CHAPTER ONE

INTRODUCTION

1.1 Concept of Bank

The origin of the bank can be traced back to as far as 2000 B.C. The word Bank however dates
back to almost a century with French word “Banque” and the Italian equivalent “Banca” both of
which were translated as a “Bench” which referred to “Money Changer’s table”. While the
primary reasons for creation of banks were to simply provide loans with interest, its functions
quickly expanded into its modern principal operations mainly concerned with accumulations of
temporarily idle money and advancing the same money to others for its expenditure. Banking
today is concerned mainly with the trading of money. Banks therefore are a financial institution
which accepts deposits from publics and creates credit. They accept deposits in various form
notably savings and fixed deposit accounts and create credit through instruments like credit
cards, debit cards and through advances and loans.

Banks today are such an integral part of the economy that most nations cannot function properly
in absence of banks. Their importance in the financial stability of the economy has caused many
countries to actively regulate banks. Not only do banks provide critical functions such as
borrowings, lending, and remittance of funds but also foster economic growth. Countries
including Nepal have controlled and regulated the monetary system through central bank.
Among its many functions one of its key functions is to administer, direct and control the actions
of banks. With the ever increasing functions the types of banks have also been diversified to suit
the needs various groups subsequently there are banks such as Agriculture development Bank,
Commercial Banks, Joint stock Bank, Cooperatives and Development Banks.

Investopedia defines banks as “A bank is a financial institution licensed to receive deposits and
make loans. Banks may also provide financial services, such as wealth management, currency
exchange, and safe deposit boxes. There are two types of banks: commercial/retail banks and
investment banks. In most countries, banks are regulated by the national government or central
bank.”

1.2 Origin of banking in Nepal

As it exists today, the banking industry in Nepal is a very competitive and operating in an ever-
changing environment. This means only proactive and constantly adapting banks will find
growth and profitable opportunities. Increase in a company’s market share is dependent on the
failure/expense of the competitor’s loss of market share. The growth can also come from
international expansion as there is only limited market in Nepal however due to the fierce

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competition and technological disadvantage it is very difficult to do so. This however does not
restrict the concept of alliance with foreign entities especially banks and remittance companies.

Kathmandu is the capital of Nepal where most of the organizations and institutions are
established. It is estimated that the population of Nepal as of March 29, 2019 is 29,858,872
according to the United Nations. It is estimated that Kathmandu holds 1/12th of the total
population of Nepal. This means a major portion of the population of Nepal live in Kathmandu
which makes this a big market for Banks. According to Nepal Rastrya Bank there are 28 Class A
Commercial banks, 33 Class B Development banks, 25 Class C Finance Companies, 65 Class D
Micro Finance Institutions and 14 Saving and Credit Co-operatives as of July 2018 (These
numbers are based on the figures published by the NRB).

Ever since the invention of money people have always looked for new ways to keep it
securely and access it when it is needed. Due to this banks were formed in the ancient
world. Today bank plays a larger role not only in collecting money but also a bigger part
in regulating the economics of a country. The importance for banks in today’s world is
paramount to the financial stability of the county. Today banks are financial institutions
that collect deposits from its customers and create credit. With the ever increasing
numbers of financial institutions it is becoming increasingly difficult to find a proper
financial institution to meet the needs and expectations of the modern customer. New
challenges such as the large volumes of information resources, changing needs and
expectations of customers, technological advancements in banking system, increasing
competition, etc. have given rise to a number of issues which have to be addressed by
banks to reach their goals and objectives

Nepal is a small country in Asia and the slow pace of development has also affect the
economy. Being agriculture based country there are not much means for economic
development

1.3 Need for project

Money is no doubt the blood of the economy. For better circulation, security, mobilization of
money, etc. banks are very important in the economy. They serve both personal as well as
commercial purposes. In the Nepalese scenario banks have played a crucial role in the
development of the various areas such as entrepreneurship, infrastructure development, rural
development, etc. However due to the ever increasing number of banks as seen today there is a
challenge among the banks to survive in dog eat dog environment. Hence the banks must
constantly push for innovations and modern facilities to provide its customers with the most
modern and easy ways to conduct banking services. The trend of SMS banking, E-banking,

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ATM, Credit & Debit card facilities and so on are bringing new changes to the banking world
and these innovations are constantly being improved and added as time goes on. As such banks
must also constantly improve and change according to the environment and competition to
survive. The difficult but necessary tasks of banks in today’s Nepal can be described in one word
“Challenging”. In order to learn more about the liquidity and profitability position of one of the
lesser known but important banks in Nepal was the reason why I have chosen this topic for my
academic research. It was interesting to study the strategies and policies of one of the lesser
known brands in the Nepalese markets. In the modern banking world where fame and brand can
be lost quite easily but not earned without long periods of excellent service I wanted to
understand why this Century Commercial Bank L. was not as well-known as other brands such
as Himalayan Bank, NMB bank, NIC Bank, etc. The research was mainly focused on the
financial aspect but some aspects of innovation, technology, procedure, new schemes and ideas
were also reviewed.

1.4 Century Commercial Bank Limited (CCBL).

CenturyCommercialBankLimited (CCBL) is a National Level Commercial bank which was
established in January 23, 2011. This bank was built with objectives of providing simplified
banking services by taking advantage of innovations in information and communication
technology. CCBL aims to extend its reach to the unbanked populations in Nepal and provide
banking services to all. It is driven by the simple mission of simplified banking to all which
in Nepali is “saral banking sabaiko lagi”.
The bank has a network which consists of 111branches as well as 8 extension counters, 13
branchless banking and 63 ATMs across the country and offers a wide range of banking
products in deposits, lending and other value added services such as internet/mobile banking,
remittance and branchless banking etc. The Bank’s team comprises of more than 900 staff
and provides services to more than 500.000 customers.
The bank is currently engaged in a progressive strategy which involves the bank focusing on
implementing sustainable business practices and deliver consistent growth that is sustainable
and profitable to all its stakeholders.

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 1.5 Organizational structure
Organizational structure can be defined as the typical hierarchical arrangement of lines of
authority, communication, rights and duties of an organization. It refers to the determination of
organization system of the enterprise and it determines the programs and procedures by which
the administrative relations of an enterprise are defined and established. It defines how the roles,
power and responsibilities are assigned, controlled and coordinated and how the information
flows between the different levels of management.

CCBL is composed of the following members who serve as the major parts in the operation of
the bank:

1. Board of directors:
 Mr. Rajesh Kumar Shrestha (Chairman)
 Mr. Laxman Kumar Shrestha (Director)
 Mrs. Uma Kumari Shrestha (Director)
 Mr. Rajesh Raj Dali (Director)
 Mr. Mahesh Kumar Agrawal (Director)
 Mr. Sunil Kumar Neupane (Director)
 Mr. Abhishek Bajracharya (Director)
2. Management Team:
 Mr. Tulasi Ram Gautam (Chief Executive Officer)
 Mr. Jeevan Bhattarai (Deputy Chief Executive Officer)
 Ms. Anupama Shrestha (Chief Risk Officer)
 Mr. Manoj Neupane (Chief Credit Officer)
 Mr. Deepesh Pradhan (Chief Operating Officer)
 Mr. Ranjan Khadka (Chief Marketing Officer)
 Mr. Ramesh Kumar Shrestha (Chief Branch Management Officer)
 Mr. Anil Regmi (Chief Finance Officer)
3. Information Officer:
 Mr. Manoj Neupane
4. Grievances Officer:
 Mr. Deepesh Pradhan

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 1.6 Vision, Mission and Objectives of Century Commercial Bank Limited
CCBL has become of the most popular and profitable banks in Nepal and in order to
expand its business in the future the following vision, mission and objectives:

 To maintain customer satisfaction and long term relation

 To help aid in economic development of the country
 To provide job opportunities
 To develop the banking sector in Nepal
 To provide easy and fast banking access to all
 Simplify banking services taking advantage of innovat ions in information
and communication technology
 To extend the reach to unbanked population of the co untry

1.7 Products and services:

Banking services:
CCBL offers a wide range of banking accounts such as Current, Saving, Platnium Saving,
Payroll Khata, Student Saving accounts, etc. These accounts are tailor made for meeting every
customer segments from children to senior citizens. Convenience and ease of access are the
benefits of CCBL accounts:
Banking services (Deposits):
CCBL offers a wide range of banking accounts such as Current, Saving, Platinum Saving,
Payroll Khata, Student Saving accounts, etc. These accounts are tailor made for meeting every
customer segments from children to senior citizens. Convenience and ease of access are the
benefits of CCBL accounts:
1) Current account
2) Century Premium Saving
3) Fixed Deposit
4) Century Shredhani Bachat Khata
5) Century Jestha Nagarik Bachat Khata
6) Century Supreme Saving
7) Century Saral Bachat Khata
8) Century Payroll Khata
9) Century Nari Bachat Khata
10) Century Bal Bachat Khata
11) Century Remit: Bachat Khata
12) Century Rastrya Sewak Khata
13) Century Mex Savings
14) FCY Deposit Account
15) Century Sabaiko Khata

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 16) Century 5 Saving Accounts
17) Students Savings Account
18) Kishan Bachat Khata
19) Social Security Savings Accounts
20) Century Premium Savings
Banking services (Fixed Deposit):
 Normal Fixed Deposit

E services:
 Mobile banking
 SMS banking
 Internet banking
Services:
 Locker services
 Remittance

1.8 Statement of problem

The role of banking is increasing day by day as there have been major changes in the financial
world. People and organizations prefer to conduct business easily and in as less time as possible
in a secure way. Due to the multitude of reasons there has been an increasing demand to fulfill
this banking role in Nepal. The marketing concepts of banks centers on the profit creation and
smooth operation by providing various services to the customers. This is the only way ti achieve
success in highly competitive market with only limited growth potential. However to be
successful in markets where the economic growth has leveled and competitors who follow the
same marketing concepts it takes a well-developed marketing strategy. There has been a surge in
the number of banks in order to fulfill these needs. CCBL is one of these banks and the it has to
face challenges while delivering the needed services. CCBL have adopted unique strategies and
engaged in progressive strategies which involves bank focusing on implementing sustainable
business practices and deliver consistent growth. The visions of CCBL should comprise actions
and procedures to increase as much as consumer as expected.

The following queries must be made while presenting the facts about the enterprise operation in the
market:
 To study about CCBL and its related aspects like its products & services, history,
organizational structure, subsidiary companies, etc.
 To analyze the financial statement i.e. P&L account and Balance sheet of CCBL
 To learn about P&L Account, Balance sheet and different types of Assets& Liabilities

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  To understanding the meaning and need of Balance Sheet and profit and loss account.
 The purpose is to portray the financial position of CCBL with the help of profit and loss
account
 To evaluate the financial soundness, stability and liquidity of CCBL

1.9 Purpose of Study:

This field work’s primary purpose is to make a comparative analysis of profitability and liquidity
position of CCBL with the uses of various tools and techniques. Some of the other objectives of
this study are as follows:

 Understanding the historical background of CCBL.

 Comparing the financial performance of CCBL
 Make comparative study of financial stability of CCBL
 Providing necessary suggestions and recommendation base on the analysis and
conclusion of data
 Making comparative analysis of liquidity and profitability position of CCBL

1.10 Focus of the study:

Banks are crucial for the development of economy of any country. They lead the development
process both directly and indirectly. They provide vital lending and deposit services for the
normal people as well as are considered storehouse of a country’s wealth. They are also known
as reservoirs of resources of economic of development. Economic progress can be achieved only
through a sound profitability and liquidity position of these banks in the country. The industrial
revolutions in European countries during the 18th and 19th centuries can directly be attributed to
the existence of a well-developed and good banking system in Europe.

So according to these presented facts it is necessary to adjust the profitability and liquidity
position of the banking system as well as the banks of our country in order to spot out the
financial weakness to suitable solutions/ corrective actions. In this way it is necessary to
evaluate, analyze and interpret the comparative profitability and liquidity position of banking of
our country.

This study is focused on the examination of the CCBL by examining its financial statement in
the financial years (F/y) of 2073/74, 2072/73, 2071/72, 2070/71 and 2069/70. The analysis of the
liquidity and profitability position of CCBL was carried out by applying these analytical tools
and techniques which will be further explained below: Ratio analysis, Profitability ratio.

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1.11 Need and Importance of the study:
The major points and reasons for preparing this study can be highlighted in the following points:

 The findings of this study will add more to understanding the literature of liquidity and
profitability in the Nepalese context
 Opening new dimensions for general readers to broaden their knowledge about the
liquidity and profitability position of the CCBL.
 Helping individual investors to make investment decision on CCBL.
 This study provides new insight into the management of CCBL in making their own
financial decision.
 Active shareholders who want to maximize their income from investment through proper
utilization of their funds can use this study to help adjust and understand whether their
funds are being properly utilized and whether they are receiving a fair share of return on
their investment.
 It will immensely help the policy makers such as officials of government, concerned
industry, Nepal Stock Exchange, Internal Revenue Office, etc. for purposes such as
formulation of policies, rules and regulations regarding operation of the commercial
banks.
 This will also be helpful for the future management students in the process of
preparation and reviewing of their research work

1.12 Limitation of study:

This study will definitely have some limitations. This study was basically done in order to
complete the partial fulfillment for the award of the degree of Bachelor in Business
Administration. Problems with limited time frame, financial problems, lack of prior research
experience will be the primary limitations for this study the other limitations are as follows:

1) The study will only be centered on Century Commercial Bank.

2) This is a brief study and does not include aspect of human resource management,
etc.
3) The research is mainly based on the primary data provided by the available data
from CCBL using primary sources: observation, interviews and other secondary
sources
4) The study was only conducted within the Kathmandu valley

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1.13 Organization of Study
This study is based on mainly five main chapters:

Chapter one:
It includes background of the study, organizational structure of CCBL, objective of the study,
vision, mission and objectives, products and services of CCBL, statement of problem, focus of
study, need and importance of study, limitations of the study and organization of the study.

Chapter two:
Second chapter will deal with mainly the review of literature. It includes the sources of data,
conceptual framework, History of banking in Nepal and financial tools are studied in this chapter

Chapter three:
Data presentation, analysis and interpretation of data will be included in the third chapter

Chapter four:
And in the last chapter findings, conclusion, suggestions and bibliography will be included.

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 CHAPTER TWO
REVIEW OF LITERATURE

2.1 Literature survey

For the public traded companies, all financial result must be reported for public consumption.
Most of today’s banks in Nepal issues shares to the public and hence provide and annual report
to its shareholders. These reports provide information into mainly 2 types “Management
Discussion and Analysis”. Firstly in a verbal section where the chairman describes the main parts
such as the bank liquidity and profitability position during the past years as well as new
development which will affect the future. In short this part is the summary of the analysis part.
Secondly this report presents the economic figures in forms of financial statements of Profit and
Loss account and Balance sheet. Here P/L account reports the profit or loss earned during a
certain period where as the Balance Sheet shows the assets and liabilities on the same period.
Since only P/L and Balance sheet cannot report the real liquidity and profitability position of the
organization it cannot provide all the useful financial data required to make decisions by the
management.

Several aspects of the financial statements need to be thoroughly studied in order to analyze and
determine the real financial positions of the bank with the use of financial tools. This study is
mainly promoted to achieve this objective.

2.1.1 Conceptual Framework

i) Financial Statements

According to Investopedia “Financial statements can be defined as the written records which
convey the business activities and the financial performance of a company.” It includes balance
sheets, income statement and cash flow statement. Through this the accountants can
communicate with the management, owners, bankers, investors and other interested parties in a
summary on the financial position of the concern and how this position has arrived in the present
time. It is the summary of the accounts of assets, liabilities and capital period.

The financial statements or reports hence are prepared for the purpose of making external
reporting to owners, investors and creditors. It comprises of P/L account and Balance Sheet as
explained below:

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ii)Balance Sheet

The balance sheet basically provides an overview of assets, liabilities and stockholder’s equity in
a fixed/certain period of time. It is also known as the statement of financial position, statements
of assets, liabilities & capital and statement of worth. This is one of the most important parts of
the financial statements. Due to it representing a fixed/certain period of time balance sheet is also
known as a static statement. In a bank it is the summary of the various debt and credit balances
of assets and liabilities to be carried forward which reflects the financial condition.

The balance sheet identifies how the assets are funded, either with liabilities such as debt or
stock holder’s equity, such as retained earning and additional paid-in capital. Assets are hence
listed on the balance sheet in order of liquidity. The B/S provides a snapshot of the financial
position of the bank at the period close to the end of the bank accounting period. This can be
prepared in 2 forms which is accounting form and statement form.

Liabilities are listed in the order in which they need to be paid. Short term also known as current
liabilities are expected to be paid in a year or less whereas long term or noncurrent liabilities are
the debts which are expected to be paid in over a year.

The main formula of Balance sheet is:

Assets= Equity+Liabilities

iii).Profit and Loss Account

This is the second major statement of the financial statement. It is also known as Income
statement since it provides an overview of revenues, expenses, net income and earning per share.
Unlike the balance sheet it usually contains data of 2-3 years for comparison as it covers a
certain range of time. It is prepared to determine the operational position of the organization.

“Profit and loss account is a statement which summarizes all indirect revenue expenses in one
side which are compared with gross profit/revenue income in another side and net trading
income of an accounting period is assessed.”-S. Mukherjee

It is comparable to a scoreboard of the firm where performance during a particular period in time
is recorded. P/L account is therefore a statement which records the statements of revenue earned
as well as the expenses incurred for earning the revenue. During this process if there is more
revenue in contrast to expenses it is profit or else it is loss. As it is a summary of revenue and
expenses of a bank it can be used to measure a bank’s profitability.

Its formula is:

Net Income= (Income- Expenses) OR

Net Expenses= (Expenses-Income)

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2.1.2 Financial Tools
While financial statements are useful on their own. It requires a basic understanding of
accounting skills and language to understand the financial position of the bank. Hence for the
simplicity of the average readers to analyze the profitability and liquidity position of a bank the
financial tools are used. This can be done with the use of financial tools for example comparative
B/S and income statements, common size percentages, fund flow analysis, ratio analysis, cash
flow analysis and so on. Due to the various limitations to this study, only ratio analysis has been
used to conduct this study.

a) Ratio Analysis:

According to the Google dictionary Ratio can be defined as the, “The quantitative relation
between two amounts showing the number of times one value contains or is contained within the
other.”

Whereas the Cambridge dictionary defines Ratio as, “The relationship between two groups or
amounts that expresses how much bigger one is than the other.”

Hence in accounting terms we understand that the ratio is similar to a yardstick that provides a
measure of relationship between 2 accounting figures. Ratios are used in finance to point out the
relationships which are not obvious by raw data. For example: earning and Shareholder’s equity, Assets
and Liabilities, etc.

Ratio analysis is a quantitative method of gaining insight into a company’s liquidity, operational
efficiency as well as profitability by comparing the information contained in its financial
statements. Ratio analysis is an important cornerstone of fundamental analysis.

It is mainly of use to outside analyst who use various types of ratio to assess the banks where as
corporate insiders (Middle level management workers like accountants, High level management
such as CEO, Financial Manager) rely on them less as they have access to more detailed
operational data about the bank.

Ratio analysis was pioneered by Alexander Wall in 1919 A.D. and has been improved upon
throughout the years most notably by Justin (1924), Horrigan (1968), Gilman (1925), and Bliss
(1923). This is the principal technique used in judging the condition portrayed by the financial
statements. It is a systematic use in which the ratios are used to intercept the financial statements

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so that the strengths and weakness of a firm as well as its historical performance and its current
conditions can be known.

Ratio analysis is useful in making a rational decision which is important not only for the enterprise but
for the outsiders, shareholders, investors, bankers, depositors, etc. It also provides guides and clues
especially in areas and tasks such as supporting trends towards better or poor performances and in
finding important deviations from as average applicable standard. While there are several types of ratios
that can be employed the main types or ratio used by the organization can depend on various factors
such as size, capital employed, type, etc. of the bank itself.

The some of the various types of ratios which can be calculated from the accounting data are as follows:

1. Liquidity ratios
2. Profitability ratio
3. Structural ratio
4. Turnover ratio
5. Market Value ratio
6. Other ratios

During this study only liquidity and profitability ratios were calculated.

i. Liquidity ratios

Liquidity means how quickly you can get your hands on your cash. Basically it refers to getting
money when you need it. It can be in forms of emergency savings account or cash lying with you
so you can access it in case of any unforeseen happening or financial setback. Liquidity is an
important part in business as it allows you to seize opportunities. Cash, saving account,
checkable account are some common examples of liquid assets as they can easily be converted
into liquid assets. (ECONOMIC TIMES//DEFINATION/LIQUIDITY)

For banks liquidity/ solvency is the ability to meet its short term or current obligations when they
become due for payments. Liquidity is one of the pre-requisites for the survival of a bank. The
liquidity is measured with the help of liquid ratios.

Liquidity ratio measures a company’s ability to pay off its short term debts as they come due by
the use of the company’s current or quick assets. Lack of liquidity can damage the credit
standing of the bank and as a result the public can lose trust in the bank. Higher liquidity results
in higher solvency for the bank which is good for the short term financial position in a bank.

It consists of 3 main ratios:

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I) Current Ratio

Current ratio measures the short term solvency position of the bank. It is the ratio between
current assets and current liabilities. This shows how many times the current assets are greater
than current liabilities.

It consists of mainly cash and bank balance, other important components are money at call &
short notes, loans, credit, bank overdrafts, bills purchased and discounted. The current liabilities
includes current deposits, fixed deposit, call and short deposit, saving deposits, tax provision,
dividend payable, other various deposits and short term loans which includes miscellaneous
current liabilities.

The formula for current ratio is as follows:

Current ratio=Current Assets/Current Liabilities

Higher current ratio means the bank has higher ability to repay its liabilities however it is
considered that the optimum current ratio needs to be 2:1 i.e. current assets need to be twice that
or current liabilities.

II) Quick Ratio:

This ratio shows the relationship between quick or liquid assets and current liabilities. Here there
are mainly 2 parts Liquid assets and current liabilities.

To calculate quick ratio the formulas are as follows:

Liquid assets= Total Current Assets-Inventory-Prepaid expenses

Quick Ratio= Liquid Assets/Current Liabilities

Higher the quick ratio more is the bank’s capacity to repay its current liabilities.

b) Profitability Ratio

Profitability ratios are a class of financial metrics which are used to assess a business’s
ability to generate earning relative to its revenue, operating costs, B/S assets and
shareholder’s equity over time, using data from a specific period of time. It is
concerned mainly with measuring operational efficiency of the bank. It deals mainly
with these many questions some of which are as follows: is the profit earned by the
firm adequate? What rate of return does it represent? What is the rate of profit for the
various divisions and segments of the firm? What amount was paid on dividends? What
is the EPS? What is the rate of return on equity of shareholders?

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 As we are all aware the profit is the main objective of any bank and no bank or
organization will have any future without sufficient profit and effective outputs. Profits
can be defined as the difference between the total revenue and total expenses over a
fixed period of time. Profit in a bank can be achieved by a mix of successful
administration, management, credit management, operating management and risk
management. Due to these reasons a bank realizes profit as long as its interest earning
asset’s values exceeds the interest bearing liabilities’ value.

Profitability of a bank can be measure with the help of profitability ratios such as:

1. Return on assets (ROA)

Return on assets is known as the ratio between net profit and total assets. This shows the
contribution of assets on profits. It establishes relationship between net profit and total assets
employed to achieve it.

The formula for ROA is as follows:

ROA= Net Profit After interest and Tax/ Total Assets

More ROA is better for the company. Higher returns on total assets are considered more
reasonable. This implies more return on fewer assets employed for the organization.

2. Return on Share Holder’s Equity

This is the ratio which clarifies the relation between net profit and shareholder’s equity. This
shows the relationship between the Shareholder’s own investment and the profit earned from it.
Shareholder’s equity shows how the shareholder’s investment is affecting the profit making in
the bank.

Return on Shareholder’s Equity= Net Profit After interest and Tax/ Shareholder’s Equity

Higher the Return on Shareholder’s Equity means better use of capital. More return on
shareholder’s equity means more profit earned from lesser use of SHEq .

3. Return on Capital Employed

This informs the percentage of profit on the capital employed. This establishes the relationship
between the profit and capital employed. Capital is the blood for the organization and more
capital means more options for investment, expansion and growth

Return on Capital Employed= Net Profit After interest and Tax/ Capital Employed

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The higher results from Return on Capital Employed is considered better for the company as it
means more profit earned from lesser capital employed.

4. Return on common equity

Payment of interests (on debenture or loan) and dividend on preference share the remaining
amount of profit divided to the common shareholders can be defined as Return on common
equity. This shows how much each common share holder has earned during the financial year
through the investment into the business. It is shows the relationship between the earnings of the
Shareholders and the investment of shareholders into the business.

Return on common equity= NPAT-Preference dividend

CommonShareholderEquity

Return on common equity means how much net profit is earned from each Rupees of investment.
ROE is an important indicator of how effective management is at using equity financing to fund
operations to grow the company. Since the SHEq is used throughout the year the average of
beginning value and ending value of SHEq is used to calculate the return on common equity. The
result from the capital employed by the equity shareholders are shown here. More Return On
Common Equity means the common shareholders have earned more income from their
investments and vice versa.

5. Earning Per Share(EPS)

The EPS is one of the most important ratios which is used by outsiders to analyze the bank’s
profitability. It is determined by dividing the earning available to the Equity holders by the
number of Equity shares outstanding or the number of equity holders.

The formula for EPS is as follows:

EPS= Earning Available TO Equity Shareholders/ No. of Equity Shares o/s

Or

NPAT  Pr eferencedividend
EPS=
No.ofEquityshareouts tan ding

Earning available to equity shareholders are obtained after deducting Dividend to Preference
shareholders, Interest on Debentures/loans, tax form the net income. EPS refers to the real
earnings of each shareholder in the given fiscal year. Real return earned by the common
shareholder is calculated in this ratio. This amount is later either distributed as dividend or kept
in reserve but usually only a portion of it is distributed and the rest is saved in reserves.

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 6. Dividend Per Share (DPS)

Dividend per Share is calculated by dividing the earning paid to the shareholder by the number
of shares outstanding. This refers to how much dividend is earned by the common shareholder
during the fiscal year. The DPS is a portion of EPS and refers to how much portion of the total
earning is provided to the common shareholders in form of dividend. DPS is one of the main
ratios which investors want to study before investing into a bank.

DPS= Dividend paid to shareholders/ No. of Equity shareholders outstanding

More DPS and consistent payment of dividend signifies a company is doing well and is
financially healthy. DPS is distributed from the proposed dividend to the common shareholders.
Higher rate of DPS signifies the bank is doing well and is earning enough profit to distribute
more dividends and vice versa.

7. Dividend Payout Ratio(DPR)

DPR is used to measure the relationship between the earning of the firm which belongs to the
ordinary shareholders and the dividends paid to them out of those earning. This ratio tells what
proportion of earning per share has been paid in cash dividends and what proportion of the
remaining amount is brought back in form of retained earning for the bank’s possible expansion
and growth. DPR shows how much the dividend is being paid out of total earnings. It is the ratio
between what is given to shareholders and what is earned by them.

DPR is calculated by using the following formula

DPR= Dividend per share/ Earning per share

Higher rate of DPR refers to more portions of EPS being used to distribute profit. Similarly less
DPR means lesser dividend but more reserve. However if company is in loss and DPR is low it
signifies that no profit is made and hence no dividend is being distributed.

8. Dividend Yield

Dividend yield is used to evaluate the shareholder’s cash receipts with relation to the market
price per share. This expresses the dividend per share to a percentage of bank market prices per
share. It shows the ratio between the dividend paid and the market value in the share. Dividend
yield

It is calculated by dividing the cash dividends per share by the market price per share.

Its formula is as follows:

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Dividend Yield= Dividend per share/ Market price per share

Higher dividend yield means more growth potential and greater retention of earning and vice
versa. Dividend yield is one of the main ratios studied by the investors before investing into the
business. Higher dividend yield means the company is profitable and a good investment option.

9. Earning Yield

Earning yield which is also known as earning price ratio can be defined as the ratio of earning
per share to the market price per share. This is used to indicate the shareholder’s return with
relation to the market price per share.

The earning yield is hence obtained by dividing the EPS by Market price per share.

It can be calculated by using the following formula

Earning Yield= Earning per share/ Market price per share

The Earning yield is a ratio which shows how much the investor earned with the current market
rate of the share. Unlike other ratios the earning yield is based on new data and is more accurate
to describe the share’s real value in the market.

10. Price Earning Ratio

The price earning ratio refers to the investor’s perception about overall risk to the bank’s
earnings and growth in bank earning. This is also used by the investors while making judgments
about the bank performance. It can also be used to tell the price currently bargained by the
market participation in common stock for each rupee of earnings.

The P/E ratio is determined by the following formula

P/E ratio= Market price per share/ Earning per share

This is the opposite of Earning Yield. Where the Earning Yield shows the ratio of earning to
value of share, in P/E ratio the ratio of market value to earning is shown. Price earning ratio
shows how better the share is doing in the market and how much earning is made in the span of
the financial year.

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 Chapter 3:

Research Methodology
3.1 Introduction

In this chapter there research design, nature, source and collection of data, data collection
procedure and tools & technique of analysis are covered. The descriptive methodology is used
under this research report for reaching to the objective of the study. This helps to focus and
emphasize the useful and final meaningful points so that all concerned outcome can achieved
from this study. The following research methodology was used in this study.

The basic objective of this study is to gain more insight into the liquidity and profitability
positions of the selected commercial banks in Nepal in the current time. In order to accomplish
this objective the proper research methodology was followed.

Research methodology is mainly concerned with the methods, process, tools and techniques
which are applied during the entire research process.

The research methodology used for this study to accomplish its objectives (of mainly liquidity
and profitability analysis) contains the following: Sources of data, data collection, and data
collection techniques and data analysis tools.

3.2 Research Design

Proper well settled research design is necessary to fulfill the objectives of the study. This study is
mainly concerned with the historical research of the CCBL. Both primary and secondary data are
used and collected study the profit planning of CCBL. The relevant and needed data has been
collected from annual reports of Century Commercial Bank Limited. The financial data
necessary for this study are published annually and quarterly in the CCBL website. The Research
design of this study is both analytical as well as descriptive approaches. This study uses
statistical analysis to describe measure, compare and classify the budgeting and profit planning
of CCBL.

3.3 Data Collection Procedure

For the purpose of collecting data for this research work various financial tools were used to
access the liquidity as well as profitability positions of the selected banks under this study the
financial tools consists of ratio analysis which is used to calculate the liquidity and profitability
position of the banks.

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 3.4 Data presentation and Analysis

This chapter presents the various collected data from the various sources and attempts to analyze
and interpret the data in order to assess the liquidity and profitability position of the commercial
banks in Nepal selected for the study were from the financial years of 2074/75, 2074/73,
2073/72, 2072/71, 2071/70 and 2069/70. For the purpose of this study descriptive analysis was
used to make an analysis of liquidity and financial position of the bank using ratio analysis. Here
the liquidity and profitability ratios are calculated as follows:

3.5 Presentation and tabulation of data

Table number: 1

S.no Particular 2074/75 2073/74 2072/73 2071/72 2070/71

1 Current Assets (’00) 493325 355552 257435 257707 285475

2 Current Liabilities (’00) 20053 15325 9818 21280 14845

3 Fixed Assets (‘000) 4,93,324 5,72,996 2,57,707 2,64,522 285487

4 Total Assets (‘000) 7,33,81,234 5,67,83,322 2,79,06,031 2,78,61,650 2,10,30,021

5 Total Debt (‘000) 5,49,88,509 3,95,07,784 2,50,84,100 2,03,51,799 1,50,45,412

6 Shareholder’s Equity (‘000) 80,63,435 57,74,184 32,09,700 23,10,800 21,20,000

7 Net Profit 912283 501366 413534 260864 86927

8 No. of Shares o/s (‘000) 80634 54606 28908 21200 20000

9 Proposed Dividend (Rs) 55174.2177 50128.308 42090.048 24693.972 92389

(‘000’000)

Fig: Table showing financial data collected during the study.

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3.6 Analysis of Data
In this part the data is analyzed by the use of ratios to calculate the bank’s performance in issues
like liquidity.

a)Liquidity Ratio:

*Current Ratio

This ratio can be calculated by dividing current assets by current liabilities. It refers to the extent
to which current liabilities can be repaid by using current assets within a year. Banks run on
public’s trust and it is extremely likely to lose public trust in events where banks cannot make
timely payment on current liabilities. Current ratio in a sense is also testing if company can make
full payment on its current obligations.

Its formula is: Current ratio= Current assets/Current liabilities

Here

Current assets = Cash and bank balance+ Money at call and advance+ Bills Purchased

Or Current assets= other assets+ investment

It is considered best if the current ratio is 2:1. Too much current ratio means wastage and too
little current ratio means the risk of not being able to fulfill obligation.

Table number: 2

Current Ratio of CCBL

For the financial years of 2074/75, 2073/74, 2072/73, 2071/72 and 2070/71

Financial year 2074/75 2073/74 2072/73 2071/72 2070/71

Current Ratio 2.460:1 2.320:1 2.622:1 1.211:1 1.923:1

Source: Table number 1

As seen here the current ratio of CCBL is fluctuating year after year. While it had a 1.923:1 ratio
which can be considered healthy and well, the next year seems troubling as its current ratio is

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very dangerous sitting at 1.211:1. The subsequent years seem to be doing better with ratios of
2.622, 2.320 and 2.460 at the F/Y 2072/73, 2073/74 and 2074/75 respectively.

b) Profitability Ratio
1. Return on Assets (ROA):

This is the ratio of net income to the total assets and it provides an idea of the overall
earnings of the firm. Return on assets shows how much profit is earned for each rupee of
assets the bank has used. It is an indicator which shows how profitable a company is relative
to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a
company's management is at using its assets to generate earnings. Return on assets is
displayed as a percentage.

Its formula is as follows: Return on Assets= Net Profit After Tax/ Total Assets

Table No.3

ROA of CCBL

For the F/Y 2074/75, 2073/74, 2072/73, 2071/72 and 2070/71

Financial year 2074/75 2073/74 2072/73 2071/72 2070/71

ROA 1.24 .88 1.48 .9360 .413

Source: Table number 1

This table shows the percentage of profit earned from the assets utilized by the business. This
table reflects the ROA of CCBL in the year 2070/71 is 0.413% which is the lowest of the 5
years. The ROA increases from .9360 and 1.48 in the years 2071/72 and2072/73
respectively. The year 2072/73 is the highest ROA among the 5 years. The years of 2073/74
and 2074/75 are 0.88 and 1.24. Analyzing this we can conclude that the ROA of this bank is
very poor.

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 ROA gives investors a reliable picture of management's ability to pull profits from the assets
and projects into which it chooses to invest. The metric also provides a good line of sight into
net margins and asset turnover, two key performance drivers. ROA makes the job of
fundamental analysis easier, helping investors recognize good stock opportunities and
minimizing the likelihood of unpleasant surprises.

(Investopedia)

2. Return on Shareholder’s Equity (ROE):

This is the ratio of net profit to shareholder’s equity which shows the relationship between
Net profit and Shareholder’s investment. Because shareholder’s equity is equal to a
company’s assets minus its debt, ROE is thought to be as the return on net assets. ROE is
considered to be a measure of how effective management is using a company’s assets to
create profit. ROE is expressed as a percentage and can be calculated for any company’s
assets to create profit.

Its formula is:

ROE= Net profit after Tax/ Shareholder’s Equity

Table no.4

ROE of CCBL

For the F/Y 2074/75, 2073/74, 2072/73, 2071/72 and 2070/71

Financial years 2074/75 2073/74 2072/73 2071/72 2070/71

ROE 11.31 8.68 12.88 11.29 4.1

Source: Table no.1

Return on Equity is an important ratio to analyze the company’s financial returns. By

taking a look at this table it is clear that the ROE of the company is increasing steadily
every year. The starting ROE is only 4.1% in the year 2070/71 and after this year the
ROE is steadily increasing from 2071-2073 at rates of 11.29% and 12.88%. The year of
2073/74 shows the decline of ROE to 8.68%. The ROE recovers in the year 2074/75 by
reaching to 11.31%.

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Sustainable growth rates and dividend growth rates can be estimated using ROE assuming that
the ratio is roughly in line or just above its peer group average. Although there may be some
challenges, ROE can be a good starting place for developing future estimates of a stock’s growth
rate and the growth rate of its dividends. To estimate a company’s future growth rate, multiply
ROE by the company’s retention ratio. The retention ratio is the percentage of net income that is
“retained” or reinvested by the company to fund future growth.

3. Earning per Share (EPS):

Earning per share shows one of the most important ratios and is a key ratio that is studied
by investors before investing in any business. It basically shows the amount of return on
every outstanding share. It is one of the most important variables to determine the share’s
value. EPS shows how much market is willing to pay for each rupee of earnings. EPS is
one of the main indicators investors use before purchasing a stock.
Its formula is as follows:
EPS= Net Income after Tax/ No. of shares outstanding

Table No.5

EPS of CCBL

For the F/Y 2074/75, 2073/74, 2072/73, 2071/72 and 2070/71

Financial years 2074/75 2073/74 2072/73 2071/72 2070/71

EPS (Rs) 11.31 9.18 14.305 12.3 4.35

Source: Table no.1

The EPS of CCBL is low at the beginning at Rs 4.35 in the year 2070/71. The EPS then
increased to Rs 12.3 and reached Rs 14.305 in the years 2071/72 and 2072/73
respectively. The EPS then drops to Rs 9.18 in the following year. The year 2074/75
shows that the EPS recovers to Rs 11.31.

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 One of the first performance measures to check when analyzing a company’s financial
health is its ability to turn a profit. Earning per share (EPS) is the industry standard that
investors rely on to see how well a company has done.

3.7 Graphical Presentation of Data

Diagram-1

Net Profit for 4 Years

Net Profit
1000000
900000
800000
700000
600000
500000
Net Profit
400000
300000
200000
100000
0
70/71 71/72 72/73 73/74 74/75

Source: Table No. 2

The above is a graphical representation of table number 2 which here shows the net profit of the
company. Net profit as seen here is least in the year 2070/71 and is highest in the final year of
2074/75. The net profit increases during the first 4 years at a relatively low rate and in final year
of 2074/75 the rate of net profit is increased by almost half of the previous years. The gradual
rate of increase in the past 5 years shows that the company has been profitable and hence in the
next coming years profit can be expected.

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 Diagram-2

Return on Assets

ROA
1.6

1.4

1.2

0.8
ROA
0.6

0.4

0.2

0
70/71 71/72 72/73 73/74 74/75

Source: Table No. 3

Graphical representation of table number 3 is shown here and we can clearly see the Return On
Assets is increasing in the first 3 years on 2070/71 till 2072/73 reaching a maximum rate of 1.48
in the year 2072/73. The next year shows a decline and in 2073/74 the rate drops significantly at
0.936. The final year shows recovery of ROA and hence it shows the company can recover and
in the next years there can be higher rates of ROA.

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 Diagram-3

Return on Equity

Series 1
14

12

10

8
Series 1
6

0
70/71 71/72 72/73 73/74 74/75

Source: Table no.4

The Return On Equity shows the important ratio of earning to shareholder’s equity. Here we can
see the ROE of CCBL based on the calculation of Table no. 4. Return on Equity similar to the
Return On Assets is increasing in the first 3 years of 2070/71 till 2072/73 and is maximum in the
year 2072/73 at 12.88. The third year shows drop in ROE and reaching 11.29 in the years of
2073/74 before recovering in the final year of 2074/75. In the future Return on Equity can be
expected to rise.

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 Diagram-4

Earning Per Share

EPS
16

14

12

10

8
EPS

0
70/71 71/72 72/73 73/74 74/75

Source: Table no. 5

Earning per share of the CCBL is shows here based on Table number 5’s
calculations. As seen in the figure the EPS of the share is gradually increasing in the first 3 years
where it reaches a maximum of Rs14.305 in the year 2072/73. The EPS drops in the next year
but steadily recovers in the final year of the study.

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 Diagram-5

Dividend per Share (in percentage)

Dividend(%)
12

10

6 Dividend(%)

0
70/71 71/72 72/73 73/74 74/75

Source: Table no. 6

In the above table we can observe the dividend per share distributed to the shareholders. The first
2 years shows the same rates of dividend paid and in the next 2 years as well same rates of
dividends are paid. There is decline in the rates of dividend at the final year which means the
focus if the company is in increasing reserves to expand or make future growth of the company.

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 Diagram-6

Dividend per Share (paid in Rs and shares)

Dividend paid in Rs and share

600000

500000

400000

300000
Dividend paid in Rs and share

200000

100000

0
70/71 71/72 72/73 73/74 74/75

Source: Table no. 7

Seen here is the dividend paid to the shareholders in forms of cash or dividend in the last 5 years
(F/Y 2070/71-2074/75). The rates of dividend is increasing every year and we can see a rise in
the dividend every year so the future might also be profitable and dividend can be expected in
the future. In the figure we can clearly see the lowest dividend was paid in the year of 2070/71
and is maximum in the year of 2074/75.

3.8 Study result

The following findings were made from the study of CCBL’s financial statement on
liquidity and profitability position.

1) The historical background of CCBL shows that right after its establishment in 2011; it
has actively participated in providing banking services to the customers with modern
banking innovations.
2) The study shows that CCBL is financially stable and is a profitable venture however its
profit is relatively very low.
3) After the study of the financial performance of the CCBL it is understood that the bank
is doing fairly well in comparison to other commercial banks in Nepal.

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4) Some of the necessary suggestions and recommendations based on the analysis and
conclusion are shown in the next chapter.
5) The study of liquidity position of CCBL shows that it has healthy current assets to
current liability ratio which is close to 2:1.
6) Dividend is constantly increasing so it shows the profitable nature of the bank’s
position.
7) ROA and ROE is recovering after the fall in rates at the years of 2072/73.

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 CHAPTER-FOUR

SUMMARY, CONCLUSION AND RECOMMENDATION

4.1 Summary

The report is a financial study of liquidity and profitability position of Century

Commercial Bank Limited. This study is divided into 4 chapters. The first chapter is
introduction with background, history of the bank, limitations of the study, reason for
the study, organizational structure of the bank, vision, mission and objectives of the
study.

Similarly in the second chapter the necessary parts of literature review, sources of data,
financial tools and financial studies are covered. This part is important as the data
necessary for the study are collected from various sources. Similarly reasons for using
the various types of financial tools are explained.

The third chapter is arguably the most important chapter as the actual analysis and
calculations are made. Here the various data are presented and important ratios are
calculated. Ratios which are calculated are current ratio which is used to check the
liquidity of the bank. Other ratios such as return on Shareholder’s Equity, Earning Per
Share, Dividend Per Share and dividend payout ratio under profitability ratios. The
calculated data are then presented in graphical presentation.

. Finally in the last chapter the summary, conclusion and recommendation of the study
are made. The study results are hence summarized and the various conclusions are
outlined and some recommendations are made to help improve the financial condition
of the bank or improve its performance. Similarly it includes the bibliography used

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 for the creation of this study.

4.2 Conclusions:
Banks are perhaps the most important financial institutions which help in the
commercial and economic development of a country. The sustainable commercial and
economic development of Nepal demands a proper banking system. Smooth
functioning of the banking system demands a sound liquidity and profitability position
which can be judged by proper analysis of the financial statements. This in order to test
the bank’s ability the various important aspects such as liquidity, fund mobilization,
debt to asset ratio, etc. must be properly studied and analyzed in order to understand
the strengths and weaknesses of the bank.
Financial analysis has been an important task for both shareholders as well as the
management of the bank. Financial analysis helps in identifying the financial strengths
and weaknesses of the bank during a certain period of time, based on the published
financial statements. Financial analysis provides an in depth and true understanding of
the problem and helps to possibly find its solutions. The present study is concerned
with the financial analysis of the liquidity and profitability position of CCBL. Some of
the major conclusions derived from the study are as follows:

 CCBL has a relatively healthy liquidity status which means currently it is not in
danger of making timely repayment of current liability.
 The ROA of CCBL is very poor which means the assets are not being properly
utilized to earn income. The Asset to Income ratio is not very favorable for the
bank.
 ROE of CCBL is however fairly well. This means the bank is making more
income from its shareholder’s investments.
 The EPS of CCBL shows the bank is moving on the right tracks and is making
more profit throughout the past 5 years. Compared to the starting year of the
study 2071/72 the EPS has almost tripled in value at the end of the study in the
years of 2074/75.
 In terms of dividends paid the company is paying maximum of 10% on the
profits made by the company. The rest of the money is being utilized for further
expansion of the company.
 In conclusion the CCBL is relatively stable and is currently profitable. Based on
the data from the past 5 years it can be estimated that the bank can see further
growth.

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4.3 Recommendation

The following recommendations can be considered to improve the liquidity and

profitability positions of the CCBL:

1) The liquidity position of the bank need not be changed however it is important
to not keep over or under reserve of current assets. While the bank is not in
danger of liquidity, the liquidity ratio fluctuates very much which can result in
quite difficult situations during problems.
2) More utilization of assets and selling the unutilized or unprofitable assets is
advised as the ratio of income to total assets is staggeringly low.
3) The dividend policy is comparatively beneficial to long term investors as the
company is more focused on expansion rather than investor’s return hence short
term investors are advised to look for better investment options.
4) Profitability situation of the company shows it is doing fairly well and is
advised to invest in other sectors such as hydropower, communication, food and
beverage, etc. to continue its profitability. Expanding only in banking sector can
be more risky and thus should be avoided if possible.

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Bibliography:
 https://www.merriam-webster.com/dictionary/budget
 Sheffrin, Steven M. (2003). Economics: Principles in Action
 “Budget,” in L. Côté and J.-F. Savard (eds.), Encyclopedic Dictionary of Public
Administration
 https://www.accountingtools.com/articles/profit-planning.html
 https://www.kullabs.com/classes/subjects/units/lessons/notes/note-detail/1302
 https://www.ukessays.com/dissertation/literature-review/finance/literature-review-of-
history-of-financial-ratios-finance.php
 https://www.investopedia.com/terms/r/ratioanalysis.asp
 Broachers provided by the Century Commercial Bank
 http://www.centurybank.com.np/main/annual_report
 Financial Ratio Analysis if NABIL Bank by Karuna Bajagain (2015)

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