ANALYSIS OF PROFITABILITY ON

RASTRIYA BANIJYA BANK LIMITED (RBBL)

CHAPTER: 1

INTRODUCTION

1.1 Background of the Study

Profitability is the ability for a business to earn a profit. A profit is simply the
revenue left over after you have paid all the costs and expenses related to your
business activities. Profitability ratios are a series of metrics that you can use to
measure the relative profitability of a business.

Profit plays a vital role in every business organization. It is equally important for
commercial banks. Banks are the institutions, which provide many facilities for
trade, industry, agriculture, tourism, etc. Without profit it cannot operate its
functions and cannot provide banking facilities to the public.

The terms ‘profitability’ is composed of two words profit and ability. It reflects
the capacity of a business organization to earn profit. It is also referred to as
earning capacity or earning power of the concern investment. Thus, the term
profitability may be taken as the ability to earn profit. Profitability analysis is one
of the key tools for financial decision and assist in making plan before using
sophisticated forecasting and budgeting procedure. Profitability measures the
management of overall effectiveness as shown by the returns generating on sales
and investment. Commercial banks invest public deposit on those sectors where
they can attain the maximum income or higher rate of return as the banks is liable
to pay certain rate of interest to the public in their deposit. Hence the investment
or granting of loan and advance by them are highly influenced by profit margin.
Generally, the profit of commercial banks depends upon the interest rate of the
bank, volume of loan provided, time period of loan, and nature of investment in
different securities. The main focus of the study is to analyze the profitability
analysis of Rastriya Banijya Bank Limited (RBBL).

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 However, the term ‘Profitability’ is not synonymous to the term ‘Efficiency’.
Profitability is an index of efficiency; and is regarded as a measure of efficiency
and management guide to greater efficiency. Though, profitability is an important
yardstick for measuring the efficiency, the extent of profitability cannot be taken
as a final proof of efficiency. Sometimes satisfactory profits can mark inefficiency
and conversely, a proper degree of efficiency can be accompanied by an absence
of profit. The net profit figure simply reveals a satisfactory balance between the
values receive and value given. The change in operational efficiency is merely one
of the factors on which profitability of an enterprise largely depends. Moreover,
there are many other factors besides efficiency, which affect the profitability.

1.2 Profile of the Organization

Rastriya Banijya Bank (RBBL) is fully government owned, and the largest
commercial bank in Nepal. RBBL was established on January 23, 1966 (2022
Magh 10 BS) under the RBBL Act. RBBL provides various banking services to a
wide range of customers including banks, insurance companies, industrial trading
houses, airlines, hotels, and many other sectors. RBBL has Nepal's most extensive
banking network with 207 branches. RBBL is one of the pioneer banks in the
country, with a history of nearly a half century. Earlier constituted under RBBL
Act 2021 with the full ownership of the government of Nepal, the bank has been
running under Bank and Financial Institute Act (BAFIA) and Company Act (CA)
2063. The bank, licensed by NRB as an 'A' class commercial bank of the country,
has grown up as an indispensable component of the Nepalese economy. It was the
highest profit earning bank for fiscal year 2024/25. In terms of deposit, the bank
has collected Rs more than Rs 130 billion (FY 2024/25), which is the highest
deposit of any commercial bank in Nepal.

RBBL which has made glorious history of contributing for the monetization of the
economy, eliminating dual currency in the market, initiating preliminary financial
literacy, help flourish industrial, commercial and financial sector of the country
has now emerged as a modern and strong financial institute of the country. The
Bank with 2600 hands has expanded its wings in the most part of the country
through multiple distribution outlets of 238 branches, 17 counters, 93 branch less
banking (BLB) and 204 ATMs. The Bank with the highest public confidence-

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 reflected in the highest deposit base and growing demand for branch
establishment in the various parts -has stood as a pyramid in the financial arena of
the country. The Bank with as many as 1.7 million satisfied /direct customers
ranging from poor to elite ones and millions of indirect ones, has drawn important
imprint in the picture of country's economy through its significant involvement in
the best use of its resources to enhance the production, income and employment
opportunities. The Bank is fully committed to contribute its best for the socio-
economic development of the country and people in the days to come.

The head office or the bank is located at Singha Durbar Plaza, Kathmandu. The
Board of Director is responsible for policy making & guidance to the
management. The government nominates all board members including the
Chairman. The executive power is vested in the Chief Executive Officer (CEO).
Vision: "To provide innovative banking services to everyone, every time and
everywhere for the economic development of the nation." Mission: "To provide
easy and innovative banking products and services for our customers by
implementing one stop service concept from our wide network using our modern
technology qualified human resources in competitive environment. We always
look for the benefit of the local communities supporting entrepreneurship, social
responsibility and economic prosperity of the nation."

1.3 Statement of the problem

The main objectives of the peppering this report is analysis the profitability position of RBBL
by calculating different variables and components. This report try to solve the following
questions:

 What is the present position of profit and different profitability ratios of RBBL in the
study periods?
 What will be the trend of profit of the bank in coming years?

1.4 Objectives of the Report

The prime objectives of this report are to examine and analyze the profitability
position of RBBL. Besides that, the specific objectives of the report are as
follows:

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 1. To present the position of profit and different profitability ratios of RBBL in
the study periods.
2. To forecast the trend of profit of RBBL in coming years.

1.5 Rational of the Project Report

This report has been designed to evaluate the performance of the banks in terms of
profit. This report will help to concerned management to improve their efficiency
and to indicate strengths and weaknesses of these banks especially in the sector
profitability. This study will also helpful to depositors, lenders, borrowers, traders,
financial institutions shareholders and customers of the banks, researcher, scholars
as well as student who want to know about the profitability

1.6 Review of the literature

For the project report, literature will be reviewed in terms of Conceptual Reviews
and Review of Previous Studies.

Concept of Profit and Profitability

Generally, profit is defined as the excess of revenue over cost. In other words,
profit is residual income, which is equal to sale proceeds minus cost. Profit is the
resources left to the firm for future growth and explanation or reward to be
distributed to the entrepreneurship in the form of dividends etc. In a simple term,
profit means the residual balance of earning expected to be available with the firm
that is obtained after deducting entire expenses, costs, charges and provision from
total revenue of a period of time.

It is lifeblood of each type of business. Every business organization should earn

profit to survive and grow over the long period of time. Obviously, organization
will have no future if it is unable to make reasonable profits from its operation. As
a matter of fact, the overall efficiency of an organization is reflected in its profit.
Profits to the management are the test of efficiency of an organization is reflected
in its profits. Profits to the management are the test of efficiency and a
measurement of control to the owners, to the creditors, the margin of safety to the
employees, a sources of fringe benefits to the government, a measure of fixed
paying capacity and the basis of legislative actions, to customer, hint to demand
for better quality and price cuts, to a bank less burdensome sources if finance

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existence and finally to the country, profits are index of economic progress. Thus,
if an organization fails to make profit, capital invested erodes and if this situation
prolongs it ultimately case to exist. The term ‘profitability’ is composed of two
words profit and ability. It reflects the capacity of a business organization to earn
profit. It is also referred to as earning capacity or earning power of the concern
investment. Thus, the term profitability may be taken as the ability to earn profit.

Sometimes, the terms ‘Profit’ and ‘Profitability’ are used interchangeably. But in
real sense, there is a difference between the two. Profit is an absolute term,
whereas, the profitability is a relative concept. However, they are closely related
and mutually interdependent, having distinct roles in business.

Profit refers to the total income earned by the enterprise during the specified
period of time, while profitability refers to the operating efficiency of the
enterprise. It is the ability of the enterprise to make profit on sales. It is the ability
of enterprise to get sufficient return on the capital and employees used in the
business operation.

As Weston and Brigham rightly notes “to the financial management profit is the
test of efficiency and a measure of control, to the owners a measure of the worth
of their investment, to the creditors the margin of safety, to the government a
measure of taxable capacity and a basis of legislative action and to the country
profit is an index of economic progress, national income generated and the rise in
the standard of living”, while profitability is an outcome of profit. In other words,
no profit drives towards profitability.

According to Howard ‘the word profitability may be defined as the ability of a

given investment to earn return on its use’. It may be mentioned that the term
profitability is distinguished from the word profit. Profit refers to the absolute
measure in itself while the latter is a relative one.

According to Harper ‘the word profitability is a relative measure it indicates the

most profitable alternative’. As the profitability is the relative measure it is used to
judge the degree of operational efficiency of management.

Furthermore, it is essentially employed to measure the relative efficiency of

different trading systems, or different investment within one system. In the

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profitability analysis, the profit-making ability of an organization is measured in
terms of size of investment in it on its sales volume. Such as analysis of
profitability reveals how particularly interesting to the suppliers of funds who can
investment and take necessary decision thereon.

The state of profitability is a variable and humidity of a day. The determination of

profitability by an account or analysis is very much similar to temperature reading
and study of humidity by a meteorologist. A meteorologist records the weather
and daily basis with an intention to forecast its future prospects. Likewise, an
analysis records yearly profit of bank with a view to make prediction of the future
prospects.

The purpose of profitability measurement is to see whether a bank has effectively

used its resources to achieve its profitability objectives. The profitability
objectives refer not to the maximum profit the business can produce but to the
minimum it must produce. The minimum is the profit at the minimum rate of
required for the desired type of investment in the bank. However, there must not
be enough profit to yield the capital in the market rate of return on money which is
already sunk in business but also to provide additional capital needed to cover the
cost of staying in business.

Need of profit
Profit is necessary for the following reasons:

I. Measurement of performance:
Profit is only factor to measure the management efficiency, productivity
and performance. Profit is the most widely used yardstick to see what
really is to be achieved and where the firm is to go in further.
II. Premium to cover costs of staying in business:
Business environment is full of risks and uncertainties, to grasp the
globally changing technologies, to stay in the market uncertainties, to
replace and acquire assets and enhancing business scope etc., require a
profit margin.
III. Ensuring supply of further capital:

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 Profit is necessary to plough back in the investing like innovation, business
expansion and self-financing. It also attracts investors for further
investment.
IV. Return to the investors:
Shareholders provide equity capital to the business because they expect the
entity will provide return to their funds at least equal or above market rate
of return. To maintain this shareholders expectation, It is most important
that a firm should earn sufficient profit so that it can distribute dividends.

Review of previous studies

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

Financial analysis is the process of identifying the financial strength and weakness of the
concerned bank. It is the process of finding strength and weakness of the concerned bank. It
is the process of finding details accounting information given in the financial statement. It is
performed to determine the liquidity, solvency, efficiency and profitability position of an
organization. The function or the performance of finance can be broken down into three
major decisions i.e. the investment decision, the financing decision, and the dividend
decisions. An optional combination of the three decisions will be maximum value. Nepal's
first commercial bank, the Nepal Bank Limited, was established in 1937. The government
owned 51 percent of the shares in the bank and controlled its operations to a large extent.
Nepal Bank Limited was headquartered in Kathmandu and had branches in other parts of the
country. There were other government banking institutions. Rastriya Banijya Bank (National
Commercial Bank), a state- owned commercial bank, was established in 1966. The Land

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Reform Savings Corporation was established in 1966 to deal with finances related to land
reforms.

Pangeni, (2013) conducted research on a comparative study on profitability analysis

of Rastriya Banijya Bank and Nepal Bank Ltd. His objectives and findings are as
follows:

Objectives
i. To evaluate the profitability and operating financial efficiency of Rastriya
Banijya Bank (RBBL).
ii. To analyze the cost and profit trends of the banks.
iii. To analyze the income and expenditure.
iv. To provide suggestions and recommendations for the improvement of the
overall profitability of the banks and provide information to the stake holders.

Findings:
i. Net profit margin, return on total assets, net operating margin of RBBL is
better. It also justifies that in an average the profit position of RBBL is also
better.
ii. The return on equity and return on capital employed is better. It depicts the
Commercial Banks is not able to generate profit from operation.
iii. The balance sheet of RBBL shows the proportion of loan and advance on
deposited is very low.
iv. Net operating margin ratio of RBBL is quite better.
v. Interest income to total income of RBBL has found well it shows the more
contributions of interest in total profit of bank.
vi. Fee and commission income of RBBL is not satisfactory.
vii. It shows that RBBL pays higher amount of total interest to their depositors.

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1.7 Methods

1.7.1 Types of Research Design

Research design is a structure prepares to conduct research. In this project work
report, a descriptive and analytical research design has been followed to analyze
the profitability.

1.7.2 Population and Sample

There are many banking sectors in Nepal. The population for the study comprises
21 commercial banks (Banking and statistics, 2022). RBBL is selected for sample
in this study. This report is based upon the financial report published by the banks
in the fiscal’s years 2021/22 to 2023/24.

1.7.3 Types of Data

This study is mainly based on secondary sources. The annual report of sample
banks is the major sources of the data for the report. Beside this some information
is collected from internet and library. This report is mostly based on secondary
data. However, required and necessary information have been obtained.

1.7.4 Data gathering procedures

While preparing the fieldwork report the following procedures and activities are
adopted.

i. Pre- Fieldwork activities

Under these activities, the following steps are takes for preparing this fieldwork
report:

1. Selection of topic and organization

2. Selection of proper study
3. Preparation of the data.

ii. Fieldwork activities

After the completing all the pre-fieldwork activities. The further steps are taken.

1. Overview of the organization in internet.

2. Published sources.
3. Computerized data base.

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iii. Post fieldwork activities
This is the final phase of fieldwork report and the following steps are followed in
order to prepare the report.

1. Writing the fieldwork report.

2. Typing and printing the report.
3. Submission of the report.

1.7.5 Techniques of Analysis

The data is collected accordingly and managed, analyzed and presented in suitable
tables, formats, diagrams, graphs and charts. Financial ratios are used to analyze
the presented data in this report.

I. Financial Tools:
The financial tools are as follows:

i. Ratio Analysis

Ratio analysis is the most important financial tools analyzed the liquidity position of
banks. The ratios used in this study are as follows:

1. Net Profit Ratio or Net Profit Margin:

Net profit
Net Profit Margin = ×100
Interest Income

2. Operating Ratio:
Operating Expenses
Operating Ratio = × 100
Interest Income

3. Return on Assets:

Net profit After tax

Return on Assets = ×100
Total Assets

4. Return on Shareholder Equity:

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 Net Profit After Tax
Return on SHE = × 100
Shareholder Equity

5. Return on Loan and Advance:

Net Profit After Tax

Return on Loan and Advance == × 100
Loan∧ Advance

II. Statistical Tools:

The statistical tools are as follows:

Ex
1. Arithmetic Mean A.M =
n

2. Trend Analysis:
Y= a+bx

1.8 Limitations of the project report

This report is prepared only with banking sectors. Large sample is not taken
because of time and cost constraint. There are some limitations of this project
report which are as follows.

i. This report only covered only last three years (2021/22 to 2023/24).
ii. This report is based on secondary data.
iii. This report is concerned with only profitability analysis of RBBL. It means
doesn’t consider other banks.

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