CHAPTER – I

INTRODUCTION

1.1 Background of the Study

Banking has become a part of daily life of today's people. The development in
the banking facilities have added a numerable values to the customers,
producers, entrepreneurs, travelers and investors around the word. Despite the
importance from the view point of service facilities to the users, it plays a
significant role in the economic development and the welfare of the people.
Bank assists both the flow of goods and services for the product to the
consumers and the financial activities of the government. Banking provides the
country with a monetary system of making payment and is in important part of
the financial, which makes loan to maintain and increases the level of
consumption and production in the country.

Modern banking begins in Nepal with the establishment of Nepal Bank Ltd. in
1937 A.D. The authorized capital was contributed by the government 51% and
remaining 49% by public. In 1955, Nepal Rastra Bank was established as the
central bank of the country with the objectives of supervising, protecting and
directing the functions of commercial banks and maintaining a sound monetary
and financial stability in the country. Prior to the establishment of Nepal Rastra
Bank, Nepal Bank Ltd. acted as the central bank of the country. In 1966 A.D
another commercial bank fully owned by government named Rastriya Banijya
Bank was established under the Banijya Bank act 1964 A.D. Agriculture
Development was as established in 1967 A.D with the objective of enhancing
the agriculture development in the country. Agricultural Development provides
banking services in some urban areas of Nepal as that other commercial banks.

1.1.1 Meaning of Commercial Bank

1
According to G. Crowther, "A bank is an institution which collects money
from those who have it spare or who are saving it out of their income and
lends this out to those who requires it" (Crowther, 2003: 2). It is established
by law. So, it's a legal entity. Crowther has described that the merchants,
money lenders and goldsmiths are the ancestors of modern banks.

Commercial bank means a bank which operates currency exchanges

transactions, accepts deposits, provides loan, performs dealing relating of
commerce except the banks which have been specified for the cooperative,
agriculture, industry or other similar specific objectives (His Majesty's
Government, Commercial Bank Act, 2031 B.S.).

Commercial banks are those banks, which pool together the savings of the
community and arrange them for the productive use. Commercial banks
transfer monetary sources from savers to users. They accept deposits from the
public on the condition that they are repayable. They provide loans and
advances from the money, which they receive through deposits. Apart from
financing, they also render services like collection of bills of checks, safe
keeping of the valuables, financial advising etc. to their customers.

1.1.2 Functions of Commercial Banks

There are many functions of commercial banks. The followings are the main
functions performed by the commercial banks:

i. Accepting Deposits
Commercial banks accept deposits in three forms namely current, saving
and fixed deposits.
a. Current deposits: - Current deposit is also known as demand deposit. Under
this, any amount may be deposited in this account. The bank does not pay
any interest on such
b. saving deposits: - Saving deposit is one of the deposits collected
from small depositors and low-income depositors. The bank usually pays

2
 small interest to the depositors against their deposits. This is also called
saving account.
c. Fixed deposit: - Fixed deposit is the one in which a customer is required to
keep a fixed amount with bank for a specific period, generally by those who
do not need money for a stipulated period. The bank pays a higher interest
on such deposits.

ii. Advancing Loans

Commercial bank provides loans and advances from the money, which it
receives by way of deposits. Direct loans and advances are given to all
types of persons against the personal security of the borrowers of against
the security of movable of immovable properties. Banks in four forms
grant loans, namely:
a. Overdrafts
b. Direct Loans
c. Cash Credit
d. Discounting Bills of Exchange

iii. Agency Services

Commercial bank undertakes the payment of subscriptions, insurance premium,
rent, income tax etc. It collects cheques, bills, dividends, interest, pensions etc.
on behalf of the customers. The bank charges a small amount of
commission for those services. It undertakes to buy and sell securities on
behalf of its customers. Commercial bank also acts as a trustee, executor and
administrator.

iv. Credit Creation

Credit creation is very important function of the commercial banks. They
accept deposits and advance loans. When the bank advances loans, it opens
an account to draw the money by cheque according to his needs. By granting
loans, the bank creates credit or deposit.

3
1.2 Objectives of the Portfolio Management
The portfolio management is a complex task. Investment matrix is one of the
many approaches, which may be used in this connection. The various
considerations involved in investment decisions Portfolio Management of
Listed Commercial Banks In Nepal 28 liquidity, safety and yield of the
investment. Image of the organization is also to be taken in account. These
considerations may be taken into account and an overall view obtained through
a matrix approach by allotting marks for each consideration totaling them. The
investors would like to have the following objectives of portfolio management.
a. Capital
b. Safety or security of an investment’
c. Income by way of dividends and interests,
d. Marketability
e. Liquidity
f. Tax planning- capital gains tax, income tax and wealth tax,
g. Risk avoidance or minimization of risk
.
1.3 Statement of the Problem
Based on the above discussion on the research problems, some of the
commonly identified research questions for present research are identified as
follows:
a. What is the relationship between investment and loan & advances?
b. How is effectiveness of fund mobilization and investment policy of
commercial banks?
c. Does the effect exist of the investment decision in total earnings of the
commercial banks?
d. How much ability in performance of commercial banks in investment
portfolio?
1.4 Objectives of the Study

4
The main objective of the study is to identify the situation of portfolio
management of commercial banks on Nepal. The specific objectives of the
study are as follows.
 To examine the existing situation of portfolio management (investment
and loans and advances) of sample banks.
 To analyze the financial performance of sample banks of Nepal.
 To analyze the risk and return of sample banks
 To examine the trend of loan and advances and investment in total
deposit and forecast it.

1.5 Significance of the Study

The present analysis of any organization flashes its investment policy; sound
investment policy makes a good impact on the economy of country. The
success and prosperity of any organization or institution relies heavily on the
successful investment of its available resource into the profitable sector.
Successful formulation and effective implementation of investment policy is
the prime requisition for the successful performance of any organization.

The research work is the study of portfolio analysis of commercial banks of

Nepal. The present study focuses on the portfolio management of the selected
banks in different sectors. In addition to the portfolio investment, the study
examines the financial performance of the selected banks and provides some
inferences regarding the proper mix of investment structure for the
maximization of the return of the banks. Hence, it is hoped that this study will
significant for the individual investors, interested persons and policy makers
and bank management too.

1.6 Limitations of the Study

5
This study has following limitation:
 The study will basically concern with portfolio investment management
of commercial banks based on investment in different sectors. It doesn’t
consider other financial aspect of the banks.
 The study is mainly based on secondary data. Consequently, the results
depend on the reliability of secondary data.
 The study covers only for the period of five years.
 Out of various commercial banks, only five commercial banks have
been taken as sample for the study.
 The truth of research result is based on the reliability of the secondary
data.

1.7 Organization of the Study

This study has been organized in to five chapters and each chapters are devoted
to some aspects of the study of portfolio management. The organization of
study is arranged as follows.
Chapter –I
In the first chapter introduction of the study topics and other relevant topics and
are given. This chapter provides the introduction of portfolio management and
background to the study.
Chapter –II
In this chapter the study report is for review of literature. Review of literature
has mainly two parts. One is conceptual frame work and other is review of
related studies. In this chapter, the importance researches by academicians and
researcher studies are reviewed that give ample knowledge to the new
researcher.
Chapter –III
This chapter is for research methodology. It gives the idea of research design,
information of the population and samples used for the study purpose.
Similarly, data collection and tools and techniques of analysis are also given to
this chapter.

6
Chapter –IV
This chapter is the main part of this study. It represents the data and
information collection from secondary. The data are collected from the
secondary sources and interpreted by using various financial and statistical
tools and techniques.
Chapter - V
The last chapter includes summary and conclusions of the study and some
recommendations and suggestions that were found relevant to suggest and
recommend from the study.

7
 CHAPTER – II
Related Literature Review
This chapter is considered to the review of major related literature about
the portfolio management and related studies. For this study, various
books, journals, articles and some past thesis were also reviewed. Since
there are not so much adequate study materials related with this topic
published in Nepal, this study has to refer almost all books related with
this topic published in other countries than Nepal. The concept of this portfolio
management and its analysis is clear from the following studies.

2.1 Conceptual/Theoretical Review

Portfolio management is the process of selecting a bundle of securities that
provides the investing organization a maximum yield for a given level of risk
or alternatively ensuring minimum level of risk for a given level of return. It
can be also taken as risk and return management. Its aims to determine an
appropriate asset mix which attains optimum level of risk and return

2.2 Review of Previous Work

There are some studies had been conducted as a thesis for the partial fulfillment
of BBS. Here some thesis is reviewed:-

2.2.1 Review of Articles

An article published on the Kathmandu Post Daily on 28th April 2004 on
entitled "Effective Banking" by L.D. Mahat, explained that the efficient of
banks could be measured using different parameters. The concept of
productivity and profitability can be applies while evaluating efficiency of
banks. The term productivity refers to the relationship between the quality of
inputs employed and the quality of outputs produced. An increase in
productivity means that more output can be produced from the same inputs or
the same outputs can be produced from the less inputs. Interest expenses to
interest income ratio shows the efficiency of banks in mobilizing resources
8
at lower cost and investing in high yielding assets. In other words, if
reflects the efficiency in the use of funds. The operating profit to total income
ratio helps in assessing whether bank are doing the right things internally.

The article in the web page www.investopedia.com "Are you over diversified"
mentioned that many individual investor could not tolerate the short
term fluctuation in the stock market. Diversifying the portfolio is the best way
to smooth out the ride. Diversification is the risk management techniques that
mix a wide variety of investments within a portfolio in order to minimize the
impact that only one security will have on the overall performance of the
portfolio. Diversification low the risk of your portfolio. Academics have
complex formulas to demonstrate how this works.

2.2.2 Review of previous thesis

Neupane (2013), made a research entitled “Determinants of Stock Price
in NEPSE” and tried to explore the factors that have significant influence
on the stock price in NEPSE. He concluded his study by quoting;
Nepalese investors have not adequate education about the capital market. They
do not have good knowledge and information to analyze the scenario and to
forecast share price. Perhaps due to this reason stock price in NEPSE
rather shows irrational behavior.
Joshi (2014), conducted a research entitled "Investor Problem in Choice
of Optimum Portfolio of Stock Exchange" with reference to various
commercial banks financial companies and others. There are some of the
objectives of this study. The main objective of this research is to analyze the
trend of NEPSE and try to find out the portfolio of NEPSE to invest. This
research also suggests the majors for the improvement of the stock
market as well for better meet of investors. Mr. Joshi has taken selected
and short-listed a companies which are categorized in "grade A" in NEPSE
as his sample size. From this he has find that SCBNL has the greater expected
return i.e. Rs. 2358.85 and Necon Airlines the lowest expected return i.e. Rs.-

9
3.34. Likewise, NBBL has the greater risk i.e. =Rs 753.04 and the CIT has the
lowest risk i.e. =Rs.4.08. Higher C.V. explains that the stocks are highly
volatile and thus much risks. So as per lesser coefficient of variation
PFC, NABIL & CIT are the best stock to invest whose coefficient of
variation are 205%, 308% and 344.71% respectively. The correlation
coefficient between PFC & NSBIBL is 0.07479 where as correlation
coefficient between PFC & CIT is 0.17645. Both are positive but lower degree
of positive correlation. It means when one increases another also increases and
vice versa.
Phuyal (2015), has conducted research on “Stock Price Behavior of
Selected Banking and Insurance Companies” is related with stock price
behavior. He has tried to show the functional relationship of MPS with other
financial indicators: DPS, EPS, NWPS and price appreciation along with the
fundamental concept of stock market. He has attempted to show the behavior
of chartists (Technicians) and fundamentalists in relation to projection of equity
prices. To achieve the basic aim of this study, he set following objectives at the
time of research.

Main objective
 T0 Analyze the trend of NEPSE and try to find out the portfolio of
NEPSE to invest.
 To Analyze the major financial indicators which affect on
determining MPS.
 Commercial banking sector has dominated the overall performance of
NEPSE. Manufacturing & processing, trading and hotel sectors have
weak performance.

Major finding
 Nepalese investors have limited knowledge about security market. It
lacks of professional investors.

10
  Most of the stocks of banking and finance companies are under valued
in the stock market.
 Investors are trading the stocks without proper analysis of the
financial indicators.

2.3 Research Gap

Based on the review of the previous researches, researcher found that most of
the previous researches on portfolio management have been conducted
showing the risk and return of the stocks. Portfolio management of commercial
bank’s assets basically means the collection of fund to different components
but none of the researches are done on making analysis of portfolio
management. Previous researches are not able to show the real picture of
investment pattern of the commercial banks. Thus, this research aims to
conduct the research from the bank’s side regarding the portfolio investment
management available resources of the bank for the maximization of return to
the bank.

11
 CHAPTER – III
METHODOLOGY

The research methodology is the process of arriving to the solution of

the problem through planned and systematic dealing with the collection,
analysis, and interpretation of fact and figure. Research is a systematic
method of finding out solution to a problem whereas research methodology
refers to the various sequential steps to adopt by a researcher in studying a
problem with certain objectives in view. To find out such solution of
problems various statistical and financial tools and techniques are applied
according to the nature of phenomena. This chapter mainly deals with the
research methodology used to ascertain the study objectives. Under this,
research design, population and sample, sample selection method, data
collection and analysis techniques have been described.

3.1 Research Design

Proper planning is essential to get success either in battlefield or in research.
Research design is a strategic approach to be proactively maintained probable
cause and effects. A researcher also develops a framework or design of strategy
to get solution of research problem. Research design is a brief structure design
of strategic investment conceived to get research objectives. This research is
acquainted to examine and find out the problem and possibility of generating
the portfolio investment for the public with special reference to financial
securities listed in NEPSE. Nature of this research is historical, descriptive
and analytical research because this research based on historic data,
generalized theorem of financial management and investment analysis
evaluation the data of reference companies.

12
3.2 Population and Samples of Data
The term population of data denotes for the data of securities listed in NEPSE
and Sample data are the data from organizations selected from population
in few numbers. First, research has considered only common stock as sample
and second, those securities which were listed NEPSE in FY 1996/97, are
selected. Third, random selection model on the personal judgment of
researcher is used to select sample organizations for the study. The population
data of this study are data from all companies listed in NEPSE and sample data
among them.

Many companies are already listed in NEPSE and this is on-going process.
From the population of 29 commercial banks, the samples taken from the
study are NABIL, EBL and NIBL.

3.3 Nature and Sources of Data

Data are the mathematical expression of variables. Data help to develop some
understanding in quantitative phenomenon. The data collected from field
survey from the questioner is primary data so that researcher made some
question and given to the different people to fill up and from that result
researcher made an analysis. The data collected from others and made
available as published or unpublished statistics are secondary data. Those
data helped during this research period. Sources of secondary data are
published and unpublished data from organization like shareholder report,
annual report, reviews and reports, report and reviews from SEBO, trading
reports of NEPSE, statistics report and annual report of NRB, articles from
various magazines, previous thesis and dissertation, homepages, books
and journals.

13
3.4 Data Collection Techniques
Data were not available in readymade format. Data manipulated as per
research requirements. First, needed data assessed. Second, data are collected
and only essential are selected, classified and such a way that they represent
qualitative and quantitative glimpse. Only manipulated data used in this
research. To manipulate data Computer Application program MS- Office,
Professional Edition, 2003 were used. Techniques of data collection are as
follows:

 Library Research
 Internet, Homepages and Related Links study
 Review and reports of concerns

3.5 Data Analysis Tools

Various financial and statistical tools were used to analyze the data ratio
analysis, correlation coefficient, trend analysis, risk and return, standard
deviation, hypothesis test, etc were used in the study. A brief explanations of
statistical and financial tools employed in this study is given below.

a) Financial Tools
There are several tools which can be 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 the two accounting figures expressed mathematically
is known as ratio. Ratio analysis is used to compare a firm’s financial
performance and status to 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. In simple language it is one number expressed

14
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;

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

High ratio is the symptom of higher/ proper utilization of funds and low ratio is
the single of balance remained unutilized/ idle.

4. 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

15
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, trend analysis as well as hypothesis test have been used, which are
as follows;

I. 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. AM 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
is given by

or

II. Trend Analysis

The straight line trend implies that irrespective of the seasonal and
cyclical swings and irregular functions, the trend values increases or
decreases by absolute amount per unit of time. It is computed as follows

Where,
Y = The value of dependent variable
a = Intercept of trend line
b = Slope of trend line
x = Value of the independent variable

16
Following two equations can be developed putting the above values in normal
equation

Since , or

The constant ‘a’ is simply equal to the mean Y value and constant ‘b’ gives the
rate of change.
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.

CHAPTER – IV
FINDINGS AND RESULTS
The main theme of this chapter is to analyze and interpret the data by using

17
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
presentation. It is so obvious that the presentation of the data and its
analysis help us to draw valid conclusion.

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 presented to
achieve the objectives of the study. Here, all possible data are collected from
Nepal Stock Exchange (NEPSE) and Security Board (SEBO). Similarly, some
of the data are also collected from Internet, Journals and other concerned
sources.

For the title of the thesis, the investment portfolio of CBs is analyzed with the
help of following tools;
 Ratio analysis
 Investment operations of CBs
 Risk and return analysis of individual securities and portfolio
investment
 Financial performance of individual as well as portfolio investment
 Trend analysis

4.1 Investment Operations of CBs

handle their investment is the most important functions of CBs because
investment policy provides several inputs, through which banks can

18
operation efficiently and maximize return with, minimize risk which is the
success path for the banks. CBs must mobilize it funds to profitable, secured,
and marketable sector, so that it can earn more profit. CBs must fulfill the
credit needs of various sectors of the economy including industry,
commercial, social service, securities and agriculture sector.

Nowadays most of the banks depend upon the investment strategies. By which
the CBs are playing the vital role in the economic development of
the country. This chapter investment operation of CBs deals with the
pinpointing analysis related to the investment of the CBs of Nepal in
government securities, share and debentures and loan and advances prepared in
various economic sectors.

4.1.1 Investment on Government Securities

The investment of the CBs on government securities includes the
investment on treasury bills, development bonds, national savings bonds,
insurance bond etc. In some extent all CBs seem to be interested to use their
deposits by purchasing government securities.

Table 4.1
Structure of Investment on Government Securities Held by CBs
(Rs. in ‘000’)
FY NIBL NABIL EBL CBs
2011/12 1,948,500 2413939 2100289 6,462,728
2012/13 2,522,300 2301463 3322443 8,146,206
2013/14 3,256,400 4808348 3614541 11,679,289
2014/15 3,155,000 4646861 4821684 12,623,545
2015/16 2,531,300 3706102 5146845 11,384,247
Total 13,413,500 17876713 19005802 50,296,015
Average 2682700 3575342.6 3801160.4 10059203
Source: Annual Reports of CBs from FY 2011/12 to 2015/16

Figure 4.1
Percentage Coverage of Government Securities Held By CBs
19
 NIBL
27%
EBL
38%
NIBL
NABIL
EBL

NABIL
35%

The above table reveals that most of the CBs made investment on
government securities. The investment on government securities of EBL is
highest among other banks. The NIBL has been found to have investment on
govt. securities lower comparative to other banks. Similarly the EBL covers
more shares i.e. 37.53% of the total investment on govt. securities made by
CBs. NABIL be on 2nd position by investing 35.23% of the total investment on
govt. securities made by CBs. Similarly the lowest C.V. of NIBL shows the
more consistency in investment.
EBL has highest CV which means there is high variability in
investment on govt. securities. From above analysis about the
investment structure of CBs on the govt. securities reveal there is no similar
trend of investment on govt. securities made by CBs. Some banks 3% of total
investment while some covers more than that (i.e. nearly half parts) of total
investment on govt. securities. From average mean and CV analysis, it is clear
that EBL and NABIL are the banks which mobilize maximum funds
comparative to other banks on govt. securities. NIBL stood at the last position
sharing average 27.24% in total investment.

4.1.2 Investment on Share and Debenture

Commercial banks are interested to invest its funds on share and
debentures of other companies. Commercial banks invest their resources in

20
finance, banks, rural micro finance company, companies, and regional
development banks. Some companies whose shares are hold by
commercial banks are Nepal Oil Corporation, Nepal housing development
finance co. ltd., NIDC capital market, Insurance Corporation, rural
development banks etc. the investment structure of commercial banks on share
and debentures are shown in table below.

Table 4.2
Structure of Investment on Shares and Debentures Held by CBs
(Rs. in ‘000’)
FY NIBL NABIL EBL CBs
2011/12 17738 27363 19387 64488
2012/13 17738 27363 19387 64488
2013/14 35253 57853 19082 112188
2014/15 59,945 323236 101152 484333
2015/16 64,270 354,930 102034 521234
Total 194944 790745 261042 1246731
Average 38988.8 158149 52208.4 249346.2
Source: Annual Reports of CBs from FY2011/12 to 2015/16

Figure 4.2
Percentage Coverage of Loan and Advances of Different CBs

21
 EBL
28%
NIBL
38%

NIBL

NABIL

EBL

NABIL
34%

From the above table no. 4.5 and 4.6 shows that NIBL has the highest shares
i.e.38.03% on loan and advances among three CBs throughout the review
period from 2011/12 to 2015/16. NABIL takes at the second position and
EBL take last position covering 27.94% respectively loan and advances
among three CBs. EBL has less CV which indicates the consistency of
investment on loan and advances.

It is clear that NIBL is the best bank among three banks on the basis of
utilization of resources in the field of loan and advances. In other hand the
fluctuating trend of investment on loan and advances shows that there is a lack
of any scientific approach towards investment on loan and advances of CBs.

4.1.3 Investment on Loan and Advances

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Commercial banks are financial institutions that collect scattered
savings of community and invest them into most desirable and high
return sectors of economy. Pace of economic development is directly related
to the quality and quantity of the credit. Commercial banks invest their
funds in various sectors like industry, agriculture, commercial sector etc.
Commercial banks should invest its collected funds as loan and advance not to
keep it as cash and bank balance for mobilize its fund. Investment structure of
loan and advances of CBs are tabulated below.

Table 4.3
Structure of Investment on Loan and Advance Held by CBs
(Rs. in ‘000’)
FY NIBL NABIL EBL CBs
2011/12 9933084 10465266 7589332 27987682
2012/13 12613561 12681666 9770919 35066146
2013/14 17010464 15305910 13623689 45940063
2014/15 27,529,304 21,759,460 18836431 68125195
2015/16 36,827,157 27,999,012 24469555 89295724
Total 103913570 88211314 74289926 266414810
Average 20782714 17642262.8 14857985.2 53282962
Source: Annual Reports of CBs from FY 2011/12 to 2015/16

Figure 4.3
CBs Average Loan and Advances Portfolio in Percentage

23
 For. Bill P&D Govt. Entp.
2% 2%

Govt. Entp.
Pvt. Sector
For. Bill P&D

Pvt. Sector
96%

The above table shows the average loans and advance portfolio of three
commercial banks. NIBL is providing a very high amount of its loans and
advances to the private sector. The mean percentage of loans and advances
to the private sector is 94.66%. It has given second priority to foreign bills
P&D. The mean percentage on it is 2.88%. And finally it invests on
government enterprise with mean percentage of 2.46%.

NABIL has provided very high amount of its loans and advances to
private sector. The mean percentage of loans and advances to private sector is
97.64%. It has given a second priority to foreign bills P&D. The mean
percentage of loans and advances to foreign bills P&D is 1.74% which is
the highest as compared to other commercial banks. Lastly it has given a
priority in providing loans and advances to government securities with
mean percentage of 0.62%.

EBL is providing very high amount of its loans and advances to the
private sector. The mean percentage of loans and advances to the private
sector is 95.63%. EBL has given second priority to government enterprise. The
mean percentage of government enterprise is 2.57%. The bank has finally
given priority to foreign bills P&D with the mean percentage of 1.80%.

24
4.2 Investment Portfolio Analysis
Commercial banks cannot utilize whole of its fund raised through deposit and
borrowings into loans and advance. In order to fulfill the gap between
borrowings and lending banks rather goes for investment on such as
government securities, shares and debenture, NRB bond etc.

The portfolio of making investment by three commercial banks i.e. NIBL,

NABIL, EBL, has been analyzed in the table. (Detail on Appendix 2.a)

Table 4.4
CBs Average Investment Portfolio in Percentage
Name of Government Share & NRB
Banks Securities Debentures Bond
NIBL 44.80 55.20 0.00
NABIL 44.76 55.24 0.00
EBL 92.19 5.81 0.00
Industry Average 60.58 38.75 0.00
Source: Banking and Financial Statistics, NRB, Mid July 2011 No.49

25
 Figure 4.4
Loan and Advances to Total Deposit Ratio

75.00% 74.57%

74.00%
72.91%
73.00%

72.00%

71.00%
Mean
70.00%
69.20%
69.00%

68.00%

67.00%

66.00%
NIBL NABIL EBL

In the above table, the mean loans and advances to total deposit ratio of EBL is
highest i.e. 74.57% and NABIL is lowest ratio i.e. 60.20% among three
commercial banks. NIBL have a mean ratio of 72.91% respectively. The
industrial average mean ratio is 72.23%. It can be said that NIBL and EBL
capacity to mobilize its deposit on loan and advance is better than
average ratio of CBs.

The CV ratio of EBL is lowest i.e. 8.79% among three commercial banks
which indicates that the investment as EBL is the most uniform. NABIL has
the highest CV ratio i.e. 8.29% among three commercial banks, it indicates that
the investment of NABIL is more fluctuating. The lowest CV is better then
highest CV. The industrial average CV ratio is 6%. NABIL and EBL have a
lowest CV than industrial average CV. So it can be concluded that EBL is the
most effective, NABIL is moderate effective and NIBL is least effective to
mobilize its deposit on loan and advances.

26
4.3 Loan and Advance Portfolio Analysis
Commercial bank provides loan and advance form the money which it receives
by way of the person against the personal security of borrowers or against
the security of movable and immovable properties. The major portion of short
term investment of CBs is the loan and advance provided to various sector
of the market. Mainly commercial banks are providing their funds to
government enterprise, private sectors and foreign bills purchase and discount.
The portfolio of making loans and advance by three banks NIBL, NABIL and
EBL has been analyzed in the table (Detail on Appendix 2.b)

Table 4.5
CBs Average Loan and Advances Portfolio in Percentage
Name of Banks Govt. Entp. Pvt. Sector For. Bill P&D
NIBL 2.46 94.66 2.88
NABIL 0.62 97.64 1.74
EBL 2.57 95.63 1.80
Industry Average 1.88 95.98 2.14
Source: Banking and Financial Statistics, NRB, Mid July 2011 No.49

27
 Figure 4.5
Total Investment to Total Deposit Ratio

35.00% 31.93%

30.00%
23.91% 23.58%
25.00%

20.00%
Mean
15.00%

10.00%

5.00%

0.00%
NIBL NABIL EBL

From the above listed comparative table and figures reveals that the ratio of
investment to total deposits of CBs are in fluctuating trend throughout the
review period i.e. from the FY 2011/12 to 2015/16. The mean investment to
total deposit of NABIL is the highest at the 3193%. Similarly NIBL and
EBL has second and third highest ratio of investment to total deposit with
23.91% and 23.58%. From the point of view of average ratio it can be said that
the NABIL capacity to mobilize its deposit on investment is better than
others because their mean ratio are higher than average ratio on CBs 32.47% on
the other hand EBL, NIBL mobilized their deposit on investment is not so
good as compare to overall CBs.

But the coefficient of variation in the ratio of NABIL is the lowest i.e. 11.84%.
Similarly the CV in the ratio of NIBL is the highest i.e. 24.18%
indicates more inconsistent among other. So, it is clear that NABIL is the
most successful in utilizing its resources on investment among other three
banks. Similarly EBL moderate in utilizing its resources on investment.

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4.4 Analysis of Ratios
An arithmetical relationship between two figures is ratio. In other words, the
relationship between two accounting figures expressed in mathematical
terms is known as financial ratios. A ratio is always calculated by dividing
one item of the relationship with other. As a tool of financial analysis, ratio
can be expressed in terms of %. Ratio analysis is a very important tool of
financial analysis.

From the help of ratio analysis, the qualitative judgment can be done very
easily and timely regarding financial performance of the firm. It establishes the
significant relationship between the times of financial statements to provide
a meaningful understanding of the performance and financial position of a
firm. Ratio analysis serves as a stepping stone for an inter-firm comparison to
take remedial measures. In this chapter only important ratios are analyzed.

a. Investment to Total Deposit Ratio

This ratio Investment to Total Deposits is used to measure to which the
banks are successful in mobilizing the total deposits on investment or not.
CBs may mobilize its bank deposit by investing its fund in different
securities issued by government and other financial or non financial
companies. Normally CBs are investing their funds in govt. securities such
as treasury bills, development bonds, national saving bonds, special bonds
etc. shares to other companies. It is computed as;

High ratio is the indicator of high success to mobilize the banking funds as
investment and vice-versa. The ratio of investment to total deposit of NIBL,
NABIL and EBL are shown in table below;

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 Table 4.6
Investment to Total Deposits Ratio (%)
FY NIBL NABIL EBL
2011/12 27.60% 29.27% 21.08%
2012/13 29.60% 31.95% 30.44%
2013/14 26.57% 38.32% 27.41%
2014/15 19.95% 31.14% 21.10%
2015/16 15.85% 28.99% 17.85%
Total 119.57% 159.67% 117.88%
Mean 23.91% 31.93% 23.58%
S.D. 5.78% 3.78% 5.17%
C.V. 24.18 11.84 21.93
Source: Appendix 1 (e, f)
Industry Average Mean = 26.47% Industry Average CV = 19.32%

30
 Figure 4.6
Return on Total Assets Ratio

3.00%
2.42%
2.50%

2.00% 1.75%

1.50% Mean
1.12%
1.00%

0.50%

0.00%
NIBL NABIL EBL

The comparative table and figure shows that commercial banks has mixed
trend on their return to total assets ratio. Among three CBs, NABIL has the
highest mean return and EBL has the lowest return on total assets i.e. 2.42%
and 1.12%. The overall average mean of CBs is 1.76%. However NIBL mean
return is less than average mean of CBs i.e. 1.76%.

Similarly looking at CV among the three CBs, EBL has the lowest CV i.e.
5.56% which is the most consistent than other banks. And, the highest CV in
the ratios of NABIL i.e. 28.02% shows, the return on total assets of NABIL is
highly variable among three banks.

Lastly, it is concluded that NABIL is the best bank in relation to return on total
assets ratio because it utilized overall resources efficiently than other
bank. The profitability position of EBL is the weakest in relation to return on
total assets during study period among three CBs.

31
b. Loan and Advance to Total Deposit Ratio
The loan and advance is also one of major sectors of an investment. This ratio
measures extend to which bank are successful to mobilize their deposits
fund to earn profit by providing fund to outsiders in the form of loan and
advances. The higher ratio represents the greater efficiency of the firm in
utilizing fund and vice-versa. This ratio is calculated by dividing loans and
advance by total deposit. This can be stated as

Where, loan and advances included loans to government enterprises, private

sectors, foreign bills purchase and discount. Total deposit included current
deposit, fixed deposit, saving deposit, money at call deposit and other deposit.

The following table shows the ratios of loan and advances to total
deposit ratio of various CBs.
Table 4.7
Loan and Advance to Total Deposit Ratio (%)
FY NIBL NABIL EBL
2011/12 69.68% 71.75% 75.16%
2012/13 66.64% 65.55% 70.79%
2013/14 69.46% 65.57% 74.91%
2014/15 79.91% 68.18% 78.56%
2015/16 78.86% 74.96% 73.43%
Total 364.55% 346.01% 372.85%
Mean 72.91% 69.20% 74.57%
S.D. 6.04% 4.10% 2.83%
C.V. 8.29% 5.92% 3.79%
Source: Appendix 1 (d, f)
Industry Average Mean = 72.23% Industry Average CV = 6%

32
 Figure 4.7
Investment on Share and Debenture to Total Outside Investment Ratio

0.60%

0.50%
0.50%

0.40%

0.30% Mean
0.24%

0.20%
0.14%

0.10%

0.00%
NIBL NABIL EBL

The comparative table shows that CBs has fluctuating trend on their
investment on share and debentures to total outside investment. In share
and debenture very low portion of the total outside investment is invest.
Among three commercial banks NABIL has invested higher amount on share
and debenture i.e. 0.50% of total outside investment while NIBL has invested
lower amount on share and debenture i.e. 0.14% only.

NIBL has the lowest CV i.e. 20.77% among the three CBs, which shows that
the variability of the ratios between investment on share and debenture
and total outside investment is most uniform among the other CBs.
Similarly, NABIL has the highest CV i.e. 86.65% which shows that it has
mover variability in investment on share and debenture to total outside
investment.

33
4.5 Investment Portfolio Risk and Return Analysis of CBs
Risk and Return are two crucial phenomenons in world of investment. There is
always linear relationship between risk and return. Nobody will take to invest
in risky assets unless he is assured of adequate compensation for the
assumption of risk. Generally in a market, higher risk will command higher
premium.

The main purpose of risk and return analysis is to appraise investment

performance and to explore combinations of investments that maximize
returns, minimize risk or achieve both. The risk minimization, in
particular is not possible by holding only one asset or only one type of assets.
What makes possible to minimize risk is the diversification of investments.
Therefore, the analysis of risk of an investment in isolation is not very
meaningful for understanding the risk minimization process. Risk plays a
central role in the analysis of investments. CBs or investors generally do not
invest their money in only one risky asset

4.6 Test of Investment Portfolio Performance

The portfolio of assets usually offers advantage of reducing risk through
diversification. The portfolio risk is depending upon weight of funds invested
in various assets, risk of individual assets, the tendency of two variables to
move together etc. In this topic, the efforts have been made to explore in
which extent the CBs are able to utilize portfolio concept in their
investment.
To test the portfolio performance, this study uses three portfolio
performance models, which have been given below;

34
Sharpes’ Portfolio Performance Measure
Portfolio performance evaluations on the basis of return only will be
insufficient; therefore, it is necessary to consider both risk and return. William
F. Sharpe devised an index of portfolio performance denoted which
measures the slope of the line starting at risk less rate R and running out to
asset is defined as below;

or

Where,
= Average Return of Assets i.
= Standard Deviation of Return.
= Risk less Rate of Return.
= Sharpe’s Index of Portfolio Performance.

35
4.7 Major Finding
Based on the analysis of the various data remarkable findings are drawn up. The
major findings are as follows;

 In investment portfolio, the industry average investment on government

securities is 60.58%, among the CBs, EBL has invested the highest
amount of funds on govt. securities i.e. 92.19% and NABIL has invested
lowest 44.76%, other bank NIBL have investing highest amount of funds
on government securities among CBs i.e. 44.80% and EBL have invested lowest
amount of funds on S&D i.e.5.81%. The industry average in this case is
38.75%, on which NIBL and NABIL is invested higher than industry average
i.e. 55.20% and 55.24% respectively.

 In loan and advances portfolio, the industry average investment on Govt.

enterprises is 1.88%, Among the CBs, NIBL and EBL has invested the highest
amount of funds on Govt. enterprises i.e. 2.46 and 2.57% respectively. The
industry average investment on Private Sector is 95.98%. NABIL is investing
highest amount of funds on private sector among CBs i.e. 97.64% and NIBL and
EBL have invested below the industry average on private sector i.e. 94.66% and
95.63% respectively. NIBL is investing the highest amount of funds on for Bills
P& D as compared to other CBs i.e. 2.88%. The industry average in this case is
2.14%. NABIL and EBL has invested lower than the industry average i.e. 1.74%
and 1.80% respectively.

 According to the calculation, portfolio return is lesser than the

individual return of S&D but higher then individual return of Govt.
securities. And portfolio risk is less than and S&D but very lower
risk than securities. This is due to negative correlation between assets,
which shows that the portfolio reduce risk.

 The total investment to total deposits ratio of selected CBs shows

that NABIL is the most successful in utilizing its resources on
investment than others CBs.

36
 CHAPTER - V
DISCUSSION, CONCLUSION AND IMPLICATION
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 Discussion
Any country depends upon the economic development for developing the
country. To strengthen, the economy of any country both the private and public
sector should play a great role, which contributing to our nation. 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. All the
economic activities of each and every country are greatly influenced by the
commercial banking business of the country.

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, portfolio risk and return on
investment, ratio analysis, trend analysis, portfolio performance test and
hypothesis test. For the analysis mainly secondary data are used, which is
37
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 Conclusion
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.

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 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.

The trend analysis of the CBs accomplished that investment on share and
debentures, investment on loan and advances, investment on govt. securities

38
are ever-increasing per year.

5.3 Implication
On the basis of the analysis, findings and conclusion, the following
recommendations are suggested to overcome limitation, disorganization as well
as exploit opportunities and to improve the present fund mobilization and
investment portfolio of Nepalese CBs

In investment portfolio, except NABIL other two CBs are focusing on govt.
securities for their investment as a result of various factors, amongwhich the
important ones are government policy and regulation framework of the central
banks. Therefore, investment on govt. securities should be decreased and
investment on other investment should be increase.
 The profitability position of EBL is the weakest in relation on return on
assets. So, the bank should utilize its overall resources effectively to gain
the peak profit margins.
 From the analysis of investment operation of CBs, EBL increases its
total investment by increasing total deposit and increasing investment on
government securities.
 NABIL are not successful in better utilizing their total deposits on loan
and advances so that it is recommended that NABIL should increase the
amount of loan and advances.
 Among the three CBs, EBL is the most excellent bank which is utilizing
the investment in various assets and its best position on ratio analysis. The
lowest investment on S&D to total outside investment and L&A to
total deposit of EBL is insufficient to reduce existing total risk. So that
SCBL is to raise the investment on S&D of other companies and
increased in loan and advances.
.

39