the standard deviation 1.94% and C.V. of 21.48%.

iv) Profitability Ratio

Profitability ratios have been employed to measure the operating efficiency of the sampled bank. For the purpose Return on Equity, Return on Asset, Net Interest Margin, The Spread Rate, The Overhead efficiency, EPS, BPS, and Profit Margin have been analyzed and interpreted.

a) Return on Equity (ROE)

The ROE of the bank can be shown as follows:

Table 9: Return on Equity (ROE)

(Note: Annex-1)

In the Table-9, it can be seen that the Global IME Banks ROE is highly fluctuating. It decreased from 13.17% to 10.46% and increased to 13.90% and 15.90% in respective years before decreasing to 13.11 in 2014/15. The Mean of 13.31% indicates that the bank earned on an average return of Rs. 0.1331 for every Rs.1 invested.

All in all, Increasing Ratio is quite favorable as it shows the banks profit is increasing. The decreasing ROE may have negative impact on the Performance of the bank.

b) Return on Assets (ROA)

The ROA For the bank can be shown by the following table:

Table 10: Return on Assets (ROA)

(Note: Annex-1)

The above Table shows variations in ROA of Global IME Bank limited. Initially, The ROA stood at 1.28% in year 2010/11. Then it decreased to its lowest in following year before recovering in subsequent years. It stood at 1.39% in 2014/15. The Mean around the sampled period is 1.26% which indicates that the bank earned Rs.0.0126 for every Rs.1 of assets. The S.D. was 0.28 with C.V. equal to 22.28% for the sampled period.

Generally, increasing ROA is preferable as it indicates increase in return on the banks assets after interest and taxes.

c) Net Interest Margin

It can be shown by the table as follows:

Table 11: Net Interest Margin

Net Interest margin measures the income generate by each investments and loans and leases. Higher Net Interest Margin is generally preferable. In the above table, The Net Interest Margin is 4.42 for initial sampled year. There is drastic decrease in margin for year 2011/12. The improvement can be seen in the later years as there is slight increase in the Margin.

There is a quiet variation in terms of Net Interest Margin in above table. However, increasing margin is preferred. The Years with better return than the Mean Margin (i.e.3.74) are potentially beneficial.

d) The Spread Rate

From Annex-7, it can be seen that the Spread Rate for Global IME is 4.51%, 3.19%, 4.76%, 3.64% and 3.88% for the respective years. The Mean Spread Rate is 4 with S.D. of 0.64 and C.V. of 15.98%.

e) Overhead Efficiency

Overhead efficiency is the measure of the ability of the firm to cover its non-interest expenses through its non-interest income. Higher Overhead efficiency is generally desirable by the banks.

The Overhead efficiency of Global IME Bank can be shown as:

Table 12: Overhead Efficiency

(Note: Annex 10)

The Operating efficiency is initially 0.4384 times. It is in increasing trend as shown in the above table. Eventually it stands at 0.5783 times for 2014/15. It’s Average during the period is 0.53 times. The increasing trend of the overhead efficiency makes it profitable.

Other Indicators:

a) Earnings Per Share (EPS)

EPS is one of the most important determinants of the commons tocks value as it measures the earning power under each share of stock. Generally, Higher EPS is preferable.

In the Annex-8, the EPS begins in decreasing trend initially but begins to rise from third year and up until fourth year. It incurs slight decrease in 2014/15. The average EPS of the sampled year stands at 15.43 per share with S.D. of 2.86 and C.V. 18.56%.

It can be shown as belows:

Figure 6: EPS

b) Book value per share (BPS)

Book Value per Share denotes the net worth of the company which is reported by the balance sheet. BPS is of importance to the value investors who are in search of stocks whose Market price is not much higher or even lower than the BPS.

The Annex-9 shows BPS is increasing initially up to fourth year. Then after there is slight decline as the BPS ends with 118.81 per share in 2014/15. The Mean BPS around the sampled year stands at 115.51 per share with S.D. of 6.19 and C.V. of 5.36%.

The above trends can be shown by diagram as:

Figure 7: BPS

2.3 Major Findings and Discussions

The Following Findings have been derived from the analysis and presentation of the data:

1. Liquidity Position

· Cash and Bank Balance to Total Deposit Ratio shows the mean ratio of 14.78%. It too shows fluctuations in the ratio. It has increased to certain point and later started to decrease in later years. Since, High Ratio is preferable, its decreasing trend in the later years may not been that profitable for the company.

· NRB balance to current saving deposit ratio shows the average of 17.96%. It is good given the required ratio as per the directives is only 8%. So, as a whole the bank has been able to maintain the sufficient NRB Balance to Current saving deposit.

· NRB balance to fixed deposit ratio shows the average 21.15% which is good for the bank. It has been able to maintain the minimum requirement set as per the NRB Directives of 6%.

· Fixed Deposit to Total Deposit Ratio shows the average balance 37.05% over the course of five years. It has maintained 32.26% in the recent year, which is quiet below its average ratio. Generally, Ratio that is neither too high nor low is preferable.

2. Solvency/Liquidity Ratios

· The Debt Equity Ratio is in decreasing trend which shows the owner’s increasing claim towards the company than the outsiders or creditors. So, the debt equity has risen to 11.08 till 2012/13 after which it is decreasing in trend which shows the banks decreasing use of leverage.

· The Debt to Assets Ratio on the other hand shows the mean of 90.29% which indicates that on average debt is used to finance 90.29% of the Bank’s assets. It must not be too high or too low. The debt to Ratio for the bank is too high in the respective years.

· Debt to Total Capital Ratio shows the average of the ratio over the year as 8.96%. For the sound solvency position, the ratio should not be too high or too low. It is slightly in decreasing trend which is the indication of lesser claims of the outsiders.

· In terms of Interest Coverage Ratio, the mean ratio of 1.45 times indicates the bank has operating income of Rs. 1.45 for every Rs.1 of interest expenses. High ratio is generally preferable and the slight increasing trend of the bank’s interest coverage is profitable for the bank.

3. Turnover Ratio

· Loan and Advances to Total Deposit Ratio depicts the variations on the ratio. The average ratio is 78.28% which shows Rs 78.28 is provided as loan and advances for each total deposits of Rs. 100. It must not be too high or too low as both impacts may not be good for the bank.

· Investment to Total Deposit Ratio shows average of 17.16% for the sampled years. Only for two studied periods, it has exceeded the average ratio. Higher ratio is generally preferable.

· The Total Assets Turnover ratio has the average of 9.04%. For most of the years the Total assets turnover has been below the average. It shows bank’s inefficiency regarding the use of its assets.

4. Profitability Ratios

· In terms of ROE, The Mean of 13.31% indicates that the bank earned on an average return of Rs. 0.1331 for every Rs.1 invested. The bank has quiet variations in the ROE as there has been rise and fall through the years. In recent year 2014/15, ROE stood at 13.12% which is below its mean for the calculated period of time.

· The Mean of ROA on the other hand, around the sampled period stood at 1.26% which indicates that the bank earned Rs.0.0126 for every Rs.1 of assets. Fluctuations have been the key features of ROA too as there has been slight increase and decrease over the years and settled at 1.39% in 2014/15.

· The average of the net interest margin over the sampled period stood at 3.74. The Net interest margin has not been stable as each year there has been slight increase and decrease in the margin. The Years with better return than the Mean Margin (i.e. 3.74) are potentially profitable.

· In terms the spread rate, The average Spread Rate stood at 4%. The Rate is not stable throughout the years as only on two occasions there has been spread rate greater than the average Rate.

· The average of the overhead efficiency stood at 0.53 over the years. It is increasing in trend which is positive for the bank. It eventually ends 2014/15 with highest 0.5783, which is above the mean efficiency

Other Indicators

· The EPS begins in decreasing trend initially but begins to rise from third year and up until fourth year. It incurs slight decrease in 2014/15. The average EPS of the sampled year stands at 15.43 per share. The EPS is quiet good as on most occasions, the EPS of the sampled period is greater than the average.

· In terms of BPS, The Mean BPS around the sampled year stands at Rs.115.51 per share. The trend of EPS and BPS is same as there has been increment throughout the year with slight decrease in 2014/15. However, the decrease BPS is higher than the average BPS throughout years.

CHAPTER III

CONCLUSIONS AND ACTION IMPLICATIONS

This chapter is dedicated to provide conclusions after analyzing the financial performance using Liquidity, Solvency, Turnover and Profitability Position during the Five Sampled years of Global IME Bank limited. It also tries to provide some action implications to the concerned banks from the conclusion derived from the study.

3.1 Conclusions

Banks and Financial institutions are playing an imperative role in whole economy by providing effective services and collecting deposits from public and invest the collected deposits in different productive sector and earn profit. For the bank to run smoothly, its liquidity, solvency, and Turnover and profitability positions needs to be studied and made more profitable. So, the study sought to study the liquidity, solvency, turnover and profitability position of Global IME Bank limited.

The investor generally wants the investment with sound financial status and stable ratios. The Liquidity Ratios are highly unstable. It is not either increasing or decreasing. For some years, it shows increment and for others it shows decrease in ratios. So, it is highly fluctuating. The Bank Balance to Total Deposit Ratio and Fixed Deposits to Total Deposits Ratio show some fluctuations with rise and fall in ratios throughout the sampled years. However, the bank has been able to satisfy the requirements of NRB Balance to Current and Saving Deposits and NRB Balance to Fixed Deposits. Likewise, the data’s obtained from the solvency/Liquidity ratios too are varying through the years. The Debt equity ratio rose in the beginning but starts to decrease in late years which are good for the bank. Same is the case with the Debt Asset Ratio and Debt Capital Ratio. Only the Interest Coverage ratio has been in increasing trend and stable throughout the sampled years. As a whole, The Solvency position is not the best but it has been improving through the years.

The Turnover Ratio provides mixed data as well. It is good in some conditions and not convincing in others. Loan and advances to total deposits ratio shows the bank has been able to increase its efficiency in late years. Investment to total deposit ratio has also been increasing towards the end which is good. Similarly, the total assets turnover shows little progress towards the end. But, its low total assets turnover seems concern for the bank as it has been in the lower side than the averages. The Profitability Ratios has not fared better either. The Variations can be seen in terms of profitability ratios too. ROE decreased from 13.17% to 10.46% and increased to 13.90% and 15.90% in respective years before decreasing to 13.11 in 2014/15. The numbers are different but the trends of ROE and ROA are quiet similar. The Interest Margin is good as the maximum margins are greater than the mean margin. The trends of spread rate are similar to Interest Margin. The Overhead efficiency is in increasing in late years which is quite good.

Other indicators such as EPS and BPS are also used. The EPS is greater in recent years as it is better than the average EPS throughout the sampled years. However it incurs slight decrease in the year 2014/15. The BPS is increasing initially up to fourth year. Then after there is slight decline as the BPS ends with Rs.118.81 per share in 2014/15, which is not as bad as the Mean BPS around the sampled year was Rs.115.51 per share. The ratios obtained in all the headings were highly fluctuating. The Global IME Bank limited seems financially stable given that its fluctuations are slight. Even including the fluctuations, most of banks Ratios are Greater than the average of ratios.

3.2 Action Implications

Based on the conclusions, the following action implications can be forwarded:

· The Above calculated ratios can be used to derive conclusions about the financial soundness of the respective banks. The bank can use the ratio to know about their strength, weakness, opportunities and threats.

· For Investors, These ratios serve as the catalyst for the investment in share of the financial sound company. Investors prefer the companies that are financially stable. So, the Study can be used for making the decisions.

· The liquidity ratio implies the bank’s ability to fulfill its obligations, mainly of depositors. So, the ratios derived can be used to analyses the ability of the bank to meet its liability. It helps in decision making regarding Investment and shows how sound the bank looks.

· The leverage/solvency position shows the bank’s use of debt. The Bank seems highly leveraged. Use of more debt helped to enhance the rate of return on shareholders’ fund. However, excessive use of debt may cause solvency of the bank. So, these banks should maintain a proper balance of total debt to shareholders fund.

· The Turnover ratio shows how well the banks have been able to use its assets to generate the income. In case of Global IME Bank limited it is not too high and it is not too low either. The bank has been able to generate sufficient ratios which have helped the bank to sustain in the market.

· The profitability ratios show the combined effects of liquidity, assets management and debt management on operating results. It is so important as a depositor and as an investor too choose the bank that has sound profitability position. It shows the banks investment in revenue generating sectors.

· Seventy percent of population is not getting banking facility yet, so bank should provide some social response by expanding their operation in rural areas rather than urban areas. In terms of rural Banking, It must emphasize on Branch less banking which makes easy access on banking activities. Banks have to give response to poor and disadvantages groups. By establishing the branches in rural areas, minimum amount for opening accounts and interest rate should be reduced for priority sector creditor.

· For the nation development banks should contribute from their side. Development of infrastructure and hydropower sector is not invested by commercial banks. Banks are not interested in agricultural sector. They should lend in these sectors.

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Websites:

www.globalimebank.com