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INVESTMENT PORTFOLIO ANALYSIS OF COMMERCIAL BANKS IN NEPAL

Thesis · November 2012

DOI: 10.13140/RG.2.2.25346.08648

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CHAPTER I
INTRODUCTION

1.1 Background

Banks and financial institutions are engine of economic development of any nation.
Banks are financial intermediaries which help to collect the fund from savers and
provide to users so that the fund can be used in productive sector. Banks are vehicle to
mobilize resources. Nowadays, the role of bank is expanding and widening as per the
increasing various economic activities. Economists argued that capital formation and
its proper utilization plays a vital role for rapid economic development. Banks invest
their collected fund in different sector so that they could maximize theirs return and
minimize the risk. The technique of diversification of fund in different sectors
considering its risk return is popularly known as portfolio management. Banks are
excessively aware on portfolio management of their fund.

The history of modern banking system is not so long in Nepal. In depth, evidence of
money lending functions was also found in practice before 8th century. In those days
people use to borrow money from money lenders and pay some interest. In 14 th
century, Malla King Jayasthi Malla divided people in 64 categories as per working
occupation. One of them was “Tankan Dari”; he practiced monetary transaction or
money lending business. It shows that lending process was prevailing during the
Malla rule in Nepal.

During the period of Rana Rule, Prime Minister Ranodip established a financial
institution “Tejarath Adda”. Prior to establishment of Nepal Bank Ltd., certain extent
of banking needs of people was fulfilled by the institution. Which was to supply credit
to government officials at 5 percent rate of interest, thereafter, they began to provide
loan to general people against security of gold, silver & ornament. By the process
Tejarath expanded the credit facilities by opening some branches.

Tejarath could not fulfill the credit needs of the whole society. It was a government
institution that benefited only to government officials. So, the general people had to
depend upon moneylenders. To make free the rural people from the grips of lenders
 2

and develop the trade and industry in the country, the need of a commercial bank was
realized in the country.

Nepal’s banking history had begun by the establishment of Nepal Bank Ltd. in 1937
A.D with 10 million rupees of authorized capital and 842 thousand of paid up capital.
It is the first commercial bank in Nepal with semi-government equities i.e. 51% of
government ownership. After establishment of NBL, if replace Tejarath Adda by
taking over its operation and limitations. It has done pioneering function in speaking
the banking habits among people.

Banks generally collect unused money from public by providing attractive interest
and earn profit by lending it. They are generally investing in business organization,
industries, agricultural sectors and government bonds. So, the main function of
commercial banks is to mobilize idle resources in productive areas by collecting it
from scattered sources and generating profit. As the Bank and Financial Institution
Act 2006 there are many function performed by commercial banks among them
accepting deposits and providing loans are major functions. Beside they invest their
assets in different sector as directed by Nepal Rastra Bank.

Commercial banks occupy an important place in the framework of every economy

because they provide capital for the development of industry, trade, business and
other resources deficit sectors by investing the saving collected as deposits. All the
economic activities of each and every country are greatly influenced by the
commercial banking business of the country.

Banks are an essential part of the business activities. They have been established to
safeguard people’s money and thereby using the money in making loans and
investments. There are several commercial banks operating inside and outside the
valley. Every bank invests its money in some profitable financial sector, which may
result in profitable business in the long range. An investment is the commitment of
money that is expected to generate additional money. Every investment entails some
degree of risk, it requires at present certain sacrifice for a future uncertain benefits.

The network of a well-organized financial system of the country has great bearing in
capital formation. It collects scattered financial resources from the masses and invests
 3

them among those engaged in commercial and economic activities of the country. It
has been well established that the economic activities of any country can hardly be
carried forward without the assistance and support of financial institutions. Financial
institutions have catalytic role in the process of economic development. Thus,
commercial banks have become the heart of financial system. A key factor in the
development in the country is the mobilization of domestic resources and their
investment for productive use to the various sectors. To make it more effective, CBs
formulate sound investment policies, which help maximize quality of investment and
eventually contribute to the economic growth of a country.

Banks plays vital role in the development of the economy. Only successful banks can
be stable in the country which is very challenging task. To be a successful bank,
formulation of investment policy and its proper utilization or implement is essential.
A healthy development of any banks depends heavily upon its investment policy.
Good investment policy has a positive impact on economic development of country
and vice-versa.

A portfolio is usually defined as a combination of assets. It is a collection of

securities. Portfolio provides the highest possible return for any specified degree of
risk. The portfolio that provides the highest rate of return with least possible amount
of risk is the real investment portfolio. A key factor in the development in the country
is the mobilization of domestic resources and their investment for productive use to
the various sectors by commercial banks. Investment portfolio is one which the
income or profit of the bank depend upon directly to minimize risk, a bank must
diversity its investment on different sectors which is known as portfolio investment.

1.1.1 Investment

The word investment sounds very good and attractive that is why every individual in
the world is interested in it. In layman’s sense, there is always a return if there is
investment. This return may be favorable as well as unfavorable to the investor’s
stand point. Investment brings forth vision of profit, risk, speculation and wealth. For
the uninformed, investing may result in disaster. In general sense, investment means
to pay out money to get more. But in the broadest sense, investment means the
sacrifice of current money for future money.
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1.1.2 Commercial banks and investment portfolio

The success of commercial bank depends upon the proper management of investment.
A commercial bank must mobilize its deposit and other funds to profitable, secured,
stable sectors. Investment policy provides several inputs to the bank through which
they can handle their investment operation efficiently ensuring maximum return with
minimum risk which ultimately leads the bank to path of success.

Commercial banks are organization on a joint stock company system, primarily for
the purpose of earning profit. They can either of the branches banking type , with a
large network of branches, or of the unit banking type as we see in the United States,
where a bank’s operation is confined to single office or to a few branches within a
strictly limited area.

“Commercial bank is a corporation which accepts demand deposits subject to check

and makes short term loans to business enterprises, regardless of the scope of its other
service.” (Fisher & Ronald; 2000:345-346).

Commercial banks is a heart of financial system they hold the deposits of many
person, Government establishment, business unit, they make fund available through
their lending and investing activities to borrower, individuals , business firms and
service from the producers to customers and the financial activities of the
government. They provide a large portion is affected. These fact shows that the
commercial banking system of nation is import to the functioning of the economy.

In this way commercial banks are those banks, which are engaged in commercial
banking transaction and exclude from description. From the above definition
commercial bank, it can be defined as a bank is a financial institution, which performs
widest range of economic and financial functions of any business firm in the
economy. The commercial banks are these financial institutions, which collect
scattered saving of people and provide loan against proper technical helps and
suggestions, administrative suggestion, safe keeping of valuable collectives of bills,
cheques, and overdraft facilities and provide modern banking facilities to industries
and commerce. CB’s collect fund as a saving from public of country and invest in
highly return yielding firm. It develops saving habits in people. CB’s plays vital role
for development of a developing country. Banks provides internal resources for
 5

developing country’s economy. It collect diversified capital from different part of

country through its own branches.

A portfolio is collection of investment securities. Portfolio theory deals with the

selection of optimal portfolio; that is, portfolio that provides the highest possible
return for any specified degree of risk or the lowest possible risk for any specified rate
of return. A portfolio is usually defined as a combination of asset.

“A portfolio simply represents the practice among the investor of having their funds
in more than one asset. The combination of investment assets is called a portfolio.”
(Weston and Brigham; 2005)

“Portfolio means a collection or group of assets.”(Gitman; 1998)

A commercial bank can maximize its wealth through maximization of return on their
investments and lending. So they must invest their funds where they gain maximum
profit.

1.1.2 Investment pattern of Nepalese commercial banks

The history of modern banking started from the establishment of “Nepal Bank ltd.” in
1937 AD. With put forth effort of government and public, as a commercial bank with
10 million authorized capital. Then the government felt the requirement of a central
bank and established “Nepal Rastra Bank” in 1956 AD. Likewise, rising of banking
function gets popular and more complicated, thus NRB suggested for the
establishment of another commercial bank and in 1966 AD. “Rastriya Banijya Bank”
was established as a 100 per cent government owned commercial bank. As the
country moved towards economic liberalization in 1980s foreign banks were invited
to operate in Nepal. The financial scenario has changed with the introduction of Joint
Venture Bank’s in 1984. The number of commercial banks has been increasing. Since
then, various financial institution like, JVB’s, Domestic commercial banks,
Development banks, Finance companies, Co-operative banks Credit Guarantee
Corporation, Employee Provident Fund, National Insurance Corporation, Nepal Stock
Exchange Ltd. has come into existence to cater the financial needs of the country
thereby assisting financial development of the country.
 6

In 1990 A.D. after restoration of democracy, the government adopted liberal policy in
banking sector. As an open policy of GoN to get permission to invest in banking
sector from private and foreign investor under commercial bank act 1975AD,
different private banks are getting permission to establish with the joint venture of
other countries. The development of CB’s in Nepal is categorized in three phases on
the basis of financial institutions policies adopted by the country from time to time.

Taking an overview of financial institutions providing banking facility in Nepal, there

are 31 commercial banks, 87 development banks, 79 finance companies, 21 micro
credit development banks and 16 co-operative societies licensed by NRB (NRB,
2011). Out of 31 commercial banks, 7 banks are joint ventures with foreign investors.

After liberal and free market policy, Nepalese banks and financial sectors are having
greater network and access to national and international markets. They have to go
with their portfolio management very seriously and superiority. Most of other
commercial banks are providing new schemes like Insurance to depositor, which is an
extra bonus to encourage them to deposit their surplus in such banks. Credit card
system is other attractive feature of commercial banks. No doubt, if commercial banks
and financial institutions has to gain prosperity without delay, they should
immediately start to improve customer service quality at high standards to reflect
tremendous opportunities in the markets for their customers benefits like managing
their risk, giving them the advantage of global strength, insights and philosophy
because this can make the customer take full confidence to expands their transaction
further more with best approach and feel secured for each investment made to earn
superior returns over time. Therefore commercial banks should be aware and at every
moment while providing service to their customers and should have better judgment
on the quality of service whether they could satisfy their customers up to their
expectation and have been able to attract others as many to meet the objectives or not
as a result of the quality in service delivered. Actually for commercial banks the
customers act as the soul which help in correcting the problems of service providers
with which they provides, can identify the defects of the gaps to minimize them in
time through strong and intensive analysis of their service market research team.

Nepal being listed among least developed countries, the commercial banks has played
a catalytic role in the economic growth. Its investments range from small scale cottage
 7

industries to all types of social and commercial loans and large industries. Generally
the investment of the commercial banks include the investment on Government
securities, like treasury bills, development bonds, national saving bonds, foreign
government securities, shares on government owned companies and non-government
companies and investment on debentures, similarly the commercial banks used their
funds as loan and advances. The guidelines given by NRB play a significant role in
the composition of bank portfolio. Since the constraints framework provided by the
central bank is for economic enhancement, it can be hypothesized that the
composition of bank portfolio has a considerable impact on national economy.
Portfolio management activities of Nepalese banks are in developing stage, however,
on the other hand most of the joint venture banks are not doing such activities so far.

1.1.3 Factors affecting the investment portfolio decision

i) Amount of investment

While determining the investment portfolio the financial manager should consider the
amount of fund available with organization. Trading and manufacturing organization
deals in securities only for the purpose of best utilization of their available surplus
cash resource. The amount of surplus funds available with them will therefore decide
the quantum of their investment in securities.

ii) Objective of investment portfolio

While determining the investment portfolio there should be clear objective on

investment in securities. The objective may differ from organization to organization.
However, an organization, looking for investment of provident fund of its employees
can invest only in such securities, which can assure the safety fund and its return.

iii) Selection of investment

This is an essential decision to be taken by a financial manager for investing the asset.
The selection of investment involves on assuring the type of securities, proportion
between fixed and variable yield securities, selection of industries, selection of
companies etc. (Maheshwari, 1997:79-81)
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iv) Timing of purchase

To maximize the profit, it is not only important for the financial manager to buy the
right security but equally important to buy and sell it at the right time. It is the most
intricate decision for financial manager.

1.2 Statement of the Problem

Commercial banks are the backbone of the Nepalese economy at present. Nepal being
listed among least developed countries, the establishment of the commercial bank in
this sector has added more bricks in the construction of Nepalese economy. Its
investment range from small-scale cottage industries to large industries in making
investment in loans and government securities one may always wonder which
investment is better. It can be hypothesized that bank portfolio variables like loans,
investment, cash reserve, deposit and borrowing affects the national income. And also
how the government policy affects these variables, such as the effect of an interest
rate on the banks portfolio variables is of great concern. Therefore, when monitoring
money and credit conditions, the central bank has to keep an eye on bank portfolio
behavior. The investments planning of the commercial banks in Nepal heavily depend
upon the rules and regulation provided by the central banks. The composition of asset
portfolio of the banks is influenced by the policy of the central bank.

Nowadays Nepalese commercial banks do not seem capable to invest their funds in
more profitable sector where there is risk. They are found to more interest in
investment in less risky and liquid sector i.e. treasury bills, development bonds,
National savings, Shares and Debenture etc. this is due to sound investment policy of
commercial banks and lack of portfolio management. Nepalese commercial banks
have not formulated their investment policy in an organized manner. They have no
consideration towards portfolio optimization. They just rely upon the instruction and
guidelines of NRB. They do not have their own clear vision towards investment
portfolio. They don’t try to pay due attention towards proper matching of deposit and
investment portfolio, which creates financial problem enforcing commercial banks to
take wrong decisions.

With the prevailing economic recession in the country, there has been lower
investment in the agriculture, manufacturing, industrial and financial sectors. Lower
 9

volume of investment is causing lower growth of gross domestic product and hence
foreign trade deficit is increasing day by day. Commercial banks are also directly
affected by this economic turmoil and are facing difficulties in furnishing their loans
and advances towards the profitable sectors. Due to the heavy rules and regulation by
government policy, there are most important problems in investment climate
prevailing in Nepal.

There are various problems in resources mobilization by commercial banks in Nepal.

The most important problem is poor investment climate prevailing in Nepal due to
heavy regulatory procedure uncertain government policy portfolio analysis between
various types of investment made by commercial banks are most important subject,
which helps to minimize risk by diversifying total risk to different sectors. But
portfolio management activities of Nepalese commercial banks are in developing
stage. There are various reasons behind not using such activities openly by
commercial banks; such as unawareness about portfolio management and it’s
usefulness, hesitation of taking risk, lack of proper techniques to run such activities in
the best and successful manner; less developed capital market, very limited
opportunity for exercising the portfolio management. NRB has also played important
role to make commercial banks as well as financial institutions to invest their funds in
good sector, which affect the investment portfolio. NRB has imposed many rules and
regulations so commercial banks can have sufficient liquidity and security. Banking
competition is increasing day per day but investment opportunity is not comparatively
extended. Now, commercial banks have to face competition with each other’s and
many more financial institutions.

Under such situation, the present study will try to analyze investment of commercial
banks, portfolio analysis of commercial banks in their investment, return on various
types of investment, portfolio risk and return. Therefore, this study will deal with the
following issues.

 What is the relationship between investment on government securities and

total deposit, loan and advance to total deposit, share and debenture to total
deposit?
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 How do commercial banks manage their risk and return using portfolio
diversification?

 Do commercial banks effectively utilize portfolio concept in their investment

to minimize risk and maximize return or not?

 Which bank has the largest degree of financial risk measured in terms of
portfolio risk?

 Is investment portfolio directed towards the objectives of profit maximization?

1.3 Objectives of the Study

The general objective of the present study is to identify the current situation of
investment portfolio of commercial banks in Nepal. The specific objectives are as
follows.

1. To explore the existing status of investments on government securities,

corporate share and debenture and loan & advance of commercial banks.

2. To find out the structure of banks investments in different sectors

3. To find out return and risk of commercial bank in different investment

portfolios.

1.4 Significance of the Study

Banks are playing vital role in the economic development of the country. Without
banking facilities, the economic growth becomes slow. The main objectives of
commercial banks are to earn profit through proper mobilization of resources. They
are found to be making investment only on short terms basis, only few banks invest
on long terms nowadays. They are hesitating to invest on long terms projects because
banks are looking for short term return. They do not seem to be capable to invest their
funds in long term investment. They are found to be more interested in investment in
less risky and highly profitable. There are various ways to minimize risk, but banks
are not aware of this and do not pay any attention toward such field i.e. they do not
think about portfolio investment.
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The main significance of this study of portfolio analysis on investment of Nepalese

commercial banks is to help how to minimize risk on investment and maximize return
through portfolio analysis. The researcher has undertaken this study to analyze the
existing portfolio investment of Nepalese commercial banks and point out the various
weakness and defects inherent in it and provide package of suggestion for its
improvement.

The study may be useful to commercial banks to understand their investment behavior
and current investment risk return structure. This study also may be helpful to new
researchers professionals, academicians and policymakers.

There are following significance of the study

 Existing situation of portfolio analysis on investment of commercial banks in

Nepal.

 Profitability situation of commercial banks and comparing with each other.

 Loan and advance portfolio analysis of commercial banks in Nepal.

 Risk and return analysis of commercial bank in Nepal.

1.5 Limitations of the Study

Some of the assumptions of the study are as follows:

(i) This study took into account only five commercial banks and it is
assumed that the sample of five commercial banks taken for the study
is enough to support for the result.

(ii) This study considered only five years secondary data and it is assumed
that study of five years secondary data are enough for study and
analysis.

(iii) This study was based on secondary data published by the commercial
banks and it is assumed that secondary data published by the
commercial banks are 100% correct and right.

(iv) This study is based on the key financial indicators published by the
commercial banks and it is assumed that these key financial indicators
 12

are enough to know the relation between deposit and government

securities, loan and advance and share and debenture.

(v) The assumptions of the study are time constraints, limited budget, lack
of experience, up-to-date information.

1.6 Organization of the Study

This study has been organized into five chapters.

Chapter-I: Introduction

The first chapter deals with the subject matter consisting introduction, background
of the study, statement of the problem, objective of the study, significance of the
study, limitation of the study and organization of the study.

Chapter II: Review of Literature

The second chapter is mainly focused with literature review that includes a
discussion on the conceptual framework on advertisement and review of major–
studies relating.

Chapter III: Research and Methodology

The third chapter describes the research methodology used to conduct the present
research. It deals with research design, nature and sources of data, data collection
procedure, population and sample, data processing and analysis and data
presentation.

Chapter IV: Data Presentation and Analysis

The fourth chapter is concerned with data presentation and analysis. The major
findings are also included at the end of the chapter.

Chapter V: Summary, Conclusion and Recommendations

The fifth chapter includes the summary, conclusion and recommendations of the
study which deals about the main theme of study.

The bibliography and appendices are also included at the end of the study.
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CHAPTER II
REVIEW OF LITERATURE

2.1 Literature Review

Literature review is an account of publications on a topic by accredited scholars and
researchers. It is a summary and analysis of current knowledge about particular topic
or area of inquiry.

It is a review of related research studies, publications in the related area of the study
which is vital and mandatory process in research. The combination of investment in
more than one sector is called portfolio. Hence, in this chapter, the focus has been
made on the review of literature relevant to the portfolio analysis of commercial
banks in Nepal. Various journal, article, books, annual reports, and research papers
related to portfolio of commercial banks reviewed. Review of literature is divided into
following subjects:

 Review of relevant text books.

 Review of legislative provisions
 Review of previous studies or theory or concept
 Review of unpublished thesis

2.1.1 Review of relevant text

Review of supportive text provides the fundamental theoretical framework and

foundation to the present study. This concept states investment with zero risk and
maximum risk. If the risk is zero, condition is recognized as saving or lending. If there
is maximum risk then it is called gambling. Books, research paper, articles dealing
with theoretical aspects of investment and portfolio analysis are taken into
consideration.

Definition of investment

“Investment is the current commitment of funds for a period of time to derive a future
flow of funds that will compensate the investing unit for the time funds are
committed, for the expected rate of inflation and also for uncertainty involved in the
future flow of the funds.” (Frank and Reilly; 2004:298-299)
 14

“Investment is any vehicle into which funds can be placed with the expectation that
will preserve or increase in value and generated positive returns.”(Gitman and Joehnk;
1990:265)

“Investment may be defined as the purchase by an individual or institutional investor

of a financial or real asset that produces a return proportional to the risk assumed over
some future investment period.”(Amling; 1994:147)

“The measurement of a portfolio risk is not as a straight forward as the calculation of

a portfolio’s expected return. In order to calculate the risk of a portfolio, consideration
must be given not only to the risk of the individual asset in the portfolio and their
relative weights but also to the extent to which the asset’s return move together. The
degree to which the assets returns move together is measured by the covariance or
correlation coefficient. By combining the measures of individual assets risk, relative
asset weights and the co-movement of asset’s return the risk of the portfolio can be
estimated.” (Cheney and Moses; 1992:653)

Source of investment risk and return

Every investment involves uncertainties that make future investment return risky.
Some of the sources of uncertainty that contribute to investment risk are as follows;

i. Interest rate risk

It is the potential variability of return caused by changes in the market interest

rates. Present value of investment moves inversely with changes in the market
interest rate. If market interest rises, the investment’s present value will fall.

1
PV of investment =
Interest Rate

Thus, the investment risk affects the prices of securities like stocks, bonds, real
estate, gold, puts, calls, and other investments as well.

ii. Purchasing power risk (Inflation risk)

It is the variability of return an investor suffers because of inflation. The rate of

inflation is measured by consumer price index.
 15

CPI t  CPI t 1
Rate of inflation = CPI t 1

Where,

CPI t = consumer price index in period t.

CPI t 1 = consumer price index in period t-1.

When inflation takes place, financial assets such as stocks, bonds, etc. may lose
their ability to command the same amount of real goods and services they did in
the past.

iii. Market risk

It is the risk that arises from the variability in market returns resulting from
alternating bull and bear market forces. When a security index rises fairly
consistent from low point, the upward trend (bull market) and downward trend
bear market arises. During bearish period the price of the stocks falls but in the
bullish market, it usually rises more than enough to compensate for the bear
market lose. So, the alternating bull and bear market forces create a perennial
source of investment risk.

iv. Default risk

Default risk results from changes in the financial integrity of the investment. In
the other word, default risk is the variability of return that investors experience as
a result of changes in the credit worthiness of a firm in which they invested.
Investors losses from default risk usually result from the securities prices falling
as the financial integrity of a firm weaken. So the market prices of the firm
securities already decline near zero during the time bankruptcy.

v. Liquidity risk

It is variability of return which results from price discounts given or sales

commission paid in order to sell the asset without delay. Perfectly liquid assets are
 16

highly marketable and suffer no liquidation costs but liquid assets are not readily
marketable. Hence, liquid assets required large price discounts and sales
commission in order to affect a quick sell.

Diversification and portfolio analysis

Investment positions are undertaken with the goal of earning an estimated rate of
return. Investors seek to minimize risk of portfolio. Diversification is essential for the
creation of an efficient investment because it can reduce the variability of returns
around the expected return. Diversification is one important mean that control
portfolio risk. Investments are made in a wide variety of assets so that exposure to the
risk of any particular security is limited. By placing one’s egg in many baskets,
overall portfolio risk actually may be less than the risk of any component security
considered in isolation.

“Investment risk can be reduced by including more than one alternative or categories
of assets in the portfolio and by including more than one asset from each category.
Hence, diversification is essential to the creation of an efficient investment because it
can reduce the variability of returns around the expected return. This diversification
may significantly reduce risk without a corresponding reduction in the expected rate
of return on the portfolio.” (Weston and Copeland; 2003: 366)

The objective of investment in portfolio is to reduce risk. By combining securities

having a low risks with securities having a high risks, success can be achieved by an
investor in making a choice of investment outlets.

Investment positions are undertaken with the goal of earning some expected rate of
return. Diversification is essential to the creation of an efficient investment because it
can reduce the variability of returns around the expected return. The objective of
portfolio analysis is to develop a portfolio that has the maximum return at whatever
level of risk the investor deems appropriate.

Some different diversification techniques for reducing portfolio’s risk are as follows:

1. Simple diversification: Simple diversification can be defined as ‘not putting all

the eggs in one basket’ or ‘spreading the risks’. The simple diversification would
be able to reduce unsystematic or diversifiable risk. It is the random selection of
 17

securities that are to be added to a portfolio. Simple diversification reduces a

portfolio’s total diversifiable risk to zero and only the undiversifiable risk
remains.

2. Diversification across industries: Some investment counselors advocate

selecting securities from different industries to achieve better diversification. It is
certainly better to follow this advice than to select all the securities in a portfolio
from one industry. But, empirical research has shown that diversifying across
industries is not much better than simply selecting securities randomly. Studies
of the rates of return from securities in many industries have shown that nearly
all industries are highly co-related with one another. Such types of securities
cannot be diversified away simply by selecting securities from different
industries.

3. Superfluous diversification: Large number of assets spreading of the portfolio

asset is superfluous diversification. It refers to the investors’ spreading himself in
so many investments on his portfolio.

4. Simple diversification across quality rating categories: Simple diversification

reduces risk within categories of stocks that all have the same quality rating. The
standard deviations of portfolio of different homogenous quality rating attained
different levels of risk. The highest quality portfolio randomly diversified stocks,
was able to achieve lower level of risk than the simply diversified portfolios of
lower quality stocks. This result reflects the default risk is a part of total risk. The
higher quality portfolios contain assets with less default risk. Portfolio managers
can reduce portfolio risk to levels lower than those attainable with simple
diversification by not diversifying across lower quality assets.

Portfolio risk of a risky and a risk free security

‘A risk free security is one which has a zero various or standard deviation
consequently the covariance between the risk free securities and the risky security will
be zero. Since the risk free security has a zero standard deviation and covariance
between the risk free security and risky security is zero, when a risky asset is
combined with a risk free asset, the product of standard deviation of risky asset and
portfolio proportion invested in the risky asset.’(Bodie, Kane and Marcus; 2002:164)
 18

Here,

 p  Wj  j

Where,

j
= Standard deviation of risky securities.

Wj
= Weight of risky securities in a portfolio.

The total risk of the portfolio can be partition into two parts. They are,

Undiversifiable risk / Market risk / Systematic risk

Diversification risk / company specific risk / Unsystematic risk / Unique risk

Systematic risk

Systematic risk is the portion of total variability in return caused by market factors
that simultaneously affect the prices of all securities. The systematic nature of these
price changes makes them immune to much of the risk reduction effects of
diversification, thus systematic risk called undiversifiable risk. Changes in the
economic, political and sociological environment that affects security market are the
source of systematic risk. Systematic variability of return found in nearly all securities
to varying degree because most securities tend to move together in a systematic
manner. Systematic risk is the market risk which could be avoidable. The
systematic risk lies in the overall stock within market measured by beta (β). The beta
of the stock is the slope of the characteristics line between return for the stock and
those for the market. Beta depicts the sensitivity of the security’s excess return to that
of the market portfolio. If the slope is one, it means that excess vary proportionately
with excess return for the market as a whole. If the slope steeper than one means that
the stock’s excess return varies more than proportionately with the excess return of
the market portfolio. In other words, it is more systematic risk than the market as
whole. This type if stock often called aggressive stock and slope less than 1 called
defensive stock.
 19

The undiversifiable risk is caused by such factor which systematically affects all firms
like war, inflations, recession, interest rates policy, corporate tax rate policy etc

Since all securities will tend to be negatively affected by these factors, systematic risk
cannot be eliminated by diversification therefore, an investor will expect a
compensation for bearing this risk.

Unsystematic risk

“Unsystematic risk or diversifiable risk is the portion of the total risk which is
unexplained by overall market movements. Since it happens due to internal causes, it
is diversifiable by increasing the efficiencies and effectiveness for the productivity of
the organization. This kind of risk is diversifiable risk or avoidable risk. Unsystematic
risk can be reduced as more and more securities are added to a portfolio. Various
studies suggest that 15 to 20 securities selected randomly are sufficient to eliminate
most of the unsystematic risk of a portfolio.” (Van Horne; 1998:55-69)

“Events such as labour strikes, management errors inventions, advertising, campaigns,

shifts in consumer taste and lawsuits cause unsystematic variability in the value of a
market asset. Since unsystematic security price movements are statistically
independent from each other, and so they may be averaged to zero when different
assets are combined to form a diversified portfolio. Therefore, unsystematic risk is
also called diversifiable risk”. (Weston and Copeland; 2003: 366)

Market portfolio

“The market portfolio is the unanimously declarable portfolio consisting of all the
securities where the proportion invested in each security corresponds to its relative
market value. The relative market value of the security is divided by the sum of the
aggregate market value of all securities. The return on the market portfolio is the
weighted average return on all capital assets (Francis: 6th edition: 254). Since the
market portfolio contains all risky assets in proportion to their market value, it is by
definition, a perfectly diversified portfolio. The market portfolio is, therefore subject
only to systematic or non diversifiable risk. The volatility of the market portfolio is
due to macroeconomic factors that affect all risky assets and not to economy or
industry specific factors. Volatility in return created by unsystematic risk, this risk can
be diversified away by adding risky assets to a portfolio.” (Cheney and Moses; 1995:
690)
 20

The market portfolio holds a special place in modern in theory and practices. It is
central to CAPM, which assumes that the market portfolio lies on the efficient set and
that all investors hold the market portfolio in combing with a desired amount of risk
free borrowing and lending.

2.1.2 Review of legislative provision

In this section, literature related to legal aspects has been reviewed. The preamble of
Nepal Rastra Bank Act, 2002 clearly states the need of commercial bank in Nepal. "In
the absence of any bank in Nepal the economic progress of the country was being
hampered causing inconvenience to the people and therefore with the objective of
fulfilling that need by providing services to the people. For the betterment of the
country this law is hereby promulgated for the established of the bank and operation."
(Nepal Rastra Bank Act 2002,)

As mentioned in this act, commercial banks will help in baking business by opening
its branches in the different parts of the country under the direction of NRB, The main
function of commercial banks established under this act will be, exchange money, to
accept deposits and give loan to commercial and business activities.

NRB rules regarding fund mobilization of commercial bank

To mobilize bank's deposit in different sectors of the different parts of the nation to
prevent them from the financial problems, central bank (NRB) any establish a legal
framework by formulating various rules and regulations (prudential norms). The
directives must have direct or indirect impact while making decision to discuss those
rules and regulation, which are formulated by NRB in terms of investment and credit
to priority sector, deprived sector, other institution, single borrower limit, CRR, loan
loss provision, capital adequacy ratio, interest spread, productive sector investment. A
commercial bank is directly related to the fact how much fund must be collected as
paid up capital, while being established at a certain place of the nation? How much
fund is needed to expand the branch and counters? How much flexible and helpful the
NRB rules are also important? But we discuss only those, which are related to
investment function of commercial banks. The main provisions, established by NRB
 21

in the form of prudential norms in above relevant area are briefly discussed here
under.

1. Provision for investment in the deprived sector

Some rules, which are formulated by NRB, affect the areas of credit and investment
extension to the deprived sector by the commercial bank. According to the new
provision, with effect from the 4th quarter of FY 2011, investment in shares of the
rural development bank by CBs, which used to be counted for the priority sector
lending, only is now to be included under the deprived sector lending. The new
provisions effective newer commercial banks are required to invest 3% of their total
loans and advances to the deprived sector.

2. Provision for credit to the priority sector

NRB requires commercial banks to extend loan & advances, amounting at least to
3.05% of their total outstanding credit to the priority sector. Commercial banks credit
to the deprived sector is also a part of priority sector credit. Under priority sector,
credit to agriculture is taken.

3. Provision for the investment in productive sector

Nepal, being a developing country needs to develop infrastructure and other primary
productive sectors like agriculture, industry etc. For this, NRB has directed
commercial banks to extend at least 40% of their total credit to the productive sectors.
Loans to priority sector, agriculture sector, and industrial sector have to be included in
productive sector investment.

4. Provision for the single borrower credit limit

With the objective of lowering the risk of over concentration of bank loans to a few
big borrowers and also to increase the access of small and middle size borrower to the
bank loans. NRB directed CBs to set an upper limit on the amount of loan financed to
an individual, firm, company or group of companies. According to this, CBs are
required not to exceed the single borrower limit 25% in the case of fund-based credit
and 50%, in the case of non-fund based credit. Such as the letter of credit, guarantee,
acceptance letter, and commitment has been fixed is a proportion of capital funds of
bank.
 22

In the case of consortium financing, commercial banks are permitted to extend a

maximum 30% credit. In addition, Nepal Oil-Corporation, Agriculture-inputs
Corporation and Nepal Food Corporation for their impost petrol, diesel, kerosene, and
fertilizer and food stuffs respectively have been removed from the restrictions of
single borrower credit limit.

Besides this, following the BASEL Capital Adequacy Accord, NRB has directed
commercial banks to maintain at least 6% capital adequacy ratio (CAR) of their risk
weighted assets (RWA) and off-balance sheet transaction i.e. letter of credit, letter of
acceptance, Bonds, Guarantee etc. They are further required to classify their capital
requirement in to (1) core capital (Tier 1) and (2) supplementary capital (Tier 2) and
maintain at least 10% of their total capital in the form of core capital. As per the
provision, risk weighted assets (RWA) are to be calculated by classifying assets and
giving them different risk weights.

5. Cash reserve requirements (CRR)

To ensure adequate liquidity in the commercial banks to meet the depositors demand
for cash at anytime and to inject the confidence in depositors regarding the safety of
their deposited funds. According to the NRB Regulation 5% CRR should be
maintained.

6. Loan classification and loss provision

With a view to improving the quality of assets of commercial banks NRB has directed
commercial banks to classify their out-standing loan and advances, investment and
other assets into six categories. The classification is done in two ways. The loans of
more than 10 million are to be classified as debt service charge ratio, repayment
situation, financial condition of borrower, management efficiency, quality of
collateral. The loans of less than 10 million have to be classified as per maturity
period.

Furthermore, NRB has directed commercial banks to maintain certain reserves for
loans so classified. The existing loan loss provisioning is as follows:
 23

Table 1.1: Loan Loss Provision

(In Percentage)
Loan Classification Loan Loss Provisioning:
Pass 1
Sub Standard 25
Doubtful 50
Loss 100
Source: (NRB Directives, 2068)

LLP has affected banks capability to extend loans and made them risk averse in
issuing newer loans, particularly to the private sector and priority sector where the
loan default is high.

7. Directives regarding interest rate spread

The interest rate spread, the difference between interest charged on loan and advances
and the interest paid to the depositors, has widened significantly in the aftermath of
deregulation in interest rates which has caused lower financial intermediation.
Therefore, NRB has required commercial banks to limit interest rate spread between
deposit and lending rated to a maximum extent of 5%. NRB has also provided
commercial banks with new calculation method of interest rate spread for a certain
period recently.

2.1.3 Review of previous studies

This section is developed to the review of major related literature concerning portfolio
in different countries. But in Nepal there are very few studies can be found in the
topic of portfolio analysis on investment of commercial banks in Nepal. For this
study, various books, journals, articles and past thesis are reviewed. It is reviewed
from international context and Nepalese context.

A study entitled “Lending policy of Commercial Banks in Nepal” (Bhattrai,1978) has

tried to examine the lending policy of the commercial banks. The study concluded
that efficient utilization of resources is more important that collection of the same.
Lower investment means lower capital formulation that hampers economic
development of the people and the country. Therefore, recommendation is that bank
should give emphasis on efficient utilization of resources.
 24

A study entitled, “A study on Investment Policy of Nepal Bank Ltd.” (Pradhan, 1980)
emphasized that there is a greater relationship between deposits and loans and
advances. The study concluded that through there is a greater relationship between
deposits and loans and advances. The study concluded that through loan and advances
as well and deposits are in increasing trend, their increase is not in a proportionate
manner. Immense increase in the deposits had leaded to little increase in loans to
grant the loan and advances without its lengthy process. The study suggested
enhancing banking transactions up to rural sector of the kingdom.

2.1.4 Review from international context

In international context, several studies have been done in the field of portfolio
analysis. Among them some studies are reviewed as follows.

The Harry M. Markowitz’s Study (1952)

Markowitz entitled the portfolios theory establishes a relationship between a

portfolios expected return and its level of risk as the criterion for selecting the
optimum portfolio. So as to find the efficient set of portfolios and select the most
effecting one, the portfolio manager need to know the expected returns and the risk of
these returns for the individual securities. The portfolio model developed by
Markowitz is based on the following assumptions. (Markowitz; 1952:77-91)

 The risk of an individual asset or portfolio is based on the variability of

returns (standard deviation or variance)
 Investors depend solely on their estimates of return and risk in making their
investment decisions. This means that an investor’s utility (indifference)
curves are only a function of expected return and risk.
 Investors adhere to the dominance principal. That is, for only given level of
risk, investors prefer assets with a highest expected return to assets with
lower expected return.
 The expected return of the portfolio is the weighted average of the expected
returns of the individual assets in the portfolio. The weights are defined as
the portion of the investor’s wealth invested in a particular asset.
 25

The Markowitz has presented the risk of the portfolio consists of the riskiness of
the individual securities and the covariance between the returns of the securities
among all possible combinations of them. Thus, portfolio risk can be calculated as
follows:-

The portfolio risk

 p  X 1  1  X 2  2  2 X 1 X 2   1 2  12
2 2 2 2 2

Where,
X1 = proportion of funds invested in security 1.
X2 = proportion of funds invested in security 2.
 1 , 2
2 2
= variance of the returns on securities 1 and 2.
r12 = correlation between the return of 1 and 2.

The Edward J. Kane and Stephen A. Buser’s Study (1979)

The study of the Edward J. Kane and Stephen A. Buser in the title “Portfolio
diversification at Commercial Banks” (Kane and Buser; 1979:19-31) deals how a firm
performs a useful function by holding a portfolio of efficiently priced securities.

It is the rational for a firm to engage round of asset diversification on behalf of its
shareholder’s even when all assets are priced efficiently and available for direct
purchase by shareholders. As a way of testing their perspective empirically, they
estimates regression model designed to explain the number of distinct of U.S. treasury
and federal agency debt held in a time series of cross section of large U.S. commercial
Banks. They interpret the systematic pattern of the diversification observed for large
U.S. commercial banks as evidence that banks stockholder from relatively uniform
diversification clientele. For firm, marginal benefits from diversification takes
reduction in the cost equity funds offered by its specific clientele of stockholders. To
maximize the value of the firm, these benefits must be weight against the explicit and
implicit marginal cost of diversification.

According to E.J. Kane and S.A. Buser:

 26

 Even wealthy investors should be sensitive to administrative costs associated

with selecting, evaluating, managing and continually keeping track of a large
number of securities.

 Investors with even modest resources, the stock of financial institutions should
be relatively less attractive than the stock of that avoid extensive
diversification costs by engaging in specialized activities.

Review of journals and articles

In this section, effort has been made to examine and review of some related articles in
different economic journals, magazines, newspapers and other related books and
publication.
Shrestha (1998) has given a short glimpse on article entitled “Portfolio Management
in Commercial Banks; Theory and Practices”. (Nepal Bank Patrika; 1998). The
article highlighted the followings issues:
 The portfolio management is a important issue both for individual and
institutional investors.

He further suggested that:

 Do not hold any single security i.e. try to have a portfolio of different securities.
 Choose such portfolio of securities, which ensure maximum return with minimum
risk or less return for wealth maximizing objectives.

He has mention short transitory view on portfolio management in Nepalese

commercial banks. Nowadays number of banks and financial institution are operating
in this sector are having greater networks and access to national and international
markets. They have to go with their portfolio management very seriously and
superiority, to get success to increase their regular income as well as to enrich the
quality service to their clients. In this competitive and market oriented open economy,
each commercial banks and financial institution has to play a determining role by
widening various opportunities for the sake of expanding provision of best service to
their customers.
 27

In this context he had presented two types of investment analysis techniques i.e.
fundamentals analysis to consider any securities such as equity, debenture or bond
and other money and capital market instrument. He has suggested that the banks
having international joint venture network can also offer admittance to global
financial markets. He has pointed out the requirement of skilled labors, proper
management information system in joint venture banks and financial institution to get
success in portfolio management and customer assurance.

On the basis of his article, the portfolio management activities of Nepalese

commercial banks at present is in nascent stage. However, on the other hand most of
the banks are doing such activities so far because of following reasons. Such as
unawareness of the client about the service available, hesitation of taking risk by the
client to use such facilities, lack of proper techniques to run such activities in the best
and successful manner, less development of capital market and availability of few
financial investment in the financial market.

He has given the following conclusion for smooth running and operation of
commercial banks and financial institution.

 For surviving commercial banks should depend upon their own financial health
and various activities.
 In order to develop and expand the portfolio management activities successfully,
the investment management methodology of portfolio manger should reflect high
standards and give their clients the benefits of global strengths, local insights and
product philosophy.
 With the discipline and systematic approval to the selection of appropriate
countries, financial assets and management of various risks the portfolio manager
could enhance the opportunity for each investor to earn supervisor returns over
time.
 The Nepalese banks having greater network and access to national and
international capital market have to go for portfolio management activities for the
increment of their fee based income as well as to enrich the client base and
contribute to the national economy.
 28

Timilsina (1999) has published an article on “Managing Investment Portfolio.” He is

however, confronted with problems of managing investment portfolio particularly in
times of economic slowdown like ours. A rational investor would like to diversify his
investments in different classes of assets so as to minimize risks and earn a reasonable
rate of return.

Commercial banks have continuously been reducing interest rates on deposits. Many
depositors are exposed to the increasing risk of non-refund of their deposits because
of the mismanagement in some of the banks and finance institutions and accumulation
of huge non-performing assets with them.

Few depositors of cooperative societies lost their deposits because some of these
cooperatives were closed down because of their inability to refund public deposits. An
investor in days of crisis has to make an effort to minimize the risk and at least earn a
reasonable rate of return on his aggregate investment.

An investment in equity share can earn dividend income as well as capital gain, in the
form of bonus share and right share until an investor holds it and capital profit when
he sells it in the stock market. As returns from equity investments have fluctuated
within a very wide range, investors feel it much difficulty to balance risk and reward
in their equity portfolio. As a matter of fact, investors in equity shares should invest
for a reasonable long time frame in order to manage the risk.

Making investment in fixed deposits with commercial banks is a normal practice

among the common people. Normally fixed deposits with banks are considered risk-
less, but they also are not 100 percent risk free. You should select a bank to put your
deposit therein, which has sound financial health and high credibility in banking
business. In times of crisis if you select a sick bank deposit your money there is high
probability that your money could be returned back.

An investor may have option of making investment in government bonds or

debentures. In history we have examples that a government can nationalize the private
property of its citizens, cancel out old currency notes, and can convert the new
investment into some conditional instrument. But in democracy there is no probability
 29

that the government would default to repay money back. This is comparatively risk
free investment, but yields low return.

An investor has to evaluate the risk and return of each of the investment alternatives
and select an alternative, which has lower degree of risk and offer at least reasonable
rate of return. One can draw a safe side conclusion to invest all the money he has only
in government securities, but this is not a rational decision. An investor who doesn’t
try to maximize return by minimizing the possible risk is not a rational investor. On
the other hand, one can place over-confidence on equity investment and assume high
risk by investing the whole money in equity shares. Stock market these days is much
dwindling and notoriously unpredictable; therefore this too is not a wise decision.
Therefore, a portfolio, which consists of only one class of financial assets, is not a
good portfolio.

2.1.5 Review of unpublished thesis

Bajracharya (2000) conduct a study on “Investment of Commercial Banks in Priority

Sector”. The major finding of the study is that the target of 12% investment of total
outstanding liabilities in priority sector and 3% out of which has been invested in
deprived sector.
Mahandhar (2003) in her thesis entitled “Analysis of Risk and Return on Common
Stock Investment of Commercial Bank in Nepal” has been done in 2003. The findings
of the study is
stocks have greater volatility risk than other investment, which takes a random and
unpredictable path. Stock market is risky in the short term and it is necessary to
prepare the investors for it.
 Stock of all banks in this study are said to be under priced. These companies’
common sticks are worth to purchase, as their expected return is greater than
required rate of return.
 Portfolio return is greater than portfolio risk of two banks (i.e. NBBL and
HBL)
 30

2.2 Theoretical Framework

2.2.1 Concept of investment

When people earn money; they either consume them or save them. Saving can be
either hoarded which does not provide any yield to the saver or it can be used for
investment to earn some return. The investment is a commitment of fund to some
assets which takes place at present in an expectation to receive some direct benefits
from those assets or to increase the value of those assets which takes place in the
future. Although, savings are a major source of investment, investments can also be
made from borrowings. (Manandhar, Gautam & Lamichhane; 2066:2)

Government
Securities
Capital
Formulation
Loan & Advance

Investment/ Lending

Deposit Share & Debenture

Collection

Others

Figure 2.1 Investment Cycle

Figure 2.1 depicts that investment is made either from deposit made or capital
formulation or both and investment contributes capital formation which may result
investment in different securities and instrument.
 31

Some of scholar definitions of investment are as follows:

“Investment, in its broadest sense, means the sacrifice of current dollars for future
dollars. Two different attributes are generally involved: time and risk. The sacrifice
takes place in the present and is certain. The reward comes later, if at all, and the
magnitude is generally uncertain.” (Sharpe, 2002, p. 123)

“An investment is a commitment of funds made in expectation of some positive rate of

return. If the investment is properly undertaken, the return will be commensurate with
the risk the investor assumes.” (Fisher & Ronald; 2000:345-346).
 32

CHAPTER III
RESEARCH METHODOLOGY

A systematic research study requires following a proper methodology to achieve the

set of objectives. Research Methodology is a systematic approach of finding solution
of a particular problem. It is systematic collection, recording, analysis, interpretation
and reporting of data and information.

This chapter aims to present a basic framework of the research work. This chapter
contains the research design, sample size, time frame, instrument of data collection,
validity and reliability, data processing tools and techniques, variables etc.

Research design is used to control variance (Wolff and Pant; 2002:51). It includes
different dependent and independent variables, types of research design, research
questions and hypothesis sample, data collection activities, technique of analysis etc.

3.1 Research Design

Research design is an overall framework or plan for the activities to be undertaken
during the course of a research study. Research design is the plan, structure and
strategy of investigations considered so as to obtain answers to research questions and
to control variances. The present study is mainly based on two type of research
design: descriptive and analytical. Descriptive research design describes phenomena
and explores the existing situation of the particular situation. Analytical research
design analysis and evaluate the situation on the basis of gathered facts and
information.

3.2 Description of the Population and Sample

The study is limited within the A class commercial banks of Nepal. There are
basically three types of banks: 1. promoted by GON, 2. domestic investors, and 3.
joint venture. At present there are 32 licensed commercial banks operating their
business in Nepal. All 32 licensed Nepalese CBs are considered as total population.
But, only 5 banks are selected as a sample.
 33

Sampling size and techniques

Sample size is determined considering time and resources available for the study. Five
banks are selected for the study. Stratified and quota sampling method is used while
selecting sample from the population. In the population frame only 15 banks are
eligible out of 32 banks. It is because the study needs at least five fiscal year data.
Bank established before 2006 are selected in the sampling frame. Only 17 banks were
eligible for the study but 2 giant banks also excluded from the study. Rest of 15 banks
are divided in two strata: 100 per cent domestic investment bank (10) and joint
venture bank (5). 33% of population has selected as a sample using random sampling
method from each strata. Out of 10 banks, 2 banks are selected and out of 5 banks, 1
bank is selected.
Name of all banks were written in different piece of paper and closed the name of the
bank by folding the paper where 5 papers were drawn randomly. The method of
sampling is simple random sampling method,
Following 5 banks have been selected as sample bank for the study of the research
project.
From 100 percent domestic investment group:
1. Nepal Investment Bank Ltd. ( in short – NIBL)
2. Kumari Bank Limited ( in short – KUMARI)
3. Nabil Bank Limited ( in short- NABIL)

From joint venture with foreign investment group:

4. Himalayan Bank Limited ( in short – HBL)

5. Everest Bank Limited ( in short – EBL)

Description of the sample banks:

I. Nabil Bank Limited

Nabil Bank Limited, the first foreign joint venture bank of Nepal, started operations in
July 1984. Nabil was incorporated with the objective of extending international
standard modern banking services to various sectors of the society. Pursuing its
objective, Nabil provides a full range of commercial banking services through its 47
 34

points of representation across the country and over 170 reputed correspondent banks
across the globe.
Nabil, as a pioneer in introducing many innovative products and marketing concepts
in the domestic banking sector, represents a milestone in the banking history of Nepal
as it started an era of modern banking with customer satisfaction measured as a focal
objective while doing business.
Paid up capital is reached to Rs. 2,029 million and total equity reached to Rs. 4144 million.

II. Everest Bank Limited

Everest Bank Limited (EBL) started its operations in 1994 with a view and objective
of extending professionalized and efficient banking services to various segments of
the society. The bank is providing customer-friendly services through its Branch
Network. All the branches of the bank are connected through Anywhere Branch
Banking System (ABBS), which enables customers for operational transactions from
any branches.
With an aim to help Nepalese citizens working abroad, the bank has entered into
arrangements with banks and finance companies in different countries, which enable
quick remittance of funds by the Nepalese citizens in countries like UAE, Kuwait,
Bahrain, Qatar, Saudi Arabia, Malaysia, Singapore and U K.
Punjab National Bank (PNB), our joint venture partner (holding 20% equity in the
bank) is the largest nationalized bank in India. With its presence virtually in all the
important centers at India, Punjab National Bank offers a wide variety of banking
services which include corporate and personal banking, industrial finance, agricultural
finance, financing of trade and international banking. Among the clients of the Bank
are Indian conglomerates, medium and small industrial units, exporters, non-resident
Indians and multinational companies.

III. Kumari Bank Limited,

Kumari Bank Limited, came into existence as the fifteenth commercial bank of
Nepal by starting its banking operations from Chaitra 21, 2057 B.S (April 03, 2001)
with an objective of providing competitive and modern banking services in the
Nepalese financial market. The bank has paid up capital of Rs. 1,485,000,000 of
which 70% is contributed from promoters and remaining from public.
 35

Kumari Bank Ltd has been providing wide - range of modern banking services
through 28 points of representations located in various urban and semi urban part of
the country, 19 outside and 9 inside the valley. The bank is pioneer in providing some
of the latest / lucrative banking services like E-Banking and SMS Banking services in
Nepal.

IV. Himalayan Bank Ltd.

Himalayan Bank was established in 1993 in joint venture with Habib Bank Limited of
Pakistan. Despite the cut-throat competition in the Nepalese Banking sector,
Himalayan Bank has been able to maintain a lead in the primary banking activities-
Loans and Deposits.

Legacy of Himalayan lives on in an institution that's known throughout Nepal for its
innovative approaches to merchandising and customer service. Products such as
Premium Savings Account, HBL Proprietary Card and Millionaire Deposit Scheme
besides services such as ATMs and Tele-banking were first introduced by HBL. Other
financial institutions in the country have been following our lead by introducing
similar products and services. Therefore, we stand for the innovations that we bring
about in this country to help our Customers besides modernizing the banking sector.
With the highest deposit base and loan portfolio amongst private sector banks and
extending guarantees to correspondent banks covering exposure of other local banks
under our credit standing with foreign correspondent banks, we believe we obviously
lead the banking sector of Nepal. The most recent rating of HBL by Bankers’
Almanac as country’s number 1 Bank easily confirms our claim.

V. Nepal Investment Bank Ltd.

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd., was
established in 1986 as a joint venture between Nepalese and French partners. The
French partner (holding 50% of the capital of NIBL) was Credit Agricole Indosuez, a
subsidiary of one the largest banking group in the world.

With the decision of Credit Agricole Indosuez to divest, a group of companies

comprising of bankers, professionals, industrialists and businessmen, had acquired on
 36

April 2002 the 50% shareholding of Credit Agricole Indosuez in Nepal Indosuez
Bank Ltd.

The name of the bank has been changed to Nepal Investment Bank Ltd. upon
approval of bank’s Annual General Meeting, Nepal Rastra Bank and Company
Registrar’s office with the following shareholding structure.

 A group of companies holding 50% of the capital

 Rashtriya Banijya Bank holding 15% of the Capital.
 Rastriya Beema Sansthan holding the same percentage.
 The remaining 20% being held by the General Public (which means that NIBL
is a Company listed on the Nepal Stock Exchange).

3.3 Instrumentation

To collect the information data secondary data source was used. Financial statements
of five banks for five fiscal years obtained from official websites and publications of
concerned banks which can be easily got from the corporate office or searching the
internet.

3.4 Data Collection Procedure and Time Frame

I used official websites of above organization, their annual report and occasional
publications as the secondary data sources. This study mainly based on secondary
source data of concerned banks, Nepal Rastra Bank, SEBO, and different library are
the providers of the data. Data has been collected from Nepal Rasra Bank, Ministry of
Finance, NEPSE, SEBO and their respective publications similarly the required micro
level data derived from annual reports of selected banks, SEBO and NEPSE. In
addition to above, supplementary data and information were collected from different
organization;
Although, the study mainly used secondary data, high level of efforts and more time
was paid to get data. Official publications like Economic Survey, Annual Reports,
Banking and Non-Banking Financial Statistics, Economic Bulletin etc. were obtained
from respective offices. Mainly most of the data are taken from the library of SEBO.
To some extent, informal interview was scheduled and conducted to obtain more
 37

information and reality about the various published data, investment policies of the
banks, portfolio concept in the field of investment etc.
Due to poor data base, the data obtained from the various sources cannot be directly
used in their original form. Further they need to be verified and simplified for the
purpose of analysis. Hence, in this study the available data, information, figures and
facts were checked, rechecked, edited and tabulated for computation. Similarly,
according to the need and objectives, the secondary data were compiled, processed
tabulated and graphed if necessary for the better presentation.

3.5 Validity and Reliability

Measurement experts (and many educators) believe that every measurement device
should possess certain qualities. Perhaps the two most common technical concepts in
measurement are reliability and validity. Any kind of assessment, whether traditional
or "authentic," must be developed in a way that gives the assessor accurate
information about the performance of the individual. At one extreme, we wouldn't
have an individual paint a picture if we wanted to assess writing skills.

3.5.1 Reliability

Reliability means degree of consistency between two measures of the same thing
(Mehrens and Lehman, 1987). Reliability of the information was examined by
different methods. Data was collected by secondary sources basically from annual
report of the organization downloaded from the official websites. The data has been
cross checked with the data obtained from Nepal Rastra Bank. Both sources of
information to be coincided. On the basis of the result it can be said that there is high
degree of reliability in the information collected for this study.

3.5.2 Validity

For a test to be valid, or truthful, it must first be reliable. The findings should be
accurate or exact. There are three types of validity: Content, Criterion and construct
validity. Validity of the data is tested on the basis of different theory. Generally,
return of risky assets is higher than return of less risky assets. Same result has been
obtained from this study.
 38

3.6 Analysis Plan

In this study, various financial and statistical tools were used. To measure the return
arithmetic mean is used, to measure the risk standard deviation; variance and
coefficient of variation are used. To find out the financial performance of the
organization different ratio are used. Return on Assets, Return on Investment, profit
margin, ratio between deposit and loan and investment, ratio between assets and
deposit are calculated.

Financial performance measurement tools

Several tools are applied in order to analyze the performance of CBs. But the
following main financial tools are used to analyze.

I. Ratio analysis
The relationship between two accounting figures expressed in quantitative figure
mathematically is known as ratio. Ratio analysis is used to compare a firm’s financial
performance and status so that of other firms or to itself on time (Gitman; 1990:275).
Likewise, ratio refers to the numerical or quantitative relationship between two items
or variables. It is one number expressed in term of another and can be worked out by
dividing the number to the other i.e. it is calculated by dividing one items of the
relationship with the other (Munakarmi;2002:204). In financial analysis, ratio is used
as an index of yardstick for evaluating the financial position and performance of the
firms. Since, this study mainly moves around investment portfolio of CBs. Only such
ratios which are related to investment of CBs are taken here. Hence, in this study the
following ratios are calculated and analyzed.

1. Total investment to total deposit ratios

Investment is one of the major credits created to earn income. This implies the
utilization of firms deposit on investment in government securities. This ratio can be
obtained by dividing total investment by total deposit. This can be mentioned as:

Total Investment
Total Deposit
 39

2. Loan and advances to total deposit ratio

This ratio assesses to what extent the banks are able to utilize the depositor’s funds to
earn profit by providing loan and advances. It is computed by dividing the total
amounts of loans and advances by total deposited funds. The formula used to
computed this ratio is as
Loan and Advances
Total Deposit
High ratio is the symptom of higher/ proper utilization of funds and low ratio is the
single of balance remained unutilized/ idle.

3. Net profit to total assets ratio

This ratio is very much crucial for measuring the profitability of funds invested in the
banks assets. It measures the return on assets. It is computed by dividing the net profit
after tax by total assets. The formula used for computing this ratio is as
Net Profit after Tax
Total Assets

4. Return on government securities

This ratio indicates how efficiently the bank has employed its resources to earn good
return from government securities. This ratio is computed by dividing interest income
on government securities by government securities. This can be expressed as;
Interest income on government securities
Government securities

5. Return on loan and advances

This ratio indicates how efficiently the bank has employed its resources to earn good
return from provided loan and advances. This ratio is computed by dividing interest
income on loan and advances by loan and advances. This can be expressed as;
Interest income on loan and advances
Loan and Advances

6. Return on share and debentures

The return on share and debenture considers dividend yield and capital gain yield. The
dividend yield is only a partial indication of the return hence, return on share and
 40

debenture significantly depends on the change in its share price. It is calculated as

follows:
Pt  Pt 1  Dt
Return on share and debenture Rs  
Pt 1
II. Risk on individual assets
The riskiness of assets depends on the variability of rates of return, which is defined
as the extent of the deviation of individual rates of return from the average rate of
return. Risk on individual assets can be calculated as;

 R  R 
2


n 1
Where
  Standard deviation or risk
R = average rate of return on individual assets
R = rate of return on individual assets
n = no. of years

III. Return on portfolio

The return of a portfolio is the weighted average of the returns of the individual assets
in the portfolio. The weights are proportion of the investors wealth invested in each
asset, and sum of the weights must be equal one.
 
Portfolio return R p  W A R A  WB RB  .................  WN RN

Where,
R p = Portfolio return

WA = Weight of investment invested in stock ‘A’

WB = Weight of investment invested in stock ‘B’

R A = Return for stock ‘A’

RB = Return for stock ‘B’

 41

IV. Risk on portfolio

The portfolio risk is measured by either variance or standard deviation of returns. The
portfolio risk is affected by the variance of return as well as the covariance between
the return of individual assets included in the portfolio and respective weights.
The portfolio risk can be calculated in term of its standard deviation as;

W A  A  WB  B  WC  C  2Cov AB  W A  WB  2Cov AC  W A  WC 
2 2 2 2 2 2

p 
2Cov BC  WB  WC

Where,
W A ,W B , W C = Weight of assets A, B and C in a portfolio

 A,  B , C = Standard deviation of return of A, B and C in a portfolio

Cov AB = Co-variance between assets A and B

Cov BC = Co-variance between assets B and C

Cov AC
= Co-variance between assets A and C

V. Co-variance
The covariance measure how two variables co-vary. It is a measure of the absolute
association between two variables. How the returns of individual stocks and market
co-vary measured by covariance between the return of individual stocks and market
return. If two variables are independent, their covariance will zero. It computed as;
Symbolically
Cov.( j & m)   j ,m j m

VI. Coefficient of variation

We know that standard deviation is the absolute measure of dispersion of rate of
return. The relative measure of dispersion based on the standard deviation is known as
the coefficient of standard deviation.
 j
C.V. =
Rj

Where,
 j = Standard deviation of securities j.

R j = Average return on securities j.

 42

The CV thus defines the risk associated with each dollar of expected return in terms
of ratio of the standard deviation of return to the expected return. (Pradhan;
2000:250).
b) Statistical tools
The process of analyzing and evaluating various data statistical tools has been used. In
this study, statistical tools such as standard deviation, mean, coefficient of variation,
coefficient of correlation between different variables are as follows;

I. Karl Person’s Coefficient of Correlation

Correlation Coefficient is statistical tools to measure the relative association between
two variables series; it describes how much linear co-movement exits between two
variables. Karl Person’s measure, known as personas correlation coefficient between
r xy
two variables (series) X and Y usually denoted by r(X,Y ) or or simply r can be
obtained as;
N  XY    X  Y 
r
N  X 2   X  N  Y 2   Y 
2 2

The value of correlation coefficient ‘r’ lies between -1 to +1

If r = 1 there is perfect positive relationship
r = -1 there is perfect negative relationship
r = 0 there is no correlation at all
The closer the value of ‘r’ is 1 or -1, the closer the relationship between the variables
and the closer ‘r’ is to 0, the less close relationship..

II. Mean
It can also be denoted by AM or simply a mean of a set of observations is the sum of
all the observation divided by the number of observations. Arithmetic mean is also
known as the arithmetic average. AM is the most popular one among the different

measures of the averages. e.g., the AM of x of N observation x1 , x 2 , x 3 .......... .. x n is

given by

X 
1
x1  x2  x3  .......  xn 
N

X 
x
N
 43

CHAPTER IV
DATA PRESENTATION AND ANALYSIS

4.1 Presentation of the Result

The main theme of this chapter is to analyze and interpret the data by using financial
and statistical tools. In this chapter, the concern is given in the presentation and
analysis part of data in detail. As data presentation and analysis is the crucial part of
any research, the purpose is to organize the collected data so that it can be used for
interpretation whereas analysis of the data is to convert it from a crude form to an
easy and understandable form.

There are a number of methods which can be used to simplify the data. It is being felt
that the easiest way to understand the data is by examining it through charts, tables
and graphs. Necessary tables and figures are personated to achieve the objectives of
the study. Here, relevant data are collected from the annual report, official website of
banks, journals and newspapers.

The investment portfolio of CBs is analyzed with the help of following tools;

 Risk and return (mean, standard deviation and coefficient of variation) on

individual investment assets and investment portfolio

 Ratio analysis

 Correlation analysis

4.1.1 Risk and return on individual investment assets and investment portfolio

Risk is an important element since investment with greater risk requires a higher
return than investment with lower risk. The relationship between risk and returns is
described by individual perception about risk and their demand for compensation. In
this section, standard deviation and coefficient of variation are taken as the
measuring tools of risk and mean return is taken as to measure realized return.
 44

Risk and return on government securities

Government securities are the fixed income securities issued by the government of
Nepal. These securities are least risky among the various investment alternatives. The
risk and return on government securities such as treasury bills, development bonds,
national saving bond etc. can be calculated as follows:

The return on government securities is computed by dividing interest income on

government by total investment on government securities. i.e.

R g
Average Rate of return on Government Securities ( R g )  t 1
n
Now, Risk on government securities is denoted by  g and can be calculated by using

following formula.
n

 (R g  Rg ) 2
g = t 1
N
g
Coefficient of variation (CVg) = 100
Rg
Where, n = no.of historical year (period)

Table 4.1: Calculation of Risk and Return on Government Securities

(in Percentage)
FY NABIL EBL KBL HBL NIBL
2006/2007 6.31 2.74 4.32 3.35 3.27
2007/2008 3.16 2.73 3.46 2.97 2.41
2008/2009 4.27 3.74 3.17 2.69 3.17
2009/2010 7.26 5.63 8.20 8.43 5.56
2010/2011 4.17 5.49 4.63 4.81 4.04
Mean 5.03 4.07 4.75 4.45 3.69
Variance 2.86 2.03 4.06 5.61 1.42
S.D. 1.69 1.42 2.02 2.37 1.19
C.V 0.34 0.35 0.42 0.53 0.32
Source: Calculation from primary source, annexure ‘A’
 45

Table 4.2: Calculation of Risk and Return on Govt. Securities of CBs

(Rs. in millions)
Government Securities Return on Investment
FY
Interest income Investment (%)
2006/2007 545.16 14631.02 3.73
2007/2008 595.53 20519.12 2.90
2008/2009 726.55 21564.26 3.37
2009/2010 1143.14 16675.85 6.86
2010/2011 1034.59 22693.08 4.56
Average 4.28
S.D. 1.56
C.V. 0.36
Source: Calculation from primary source, annexure A

 Return
The table no.4.1 shows that the return on investment on government securities was
fluctuated over the period. Similarly, there is no constant return on government
securities and interest income from government securities. During the study period,
the highest return was 6.86% in 2009/2010 and lowest return was 2.90% in
2007/2008. The return trend of the study period i.e. from FY 2006/2007 to FY
2010/2011 is ups and down. In an average, the return is 4.28% which shows that in an
average the commercial banks generate 4.28% returns on government securities.

 Risk (Standard deviation)

Similarly, the standard deviation of the return on government securities for 5 years
period is 1.56 and CV is 0.36 which shows the riskiness of return of government
securities. The lower variability on returns on government securities is due to proper
investment on various securities i.e. balanced allocation of funds on various
government securities such as treasury bills, national saving bonds, development
bonds etc. The same result is also presented by figure 4.1.
 46

Figure 4.1: Return on Government Securities

4 Return

0
2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Fiscal Year 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Return 3.73 2.9 3.37 6.86 4.56

Risk and return on loan and advance

The major portion short term investment of commercial banks is the loan and advance
in various sectors. Commercial banks provide loans and advances from the money i.e.
the money it reserves by the way of the persons against the personal security of the
borrowers or against the security of the borrowers or against the security of the
movable and immovable properties. Mainly the commercial banks are providing their
funds to the various sectors like agriculture, industry, commercial sectors etc.

The risk and return on investment in the form of loan and advance can be calculated
as follows:
Interest income from loan & advances
Return on Loan and Advance (Rl) =
Total Investment on loan & advances

R
t 1
1
Average Rate of Return on Loan and Advance ( R1 ) =
n

Now, Risk on loan and advances are denoted by  l and can be calculated by using
following formula.
 47

(R L  RL ) 2
l = t 1
N

l
Coefficient of variation (CVl) =  100
Rl

Where, n = no.of historical year (period)

Table 4.3: Calculation of Risk and Return on Loan and Advances

(In percentage)
FY NABIL EBL KBL HBL NIBL
2006/2007 7.79 7.89 7.85 7.92 7.65
2007/2008 7.63 7.10 7.78 7.38 7.65
2008/2009 7.07 7.26 7.79 7.50 7.17
2009/2010 7.96 7.79 8.52 7.51 8.13
2010/2011 10.44 10.17 11.95 10.15 10.56
Mean 8.18 8.04 8.78 8.09 8.23
S.D. 1.31 1.23 1.80 1.17 1.35
C.V 0.160 0.154 0.205 0.144 0.164
Source: Calculation from primary source, annexure ‘B’

Table No. 4.3 shows the risk and return on loans and advance by the various
commercial banks. The return on loans and advances is calculated by the ratio of the
interest income from the loans and advances and investment on loans and advances
during the fiscal years. Out of the five commercial banks KBL has the highest return
on loans and advances i.e. 8.78% while, the EBL has the lowest return i.e. 8.04%,
Similarly HBL, and EBL have the lowest risk i.e. C.V (0.144, 0.154) while the KBL
has the highest risk i.e. C.V. (0.205)
 48

Table 4.4: Calculation of Risk and Return on Loan and Advances of CBs
(Rs. millions)
Loan and Advance
FY Ratio (%)
Interest income Investment
2006/2007 4398.31 56262.99 7.82
2007/2008 5370.55 71649.95 7.50
2008/2009 7054.46 96607.57 7.30
2009/2010 10035.42 126221.41 7.95
2010/2011 15011.70 142717.51 10.52
Average 8.22
S.D. 1.31
C.V. 16%
Source: Calculation from primary source, annexure ‘B’

 Return
Table No.4.4 shows the risk and return of average commercial banks. The average
return is 8.22%. Combining table 4.3 and table no.4.4 we find that KBL and HBL
provide the return above the average industry while, the rest provide return below the
average industry.

 Risk (Standard deviation)

The standard deviation and C.V. of CBs are 1.31 and 16% comparing the riskiness of
the returns; EBL and HBL are less risky as they have C.Vs below the average, while
the remaining two banks have C,Vs more than average.

Figure 4.2: Return on Loan and Advance

12

10

6 Return

0
2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Fiscal Year 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Return 7.82 7.5 7.3 7.95 10.52
 49

Risk and return on share and debentures

The return on share and debenture considers dividend yield and capital gain yield
(change in market price) or return is the combination of capital gain yield and
dividend yield. Capital gain (loss) yield can be calculated by difference between this
year price and last year price with respect to the last year price. Dividend yield is
calculated by dividend per share divided by market price per share. Market return is
the mean return of the selected companies which is represented by the market return
of the study. Standard deviation (S.D.) measures risk that is very essential to study.
Standard deviation helps the investor to take the decision on the investment. Market
return and standard deviation are the most important factors to analyze the risk and
return. For that purpose 15 different companies are taken into consideration form
listed companies in NEPSE. These selected companies are taken from different sector
like banking sector, manufacturing companies, trading companies, service sector and
hotels etc.

The risk and return on investment in share and debenture of the commercial banks can
be calculated as follows:

Return on share and debenture (Rs) = Capital gain yield + Dividend yield
Pt  Pt 1 Dt
= 
Pt 1 Pt

Risk on Share and Debenture (S.D.) (  S ) =  (R s1  R s )2

N

Average return on share and debenture ( ( R ) 

R 2

N
s
Coefficient of variation (C.Vs) =  100
Rs
Where
Pt = Average closing price of year‘t’
Pt-1 = Average closing price of t-1 or previous year
 50

Table 4.5: Calculation of average Risk and Return investment on Share and
Debenture of 5 Commercial Banks
(In Percentage)
Average Average
Closing Price at the Return on Share
FY Capital Dividend
end of Ashad and Debenture
Gain Yield Yield
2005/2006 893
2006/2007 1284 43.78% 0.50% 44.29
2007/2008 2360 83.80% 0.22% 84.02
2008/2009 2768 17.29% 0.16% 17.45
2009/2010 2240 -19.08% 0.17% -18.90
2010/2011 1201 -46.38% 0.36% -46.02
Mean 16.17
S.D. 51.22
C.V. 3.17
Source: Calculation from primary source, annexure ‘C’

Figure 4.2: Return on Share & Debenture

100

80

60

40

20

0
2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
-20

-40

-60

Fiscal Year 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Return 44.29 84.02 17.45 -18.9 -46.02

 Returns
The table no.4.5 and figure no. 4.3 above reveals that return on share and debenture of
commercial banks shows wide fluctuation i.e. 44.29% in 2006/2007 and -46.02% in
2010/2011 respectively. These fluctuations in returns are caused mainly by the
volatility of the share price in the market. The changes in dividends also contribute to
the variability of the shares returns in some extent. Dividend yield is less than 1%
 51

throughout the period so return of share is dominated by capital gain. The return of
investment on share and debenture is more than other sector of investment.

 Risk (Standard Deviation)

Standard deviation 51.22% and coefficient of variation i3.17 show high degree of risk
of return on share and debenture. It is greater than that of government securities and
loan and advance. So it is clear that investment on share and debenture is a riskier
investment alternative for commercial banks in Nepal.

4.1.2 Risk and Return on Investment Portfolio

Investment Portfolio Return

The expected return on a portfolio (Rp) is simply the weighted average of the expected
returns on the individual assets in the portfolio with the weight being the fraction of
the total portfolio in each asset. In this study, investment portfolio is calculated by
investment on government securities, loan and advances and share and debenture. The
weight of the investment on various assets is calculated and average rate of returns are
presented as follows:
Here for three assets

Portfolio Return ( R p ) = X g  R g  X l  R l  X s  R s

= (0.1676  4.28+0.8279  8.22+0.0045  16.17)

= 7.60%
Where Xg = weight of government securities
Rg = return of government securities
Xl = weight of loan and advance
Rl = return of loan and advance
Xs = weight of share and debenture
Rs = return of share and debenture
 52

Table No. 4.6: Calculation of Weight of the Investment on Various Assets

Investment Amount Proportion Average Rate

S.N Assets
(In Rs. Millions) Weight (X) of Return (%)
1 Government Securities 109135.77 0.1676 4.28
2 Loan And Advance 539136.07 0.8279 8.22
3 Share and Debenture 2942.95 0.0045 16.17
Total 651214.79 1.0000

Investment portfolio risk

Expected risk on a portfolio is function of the proportion invested in the components,
the riskiness of the components and correlation of returns on the components
securities. It is measured by standard deviation. The standard deviation of portfolio is
not simply the weighted average of standard deviation of individual securities. The
portfolio risk is affected by the association of movement of returns of two securities.
The degree to which the assets return move together is measured by the covariance.
Hence, by combining the measures of individual asset risk, relative asset weights and
co-movement of asset returns (covariance) the risk of the portfolio can be estimated.
Here, firstly covariance between two assets can be calculated and then portfolio risk
can be calculated as:

n Ri R j   Ri  R j
rij 
n Ri  ( Ri ) 2  n R j  ( R j ) 2
2 2

From the calculation shown in Annex 4 we get,

Correlation between Rg and Rl (rgl) = 0.24
Correlation between Rl and Rs (rls) = -0.73
Correlation between Rg and Rs (rgs) = -0.65

g 1.56 Wg 0.1676 rgl 0.24

i 1.31 Wl 0.8279 rls -0.73
s 51.22 Ws 0.0045 rgs -0.65
 53

Now,
The Standard deviation of portfolio investment (  p ) for three assets can be

calculated as follows:

 p = Wg  g  Wl  l  Ws  s  2WgWl rgl g l  2WgWs rgs g s  2WlWs rls l s

2 2 2 2 2 2

p 0.9905
=
p
= 0.9952

Overview of Individual with Portfolio

Securities Weight Returns S.D. C.V.
Government Securities 0.1676 4.28 1.56 0.36
Loan & Advances 0.8279 8.22 1.31 0.16
Share and Debenture 0.0045 16.17 51.22 3.17
Portfolio 1.0000 7.6 0.99 0.13

Returns
Returns on Government securities are lower than other securities i.e. Loan & Advance
and Share and Debenture. Government securities are a risk free security that’s why
the returns of government securities is very low. In the comparison between
remaining two risky assets, loan & advance and share & debenture, share and
debenture is showing high rate of average returns. Comparatively share & debenture
is high risky than the loan and advance. So high risk high return and vice-versa.
Portfolio return is weighted average return of the securities; it is 7.6 percent which is
normally higher than government securities and lower than the other two securities.

Risk (S.D. and C.V.)

In the sense of risk, among three securities share and debenture showing the highest
risk. Actually the share and debenture includes two types of risk i.e. capital gain risk
and dividend risk. Capital gain risk is risk that occurs when the price of securities
fluctuates. And dividend risk is normal risk depends upon the performance and
profitability of the institutions. Here in the research share and debenture showing the
highest risk i.e. C.V. of CBs is 3.17
 54

4.1.3 Analysis of ratio

A ration is calculated is calculated by dividing one item of relationship with other. As

tool of financial analysis, ratio can be expressed in terms of percentage. Ratio analysis
is a very important tool of financial analysis. From the help of ration analysis, the
qualitative judgment can be done very easily an timely regarding financial
performance of the firm. The purpose of this chapter is to evaluate and analyze the
financial position and performance of the different commercial banks. In this section
only those major ratios which are mainly related to the investment mechanism of
commercial banks are calculated and analyzed.

Returns to Total Assets Ratio

This ratio is calculated by dividing net profit after tax by total assets of the bank.
Thus, it measures the profitability of the banks’ with respect the total assets. It seems
to be vital for measuring financial performance of the firm or shows the efficiency of
bank using its resources. The higher ratio indicates the effective utilization of
resources and yields higher returns for the banks it is calculated as:

Table No.4.7: Calculation of Returns to Total Assets Ratio

(In Percentage)
FY NABIL EBL KBL HBL NIBL Average
2006/2007 2.84 1.49 1.15 1.54 1.64 1.82
2007/2008 2.47 1.38 1.43 1.47 1.82 1.75
2008/2009 2.01 1.66 1.16 1.76 1.79 1.75
2009/2010 2.35 1.73 1.41 1.91 1.70 1.87
2010/2011 2.19 2.01 1.54 1.19 2.37 1.93
Mean 2.37 1.65 1.34 1.57 1.87 1.83
S.D. 0.32 0.24 0.17 0.28 0.29 0.08
C.V 0.133 0.146 0.130 0.176 0.157 0.043
Source: Calculation from primary source, annexure ‘E’

Table no. 4.7 shows that the commercial banks has mixed trend on their return on
total assets ratio. During the study period, FY 2006/2007 to 2010/2011 Nabil bank has
earned the highest ratio compared to other commercial banks. While examining the
mean ratio Nabil bank has highest ratio 2.37% and KBL has lowest ratio of 1.34%
among the five commercial banks (average ratio of CBs 1.83%).
 55

While analyzing the riskiness of the returns on the total assets of the commercial
banks, HBL has the highest C.V. (0.176) reflecting highest risk for each unit of return
among the other commercial banks. KBL has the lowest C.V. (0.130). The lowest
C.V. of KBL 0.130 shows that the return on total assets of KBL is the most consistent
among the five commercial banks.

Therefore, it can be concluded that Nabil bank provides the highest return on its total
assets among the five commercial banks while, the risk on these returns are lower for
KBL. This means though Nabil provides higher returns on their assets, the risk
associated with them are not less. Nabil provides greater returns on their assets
however; the returns are more consistent for KBL among five commercial banks.
Figure no. 4.4 depicts the returns on total assets of the selected commercial banks.
Figure 4.4

Total investment to total deposit ratio

The calculated results of this ratio measure the magnitude to which the banks are
successful in mobilizing the total deposit on investment or not. Total investment to
total deposit ratio is calculated by dividing investment by total deposits. In general,
high ratio indicates high success to mobilize the funds of banks as investment and
vice- versa. It is computed as:
 56

Table No. 4.8: Calculation of Total Investment to Total Deposit Ratio

FY NABIL EBL KBL HBL NIBL CBs
2006/2007 31.93 30.43 17.96 41.10 29.60 32.74
2007/2008 38.32 27.41 15.90 39.35 26.57 31.83
2008/2009 31.14 21.10 16.74 41.89 19.95 27.68
2009/2010 28.99 17.85 9.62 25.12 15.85 20.50
2010/2011 22.99 13.56 13.18 22.45 17.24 18.60
Mean 30.68 22.07 14.68 33.98 21.84 26.27
S.D. 5.53 6.88 3.33 9.40 5.98 6.46
C.V 0.180 0.312 0.227 0.277 0.274 0.246
Source: Calculation from primary source, annexure ‘F’

The comparative table no. 4.8 reveals that the ratios of investment to total deposits of

commercial banks are in fluctuating trend throughout the study period i.e. from

2006/2007 to 2010/2011. At beginning of the study period, the ratio of HBL of higher

at 33.98% which has fluctuated over the years and come to 22.45 in the FY

2010/2011. While KBL had the least ratio among the five commercial banks in the

first year with 17.96%, however the ratio has further decline in the later year and

reached 9.62% in FY 2009/2010 and again increases to 13.18 in FY 2010/2011. HBL

has the highest average ratio with 33.98% and KBL has the lowest average ratio with

14.68% among the five commercial banks having an average ratio 26.27%. HBL and

Nabil have higher ratio than average ratio of CBs while, NIBL, EBL and KBL have

ratios below the average ratio of CBs. Similarly; Nabil has lower CV than average CV

of the commercial banks reflecting that any other CBs. It can also been presented in

fig no. 4.5

 57

Figure No. 4.5

Government secutirties to total depostit ratio

Government securities to total deposit ratio explain as to what extent the banks are
able to invest depositor’s fund on government securities. This ratio is calculated by
dividing total investment on government by total deposit. The high ratio represents
the efficiency of the firm in utilizing collected deposit to governemt securities and
vice-versa. It is computed as:

Table No. 4.9: Government Securities to Toal Deposit Ratio

(In Percentage)
FY NABIL EBL KBL HBL NIBL CBs
2006/2007 11.90 25.71 14.34 19.42 13.33 16.95
2007/2008 20.60 25.85 12.29 21.48 13.30 19.24
2008/2009 14.56 20.11 11.50 23.46 9.16 15.98
2009/2010 9.92 15.44 6.87 12.15 5.42 9.94
2010/2011 17.11 11.79 9.92 11.87 8.39 12.04
Mean 14.82 19.78 10.99 17.68 9.92 14.83
S.D. 4.22 6.22 2.80 5.37 3.40 3.77
C.V 0.285 0.314 0.254 0.304 0.343 0.255
Source: Calculation from primary source, annexure ‘G’
 58

The table no. 4.9 shows the ratio of investment on government securities to total
deposit. Here, it is found that EBL has the highest mean of government securities to
total deposit ratio i.e.19.78% and NIBL has lower investment on the securities
i.e.9.92% among the five CBs over the study period. As compared to the average
mean ratio of commercial banks i.e.14.83%, average mean of Nabil, KBL, NIBL are
lower and average mean of EBL and HBL are higher. KBL also has the lowest CV
among the commercial banks i.e. only 0.254 which reflects that KBLl is more
consistent in the investment on government securities than any other commercial
banks. The same thing is more clearly presented by figure no. 4.6

Figure No. 4.6

Loan and advance to total deposit ratio

Loan and advances to total deposit ratio explains as to what extent the banks are able
to mobilize depositors fund to profit by providing the funds to outsider in the form of
loans and advances. This ratio is calculated by diving loan and advances by total
deposits to loan and advances and vice versa.
 59

Table No. 4.10: Loan and Advances to Total Deposit Ratio

(in Percentage)
FY NABIL EBL KBL HBL NIBL CBs
2006/2007 65.55 70.79 87.54 54.34 66.64 65.17
2007/2008 65.57 74.91 84.09 56.02 69.46 67.20
2008/2009 66.30 76.40 88.10 60.48 77.26 71.58
2009/2010 73.45 71.37 92.15 71.46 76.55 75.24
2010/2011 69.53 74.61 83.71 74.39 80.48 75.72
Mean 68.08 73.62 87.12 63.34 74.08 70.98
S.D. 3.42 2.42 3.43 9.10 5.79 4.72
C.V 0.05 0.03 0.04 0.14 0.08 0.07
Source: Calculation from primary source, annexure ‘H’

Figure 4.7

The table no. 4.10 shows the KBL has the highest ratio of investment on loans and
advances from its total deposit and HBL has the lowest ratio of investment on loans
and advances. The average ratio of CBs is 70.98%. KBL, EBL and NIBL are above of
the average ratio of CBs while Nabil and HBL have ratio below the average of CBs.
According to CV, Nabil, EBL and KBL have the lowest CVs and HBL and NIBL
have higher CVs than the average CV of CBs which indicates that the investment on
 60

loan and advance has been uniform in EBL that Nabil, HBL and NIBL. It can also be
shown in figure 4.7
From the above analysis, it can be said that KBL has mobilized its total deposit more
effectively on loan and advance than other 4 commercial banks. EBL has also
mobilized in an effective way. Among five banks, HBL is the least effective to
mobilize the deposits on loan and advances

Share and debenture to total deposit ratio

Investment on share and debenture to total deposit ratio shows that the portion of
investment on share and debenture from total deposit fund. It explains as to utilize the
depositor’s fund to earn profit by investment of share and debenture by total deposits.
The high ratio represents the efficiency of the firm in utilizing collected deposits to
share and debenture and vice-versa

Table No.4.11: Share and Debenture to Total Deposit Ratio

(In Percentage)
FY NABIL EBL KBL HBL NIBL CBs
2006/2007 0.54 0.14 0.00 0.15 0.09 0.21
2007/2008 1.23 0.10 0.00 0.24 0.14 0.39
2008/2009 1.01 0.42 0.14 0.28 0.16 0.43
2009/2010 0.95 0.31 0.12 0.27 0.13 0.38
2010/2011 0.75 0.28 0.13 0.21 0.13 0.33
Mean 0.90 0.25 0.08 0.23 0.13 0.35
S.D. 0.26 0.13 0.07 0.05 0.02 0.09
C.V 0.29 0.52 0.88 0.24 0.18 0.25
Source: Calculation from primary source, annexure ‘I’

The above table shows the share and debenture to total deposit ratio of CBs does not
have fixed trend. Among the five CBs, Nabil has the highest investment on share and
debenture from its total deposits i.e. 0.90% over the study period. On average CBs
have ratio of 0.35% on shares and debenture. All the remaining CBs have lower ratio
than average ratio of CBs. KBL have lowest share of only 0.08%. Similarly, NIBL
and HBL have CV lower than the average CVs of CBs.

From the above analysis, it can be concluded that NABIL has greater investment in
shares and debenture while, NIBL’s investment on share and debenture are more
 61

consistent than the other CBs. Figure no.4.8 shows the ratio of investment on share
and debentures by commercial banks to their total deposits
Figure No. 4.8

4.2 Correlation Analysis

Under the correlation analysis, the intensity of linear relation between the following
variable have been measured.
 Total deposit and government securities
 Total deposit and loans and advances
 Total deposit and share and debenture

4.2.1 Total Deposit and government securities

Table No. 4.12: Correlation Analysis between Total Deposit and Total
Investment on Government Securities (in Millions)
Total Government
FY XY X2 Y2
Deposits (X) Securities (Y)
2006/2007 86336.96 14631.02 1263197788 7454070662.04 214066746.2
2007/2008 106623.2 20519.12 2187815056 11368515308.10 421034285.6
2008/2009 134960.2 21564.26 2910317274 18214260982.45 465017309.3
2009/2010 167762.6 16675.85 2797583453 28144279893.00 278083973.2
2010/2011 188481.2 22693.08 4277218496 35525155214.19 514975879.9
Total 684164.2 96083.33 13436132068 100706282059.79 1893178194
Source: Calculation from primary source
 62

From the calculations we get,

(5  13436132068)  (684164.17  496083.33)

r=
5  100706282059.79  (684164.17) 2 5  1893178194  (96083.33) 2

= 0.50
1  r2
P.E. = 0.6745 
n

1  0.50 2
= 0.6745 
5
= 0.226
From the table, we find the correlation coefficient and probable error of coefficient
between total deposit and total investment on government securities are 0.50 and
0.226 respectively. Here, correlation coefficient is less than six times greater than
probable error i.e. 0.50< 6x 0.226. It indicates that the correlation between total
deposit and government securities are positively related but the correlation is not
significant.
Thus, from the above analysis it can be concluded that an additional unit of deposit
does not necessarily create a proportionate addition to the investment in Government
securities. Therefore, commercial banks are not able to raise the volume of investment
on government securities despite their volumes of total deposit have increased.

4.2.2 Total deposit and loan & advance

Total deposit and total investments on loan and advances variables of commercial
banks for the different sampled period have been presented in following table no.
4.13.
 63

Table.No.4.13: Correlation Analysis between Total Deposit and Total Loan &
Advance (in Millions)
Total Loan
Total
&
FY Deposits XY X2 Y2
Advance
(X)
(Y)
2006/2007 86336.96 56262.99 4857575517 7454070662.04 3165524043.74
2007/2008 106623.24 71649.95 7639549815 11368515308.10 5133715335.00
2008/2009 134960.22 96607.57 13038178901 18214260982.45 9333022581.30
2009/2010 167762.57 126221.41 21175228131 28144279893.00 15931844342.39
2010/2011 188481.18 142717.51 26899564691 35525155214.19 20368287660.60
Total 684164.17 493459.43 73610097054.90 100706282059.79 53932393963.04
Source: Calculation from primary source

From the above calculation we got,

(5  73610097054.90)  (684164.17  493459.43)

r=
5  100706282059.79  (684164.17) 2 5  53932393963.04  ( 493459.43) 2
= 1.00
1  r2
P.E. = 0.6745 
n

1  1.002
= 0.6745 
5
=0

Above calculation shows that the correlation coefficient and probable error of
coefficient between total deposit and total investments on loan and advances are 1 and
0 respectively. Here, correlation coefficient is perfectly positive. Thus, the correlation
between total deposit and advances is perfectly positive. Therefore, commercial banks
increase (decrease) their portion of investment on loan and advances with increase
(decrease) of portfolio of total deposits over the study period.
 64

4.2.3 Total deposit and share & debenture

Table No.4.14: Correlation Analysis between Total Deposit and Total Investment
on Share and Debenture
(in Millions)
Total Share and
FY Deposits Debenture XY X2 Y2
(X) (Y)
2006/2007 86336.96 179.93 15534609.21 7454070662 32374.8049
2007/2008 106623.2 415.05 44253975.76 11368515308 172266.5025
2008/2009 134960.2 586.73 79185209.88 18214260982 344252.0929
2009/2010 167762.6 630.16 105717261.1 28144279893 397101.6256
2010/2011 188481.2 613.04 115546691.1 35525155214 375819.2677
Total 684164.17 2424.91 360237747.03 100706282059.79 1321814.29
Source: Calculation from primary source

(5  360237747)  (684164.17  2424.91)

r=
5  100706282059.79  (684164.17) 2 5  1321814.29  ( 2424.91) 2
= 0.88
1  r2
P.E. = 0.6745 
n

1  0.882
= 0.6745 
5
= 0.068

From Table No.4.13, we get the correlation coefficient and probable error of
coefficient between total deposit and total investment on share and debenture to be
0.88 and 0.068 respectively. This indicates that the correlation between total deposit
and total investment on share and debenture is significant (0.88>6x0.068).
 65

4.3 Major Finding of the Study

The major findings of the study are as follows:

Risk and Return Analysis

Major findings from the risk and return on various investment assets in which the
commercial banks invest their funds and make portfolio from such investment assets
are as follows:
i. The average return on government securities is 4.28% and its standard
deviation and CV is 1.56 & 0.36 respectively.
ii. The average return, S.D. and CV of loan and advances are 8.22%, 1.31 and
0.16 respectively.
iii. Average return, S.D. and CV of share and debenture of CBs are 16.17%, 51.22
& 3.17 respectively.

Analysis of Ratios

i. The return on total assets shows that NABIL has the better position among the
selected CBs. NABIL has greater mean return than CBs mean return i.e.
2.37%>1.83% while KBL has the lowest return in the industry i.e. 1.34. The
return on total assets for EBL, HBL and NIBL fell between the two extremes.
KBL has the lowest C.V. i.e. 0.13 among the five commercial banks while HBL
has the highest C.V. i.e. 0.176. The average C.V. of CBs is 0.043.

ii. The ratio of investment to total deposit of CBs the ratio is in increasing trend over
the study period despite the Rupees figure have increased. In the study, HBL has
the highest ratio i.e. 33.98% and KBL has the lowest ratio i.e. 14.68%. The
industry average is 26.27%. Similarly, NABIL has the lowest C.V. i.e. 0.18 and
EBL has the highest C.V. i.e. 0.312

iii. In case of investment on government securities to total deposit ratio, EBL has the
highest ratio i.e. 19.78% and NIBL has the lowest ratio of 9.92%. The average
 66

ratio of CBs is 14.83%. However, Nabil has the lowest C.V. i.e. 0.285 and NIBL
has the highest C.V. i.e. 0.343, among the five commercial banks.

iv. The investment on loans and advances by the average CBs has the followed an
increasing trend from FY 2006/07 to FY 2010/11. However, among the five
commercial banks, KBL has the highest share of investment on loan and advances
with 87.12% of the total deposits and HBL, has the lowest share of investment on
loans and advances with only 63.34%. The industry average is 70.98%. Similarly,
EBL has the lowest C.V. i.e. 0.03 and the HBL has the highest C.V i.e. 0.14.

v. The investment on share and debenture has been minimal for the commercial
banks in Nepal. The industry average of investments on share and debenture is
0.35%. Nabil has the highest investment ratio with 0.9% while, KBL has the
lowest ratio with only 0.08%. However, KBL also has highest of C.Vs among the
CBs reflecting less consistency in the investment. Among the five commercial
banks, it is NIBL who has the highest consistency of investment on shares and
debentures.

Correlation Analysis
i. The correlation between total deposit and total investment on government
securities is positively related but the correlation is less significant because the
correlation coefficient is less than six times the probable error that is 0.50>6x0.26.
Therefore, the investment on government securities do not increase in the same
proportion as the increase in the deposit or, with the increase in deposit,

ii. The correlation coefficient between total deposit and total loan and advances is 1.
It indicates that the correlation is perfectly positive and correlation is much
significant. Therefore, CBs are able to raise the volume of investment on loan and
advances with rise in the volume of total deposit over the study period.

iii. Commercial banks do not necessarily in the investment on government securities

despite the fact that their investment increase proportionately to the increase in
deposits.
 67

iv. The correlation coefficient is not greater than six times of probable error i.e.
0.88>6x0.068. It indicates that the correlation between total deposits and total
investment on shares and debenture is significant.
 68

CHAPTER V
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

This chapter is an accomplished specific and indicative enclose which contains

summary, major finding and conclusion of finding and recommendations. Brief
introduction to all chapters of the study and genuine information of the present
situation under the topic of the study is defined on summary. Conclusions and
Findings are analysis of applicable data by using various financial and statistical tools,
which presents strengths, weakness, opportunities and threats of the CBs. And
suggestions are obtainable in recommendation, which is arranged on the based from
finding and conclusions.

5.1 Summary

The process of the economic development depends upon various factors, however
economists are now convinced that capital formation and its proper utilization plays a
paramount role for rapid economic development. Banks are an essential part of the
business activities which are established to safeguard. CBs collect scattered financial
resources from the masses and invest in commercial and economical activities of the
country. Besides financial supports, CBs provide technical and administrative
assistance to industries, trade and business enterprises. CBs are defined as a bank is a
financial institution, which performs widest range of economic and financial functions
of any business firm in the economy. CBs plays vital role for development of a
developing country. Banks provides internal resources for developing country’s
economy.

The evolution of the organized financial system in Nepal has a more recent history
than in other countries of the world. In Nepalese context, the history of development
of modern banks started from the establishment of Nepal bank limited in 1937 A.D.
nowadays there are 31 CBs operating in Nepal financial market which is in increasing
due to the country moved towards economic liberalization, financial scenario has
changed, and foreign banks were invited to operate in Nepal. For the better
performance of CBs, successful formulation and effective implementation of
investment policy is the prime requisite. Nowadays there is a very high competition in
 69

the banking industries but very less opportunity to make investment. The
opportunities are hidden. Thus these CBs should take initiative action in search of the
new opportunities. So, that they can easily survive in this competitive banking
business world and earn profit. A bank manager its investment has a lot to do with the
economic health of the country because the bank loans support the growth of new
business and trade empowering the economic activities of the country.

Investment portfolio refers to an investment that combines several assets. Investment

portfolio is one which the income or profit of the banks depend upon directly.
Investment portfolio usually offers the advantage of reducing risk through
diversification of risk from risky investment to less risky investment. The objective of
portfolio is to develop a portfolio that has the maximum return at whatever level of
risk. The investment portfolio is the tool which helps to reduce risk and maximize
return. The banks should never invest its funds in those securities; difference may
cause a great loss. The bank should accept that type of securities which are
commercial, durable, marketable stable, transferable and high market price.

Generally the investment of the CBs include the investment on government securities,
like treasury bills, development bonds, national saving bonds, foreign government
securities, shares on government owned companies and non government companies
and investment on debentures, similarly the CBs used their funds as loan and
advances. Most of the banks are interested to invest their funds in more liquid and less
risky sector. Nepalese CBs don’t have their own clear vision towards investment
portfolio. The investment planning of the CBs in Nepal heavily depend upon the rules
and regulation provided by the central banks. The composition of asset portfolio of
the banks is influenced by the policy of the central bank. NRB’s directives, unsecured
climate created by political situation, government policy, Maoists problems etc are the
most important problem for banking sectors in investment.

The researcher has tried to explore investment of CBs in various assets, portfolio
management and risk return, risk and return on assets, relationship between various
factors of CBs with various investment assets, performance of CBs towards
investment for the study of ‘Investment portfolio analysis of Nepalese CBs’. For the
fulfillments of the objectives of the study many analysis has been done such as
operation of CBs, investment and loan and advance portfolio, risk and return analysis,
 70

portfolio risk and return on investment, ratio analysis. For the analysis mainly
secondary data are used, which is collected from concerned banks, NRB, NEPSE,
SEBO and different library and different information also provided from there.
Financial and statistical tools are used to reckoning and secondary data were
compiled, processed, tabulated and graphed for better presentation from which
various finding and conclusion have been drawn which are presented as below.

5.2 Conclusions

Commercial banks have been operating efficiently and have been successful in
becoming the pillars of economic system of the country. These banks are performing
as financial intermediaries, which provided a links between borrowers and lenders by
mobilizing the scattered resources towards productive investments. It is not possible
to achieve such goal without using portfolio concept on the investment strategies,
which helps to reduce risk and increase return on investment. Most of the CBs are
fascinated to invest their resources in more liquid and less risky sectors. CBs are
unsuccessful to use the investment portfolio management to balanced investment
opportunities.

From the analysis of risk and return of individual investment resources, it is conclude
that the loan and advances is much better than investment on share and debentures
and govt. securities. It is due to the fixed interest income on loan and advances. So
that the CBs are eager to invest their maximum part of investment on loan and
advances in different sectors due to return from loan and advances seems less
explosive than other resources. The average rate of return and risk on share and
debentures are advanced than other assets so that the CBs are invested very low
portion of resources into share and debentures of other companies which terminate
that the CBs are investment on less risky sectors by which CBs can reduced risk but
reduced on return also. From the various ratios relating with the utilization of
resources on investment it can be accomplished that SCBL is the bank which shows
better performance on their investment strategies. While EBL, NIBL, NABIL imitate
moderate performance in utilization of overall resources. And HBL is the weakest
bank to mobilize its total resources in various investment assets among five CBs.

While comparing the investment portfolio weight set up by the CBs with directives
given by the central banks, the banks have not followed the directives. Directives
 71

direct not to invest more than 50% in one sector but most of the banks have invested
more than 90% of their funds into one sector. From investment portfolio analysis, it is
accomplished that the CBs are given first priority to invest their funds in the govt.
sector due to less risky and second priority given to the share and debentures of other
companies. And in the case of investment on loan and advances portfolio, CBs are
concentrated in the private sector due to high return from them and given second
priority to bills P & D and lastly on the govt. enterprises due to the less return from
them. CBs flow their funds from higher level of return to lower level of return.

From the negative correlation coefficient between various investment assets, the CBs
can reduce total risk at minimum level and increase profit at higher level. From the
study it can be accomplished that CBs are not able to diversify their resources
efficiently, which is proved by the financial performance test.

The trend analysis of the CBs accomplished that total investment, total deposit,
investment on share and debentures, investment on loan and advances, investment on
govt. securities are ever-increasing per year. NIBL is the best bank among five CBs
on the basis of exploitation of resources in the field of govt. securities, on the basis of
S&D, NABIL is the best bank among 5 CBs and EBL is the best bank among 5 banks
on the basis of exploitation of resources in the field of loan and advances.

5.3 Recommendations

This study is basically conducted to analyze the portfolio risk and return of securities
from the investor’s point of view, and based on secondary and primary data analysis.
On the basis of major findings of the study, following recommendations and
suggestions are provided
 Generally investors think that investment in share market is always beneficial.
They believe that price of shares always increases. But in reality it is not always
like that. Due to many economic and non-economic factors the shares can not
provide attractive benefits and the share price do not increases. To take better
advantage, the investors are recommended to make stock transactions on the
basis of fundamental and technical analysis scientifically.
 Investors should always think not only about the return but also risk. Investor's
objective should be the minimization of risk and maximization of return. To
 72

meet the objective, the investors should create well-diversified portfolio.

Negatively correlated or low correlated stocks can reduce risk significantly.
 All the selected commercial bank's stocks are under-priced. Investors are
suggested to invest on under-priced stocks while making portfolio and to take
short position for the over-priced stocks.
 In Nepalese context, investors don’t analyze related information carefully other
than financial sectors. Information from other sector such as political, social and
legal should also be considered before taking the investment decision.
 Many investors are adopting passive investment strategy. They buy the
securities and wait for dividend. To gain from the investment, they should
actively participate.
 It is necessary to establish a 'Information Center' for investors. The investors
should be provided right information timely. Updated and real statements should
be published. Manipulated and window dressing information should not be
published.
 Government should play a vital role to improve the securities market and to
promote the investors. Sometimes, the policies made by Nepal Rastra Bank and
the rules made by NEPSE are seen as opponent of investors .The policies and
rules should be more confidential and easier for investors.
 73

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 75

OFFICIAL PUBLICATIONS
Everest Bank Ltd., Annual Report, FY 2006/2007– 2010/11

HMG Ministry of Finance, Economic Survey, FY 2010/2011

Himalayan Bank Ltd., Annual Report, FY 2006/2007– 2010/11

Nepal Investment Bank Ltd., Annual Report, FY 2006/2007– 2010/11

NABIL Bank Ltd., Annual Report, FY 2006/2007– 2010/11

Research Department, NRB, Economic Report, FY 2011/2012

Standard Chartered Bank Ltd., Annual Report, FY 2006/2007– 2010/11

Research Department, NRB, Macro Economic Indicators of Nepal, FY 2010/2011

Web Sites
www.aaii.com
www.blackwell-synergy.com
www.business.com
www.emraldinside.com
www.nepalstock.com.np
www.nrb.org.np
www.searchepnet.com
www.sebonp.com
www.teachmefinance.com
 76

APPENDICES

Annex ‘A’

I. Calculation of Return on Government Securities

Nabil Bank Ltd. Everest Bank Ltd.
Government Securities Government Securities
Ratio Ratio
FY Interest FY Interest
(%) (%)
income Investment income Investment
2006/2007 145.11 2301.46 6.31 2006/2007 97.27 3548.62 2.74
2007/2008 152.01 4808.34 3.16 2007/2008 128.57 4701.64 2.73
2008/2009 198.44 4646.89 4.27 2008/2009 180.22 4821.61 3.74
2009/2010 269.19 3706.10 7.26 2009/2010 289.76 5146.05 5.63
2010/2011 330.92 7941.56 4.17 2010/2011 238.99 4354.35 5.49

Kumari Bank Ltd. Himalayan Bank Ltd.

Government Securities Government Securities
Ratio Ratio
FY Interest FY Interest
(%) (%)
income Investment income Investment
2006/2007 48.12 1114.32 4.32 2006/2007 172.24 5144.32 3.35
2007/2008 44.90 1297.87 3.46 2007/2008 191.56 6454.87 2.97
2008/2009 46.59 1469.10 3.17 2008/2009 201.31 7471.66 2.69
2009/2010 88.54 1080.10 8.20 2009/2010 354.95 4212.30 8.43
2010/2011 80.06 1729.92 4.63 2010/2011 215.00 4465.40 4.81

Nepal Investment Bank

Ltd. Commercial Banks
Government Securities Government Securities
Ratio Ratio
FY Interest FY Interest
(%) (%)
income Investment income Investment
2006/2007 82.42 2522.30 3.27 2006/2007 545.16 14631.02 3.73
2007/2008 78.49 3256.40 2.41 2007/2008 595.53 20519.12 2.90
2008/2009 99.99 3155.00 3.17 2008/2009 726.55 21564.26 3.37
2009/2010 140.70 2531.30 5.56 2009/2010 1143.14 16675.85 6.86
2010/2011 169.62 4201.85 4.04 2010/2011 1034.59 22693.08 4.56
 77

Annex ‘B’
2. Calculation of Return on Loan and Advances
Nabil Bank Ltd. Everest Bank Ltd.
Loan and Advance Loan and Advance
Ratio Ratio
FY Interest FY Interest
(%) (%)
income Investment income Investment
2006/2007 988.41 12681.67 7.79 2006/2007 770.83 9770.91 7.89
2007/2008 1167.26 15305.91 7.63 2007/2008 967.18 13623.69 7.10
2008/2009 1496.24 21159.85 7.07 2008/2009 1329.70 18317.17 7.26
2009/2010 2182.65 27431.77 7.96 2009/2010 1852.13 23782.35 7.79
2010/2011 3368.10 32268.87 10.44 2010/2011 2801.30 27556.36 10.17
Kumari Bank Ltd. Himalayan Bank Ltd.
Loan and Advance Loan and Advance
Ratio Ratio
FY Interest FY Interest
(%) (%)
income Investment income Investment
2006/2007 533.69 6801.00 7.85 2006/2007 1140.69 14395.85 7.92
2007/2008 691.14 8878.01 7.78 2007/2008 1242.85 16831.88 7.38
2008/2009 877.01 11254.06 7.79 2008/2009 1444.25 19257.72 7.50
2009/2010 1233.55 14477.52 8.52 2009/2010 1861.04 24784.24 7.51
2010/2011 1744.00 14593.35 11.95 2010/2011 2838.90 27980.63 10.15
Nepal Investment Bank
Ltd. Commercial Banks
Loan and Advance Loan and Advance
Ratio Ratio
FY Interest FY Interest
(%) (%)
income Investment income Investment
2006/2007 964.69 12613.56 7.65 2006/2007 4398.31 56262.99 7.82
2007/2008 1302.12 17010.46 7.65 2007/2008 5370.55 71649.95 7.50
2008/2009 1907.26 26618.77 7.17 2008/2009 7054.46 96607.57 7.30
2009/2010 2906.05 35745.53 8.13 2009/2010 10035.42 126221.41 7.95
2010/2011 4259.40 40318.30 10.56 2010/2011 15011.70 142717.51 10.52
 78

Annex ‘C’

Closing Price and Dividend Payment of CBs

2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011
Banks
Pt Pt Dt Dt/Pt Pt Dt Dt/Pt Pt Dt Dt/Pt Pt Dt Dt/Pt Pt Dt Dt/Pt
NABIL 1505.0 2240.0 85.0 3.79% 5050.0 100.0 1.98% 5275.0 60.0 1.14% 4899.0 35.00 0.71% 2384.0 30.0 1.26%
NIBL 800.0 1260.0 20.0 1.59% 1729.0 5.0 0.29% 2450.0 7.5 0.31% 1388.0 20.00 1.44% 705.0 25.0 3.55%
HBL 920.0 1100.0 30.0 2.73% 1760.0 15.0 0.85% 1980.0 25.0 1.26% 1760.0 12.00 0.68% 816.0 11.8 1.45%
EBL 870.0 1379.0 25.0 1.81% 2430.0 10.0 0.41% 3132.0 20.0 0.64% 2455.0 30.00 1.22% 1630.0 30.0 1.84%
KBL 369.0 443.0 1.1 0.24% 830.0 1.1 0.13% 1005.0 0.5 0.05% 700.0 0.55 0.08% 468.0 12.0 2.56%
Total 4464.0 6422.0 161.1 2.51% 11799.0 131.1 1.11% 13842.0 113.0 0.82% 11202.0 97.55 0.87% 6003.0 108.8 1.81%
Average 892.8 1284.4 32.2 0.50% 2359.8 26.2 0.22% 2768.4 22.6 0.16% 2240.4 19.51 0.17% 1200.6 21.8 0.36%

Investment In Share and Debenture

In Rs. Million
FY Nabil EBL KBL HBL NIBL
2006/2007 104.19 19.08 0.35 38.57 17.74
2007/2008 286.95 19.08 0.35 73.42 35.25
2008/2009 323.23 101.16 18.23 89.56 54.55
2009/2010 354.93 102.04 18.35 93.88 60.97
2010/2011 346.86 102.4 21.92 78.88 63.35
 79

Annex ‘D’
Return Return
Return
on Loan on share
FY on Govt.
& &
RgRl RgRs RlRs Rg2 Rl2 Rs2
Securities
Advance debenture
2006/2007 3.73 7.82 44.29 29.13 165.03 346.23 13.88 61.11 1961.60
2007/2008 2.90 7.50 84.02 21.75 243.85 629.78 8.42 56.18 7059.36
2008/2009 3.37 7.30 17.45 24.60 58.79 127.42 11.35 53.32 304.50
2009/2010 6.86 7.95 -18.9 54.50 -129.56 -150.27 46.99 63.21 357.21
2010/2011 4.56 10.52 -46.02 47.95 -209.81 -484.06 20.78 110.64 2117.84
Total 21.41 41.08 80.84 177.94 128.30 469.10 101.44 344.47 11800.52

n  Ri R j   Ri  R j
rij 
n  Ri  (  Ri ) 2  n  R j  (  R j ) 2
2 2

Annex ‘E’
Calculation of Return on Total Assets Ratio
Net Profit Net Profit
Total Ratio Total Ratio
FY After Tax FY After Tax
Assets (%) Assets (%)
(NPAT) (NPAT)
Nabil Bank Ltd. Everest Bank Ltd.
2006/2007 635.26 22329.97 2.84 2006/2007 237.29 15959.28 1.49
2007/2008 673.96 27253.39 2.47 2007/2008 296.41 21432.57 1.38
2008/2009 746.47 37132.76 2.01 2008/2009 451.22 27149.34 1.66
2009/2010 1031.05 43867.41 2.35 2009/2010 638.73 36916.87 1.73
2010/2011 1139.10 52079.73 2.19 2010/2011 831.65 41382.76 2.01
Kumari Bank Ltd. Himalyan Bank Ltd.
2006/2007 103.67 9010.27 1.15 2006/2007 457.46 29640.38 1.54
2007/2008 170.26 11918.31 1.43 2007/2008 491.82 33519.14 1.47
2008/2009 174.93 15026.60 1.16 2008/2009 635.87 36175.54 1.76
2009/2010 261.44 18538.55 1.41 2009/2010 752.83 39330.32 1.91
2010/2011 316.54 20522.47 1.54 2010/2011 508.80 42717.12 1.19
Nepal Investment Bank Ltd. Commercial Banks
2006/2007 350.54 21330.13 1.64 2006/2007 1784.21 98270.03 1.82
2007/2008 501.40 27590.85 1.82 2007/2008 2133.85 121714.26 1.75
2008/2009 696.73 38873.30 1.79 2008/2009 2705.22 154357.54 1.75
2009/2010 900.62 53010.79 1.70 2009/2010 3584.67 191663.94 1.87
2010/2011 1265.95 53305.41 2.37 2010/2011 4062.04 210007.49 1.93
 80

Annex ‘F’
Calculation of Total Investment to Total Deposit Ratio

Total Total Ratio Total Total Ratio

FY FY
Investment Deposit (%) Investment Deposit (%)
Nabil Bank Ltd. Everest Bank Ltd.
2006/2007 6178.53 19347.40 31.93 2006/2007 4200.52 13802.44 30.43
2007/2008 8945.31 23342.29 38.32 2007/2008 4984.31 18186.25 27.41
2008/2009 9939.77 31915.05 31.14 2008/2009 5059.56 23976.30 21.10
2009/2010 10826.38 37348.26 28.99 2009/2010 5948.48 33322.95 17.85
2010/2011 10670.92 46410.70 22.99 2010/2011 5008.31 36932.30 13.56
Kumari Bank Ltd. Himalyan Bank Ltd.
2006/2007 1394.95 7768.96 17.96 2006/2007 10889.03 26490.85 41.10
2007/2008 1678.42 10557.42 15.90 2007/2008 11822.98 30048.42 39.35
2008/2009 2138.80 12774.28 16.74 2008/2009 13340.18 31842.79 41.89
2009/2010 1510.82 15710.92 9.62 2009/2010 8710.69 34682.34 25.12
2010/2011 2296.87 17432.25 13.18 2010/2011 8444.91 37611.20 22.45
Nepal Investment Bank Ltd. Commercial Banks
2006/2007 5602.87 18927.31 29.60 2006/2007 28265.90 86336.96 32.74
2007/2008 6505.68 24488.86 26.57 2007/2008 33936.70 106623.24 31.83
2008/2009 6874.02 34451.80 19.95 2008/2009 37352.33 134960.22 27.68
2009/2010 7399.81 46698.10 15.85 2009/2010 34396.18 167762.57 20.50
2010/2011 8635.53 50094.73 17.24 2010/2011 35056.54 188481.18 18.60
 81

Annex ‘G’

Calculation of Government Securities to Total Deposit Ratio

Investment Investment
Total Ratio Total Ratio
FY on Govt. FY on Govt.
Deposit (%) Deposit (%)
Sec Sec
Nabil Bank Ltd. Everest Bank Ltd.
2006/2007 2301.46 19347.40 11.90 2006/2007 3548.62 13802.44 25.71
2007/2008 4808.34 23342.29 20.60 2007/2008 4701.64 18186.25 25.85
2008/2009 4646.89 31915.05 14.56 2008/2009 4821.61 23976.30 20.11
2009/2010 3706.10 37348.26 9.92 2009/2010 5146.05 33322.95 15.44
2010/2011 7941.56 46410.70 17.11 2010/2011 4354.35 36932.30 11.79
Kumari Bank Ltd. Himalyan Bank Ltd.
2006/2007 1114.32 7768.96 14.34 2006/2007 5144.32 26490.85 19.42
2007/2008 1297.87 10557.42 12.29 2007/2008 6454.87 30048.42 21.48
2008/2009 1469.10 12774.28 11.50 2008/2009 7471.66 31842.79 23.46
2009/2010 1080.10 15710.92 6.87 2009/2010 4212.30 34682.34 12.15
2010/2011 1729.92 17432.25 9.92 2010/2011 4465.40 37611.20 11.87
Nepal Investment Bank Ltd. Commercial Banks
2006/2007 2522.30 18927.31 13.33 2006/2007 14631.02 86336.96 16.95
2007/2008 3256.40 24488.86 13.30 2007/2008 20519.12 106623.24 19.24
2008/2009 3155.00 34451.80 9.16 2008/2009 21564.26 134960.22 15.98
2009/2010 2531.30 46698.10 5.42 2009/2010 16675.85 167762.57 9.94
2010/2011 4201.85 50094.73 8.39 2010/2011 22693.08 188481.18 12.04
 82

Annex ‘H’

Calculation of Loan and Advances to Total Deposit Ratio

Loan & Total Ratio Loan & Total Ratio

FY FY
Advance Deposit (%) Advance Deposit (%)
Nabil Bank Ltd. Everest Bank Ltd.
2006/2007 12681.67 19347.40 65.55 2006/2007 9770.91 13802.44 70.79
2007/2008 15305.91 23342.29 65.57 2007/2008 13623.69 18186.25 74.91
2008/2009 21159.85 31915.05 66.30 2008/2009 18317.17 23976.30 76.40
2009/2010 27431.77 37348.26 73.45 2009/2010 23782.35 33322.95 71.37
2010/2011 32268.87 46410.70 69.53 2010/2011 27556.36 36932.30 74.61
Kumari Bank Ltd. Himalyan Bank Ltd.
2006/2007 6801.00 7768.96 87.54 2006/2007 14395.85 26490.85 54.34
2007/2008 8878.01 10557.42 84.09 2007/2008 16831.88 30048.42 56.02
2008/2009 11254.06 12774.28 88.10 2008/2009 19257.72 31842.79 60.48
2009/2010 14477.52 15710.92 92.15 2009/2010 24784.24 34682.34 71.46
2010/2011 14593.35 17432.25 83.71 2010/2011 27980.63 37611.20 74.39
Nepal Investment Bank Ltd. Commercial Banks
2006/2007 12613.56 18927.31 66.64 2006/2007 56262.99 86336.96 65.17
2007/2008 17010.46 24488.86 69.46 2007/2008 71649.95 106623.24 67.20
2008/2009 26618.77 34451.80 77.26 2008/2009 96607.57 134960.22 71.58
2009/2010 35745.53 46698.10 76.55 2009/2010 126221.41 167762.57 75.24
2010/2011 40318.30 50094.73 80.48 2010/2011 142717.51 188481.18 75.72
 83

Annex ‘I’

Calculation of Share and Debenture to Total Deposit Ratio

Share & Total Ratio Share & Total Ratio

FY FY
Debenture Deposit (%) Debenture Deposit (%)
Nabil Bank Ltd. Everest Bank Ltd.
2006/2007 104.19 19347.40 0.54 2006/2007 19.08 13802.44 0.14
2007/2008 286.95 23342.29 1.23 2007/2008 19.08 18186.25 0.10
2008/2009 323.23 31915.05 1.01 2008/2009 101.16 23976.30 0.42
2009/2010 354.93 37348.26 0.95 2009/2010 102.04 33322.95 0.31
2010/2011 346.86 46410.70 0.75 2010/2011 102.04 36932.30 0.28
Kumari Bank Ltd. Himalyan Bank Ltd.
2006/2007 0.35 7768.96 0.00 2006/2007 38.57 26490.85 0.15
2007/2008 0.35 10557.42 0.00 2007/2008 73.42 30048.42 0.24
2008/2009 18.23 12774.28 0.14 2008/2009 89.56 31842.79 0.28
2009/2010 18.34 15710.92 0.12 2009/2010 93.88 34682.34 0.27
2010/2011 21.92 17432.25 0.13 2010/2011 78.88 37611.20 0.21
Nepal Investment Bank Ltd. Commercial Banks
2006/2007 17.74 18927.31 0.09 2006/2007 179.93 86336.96 0.21
2007/2008 35.25 24488.86 0.14 2007/2008 415.05 106623.24 0.39
2008/2009 54.55 34451.80 0.16 2008/2009 586.73 134960.22 0.43
2009/2010 60.97 46698.10 0.13 2009/2010 630.16 167762.57 0.38
2010/2011 63.35 50094.73 0.13 2010/2011 613.04 188481.18 0.33

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