A COMPARISON OF FINANCIAL PERFORMANCE OF PUBLIC AND

PRIVATE COMMERCIAL BANKS IN NEPAL THROUGH CAMEL MODEL

A Business Research Report

Submitted by:

Hari Narayan Mahaseth

KU Regd. No.: A025760-18

Batch: 2018-2022

Bachelor of Business Administration (BBA)

Nepal College of Management (NCM)

Submitted in

Partial Fulfilment of the requirements for Bachelor of Business Administration

(BBA) degree

Submitted to:

Research Department

Nepal College of Management

Affiliated to Kathmandu University

Dhobighat, Lalitpur

Nepal

Submitted on

September 20th , 2022

 ACKNOWLEDGEMENTS

The accomplishment and final outcome of this research project needed a lot of guidance
and assistance from many people. I would like to take this opportunity to express my
sincere appreciation to all those who provided me the guidance and opportunity to
complete this report.

The first acknowledgement for this report would go to the Kathmandu University
School of Management (KUSOM) for providing us with the opportunity to carry out
the research as a partial requirement of BBA degree to gain real experience through
application of theoretical knowledge.

I would like to express my special and deepest gratitude to our final year research
supervisor Mr. Pitri Raj Adhikari and former teaching assistant Mr. Shreeran Sah for
their immense support, guidance and motivation which helped me to coordinate,
develop and systematically synchronize this report. Special thanks to John Koirala and
Ujjwal Bhattrai for their immense support and guidance to develop systematically
synchronize this report.

My sincere gratitude to Prof. Dr. Sushil Bhakta Mathema, Principal of Nepal College
of Management (NCM), and Mr. Prem Prasad Silwal for all encouragement and
support. I would also like to express my sincere gratitude to all the staffs of NCM for
providing all the necessary books, literature search and information that helped to carry
out the research activities in a systematic way.

Finally, I would like to value the constant support and consolation of my loved ones;
my friends, family members, seniors and well-wishers for their help and moral support
during the study period. This research wouldn’t have been possible without their help
and participation.

Hari Narayan Mahaseth

Degree candidate

pg. I
 DECLARATION

I, Hari Narayan Mahaseth, the degree candidate, hereby declare that the work presented
in this report is a genuine work done originally by me under the closer guidance and
supervision of the respective Supervisor, following the stipulated guidelines and the
same report has not been submitted elsewhere for the award of any degree. All sources
of information referred in this work are acknowledged with reference to the respective
authors. I firmly understand that this document becomes a university property on its
acceptance and promise to abide by the respective norms of the university in this
respect.

Hari Narayan Mahaseth

Degree Candidate

pg. II
 RECOMMENDATION

This is to certify that Mr. Hari Narayan Mahaseth, has completed her Business Report
work entitled A COMPARISON OF FINANCIAL PERFORMANCE OF PUBLIC
AND PRIVATE COMMERCIAL BANK as a partial fulfilment of the requirements for
Bachelor of Business Administration (BBA) degree under our supervision following
the respective guidelines for the paper documentation. We, therefore, recommend the
report for acceptance and approval.

Mr. John Koirala Mr. Prem Prasad Silwal

Business Research Supervisor Research Head

pg. III
 CERTIFICATE OF ACCEPTANCE

Following a successful presentation and evaluation by the Research Evaluation

Committee, this report entitled A COMPARISON OF FINANCIAL PERFORMANCE
OF PUBLIC AND PRIVATE COMMERCIAL BANK submitted by Mr. Hari Narayan
Mahaseth has been accepted and forwarded to the University for awarding Bachelor of
Business Administration (BBA) degree.

Research Evaluation Committee

Mr. John Koirala Signature……………….

Business Research Supervisor Date…………………….

Mr. Prem Prasad Silwal Signature……………….

Research Head, Research Evaluation Committee Date…………………….

Prof. Dr. Sushil Bhakta Mathema Signature……………….

Chairman, Research Evaluation Committee Date…………………….

pg. IV
 ABSTRACT

The present study was conducted to meet the requirement of Bachelor in Business
Administration (BBA) program of Kathmandu University (K.U). The main intention of
conducting the present research was to analyse the effect of CAMEL model on
profitability of commercial banks in Nepal. Also, this research was conducted to gain
more knowledge regarding the reaction of investors toward share price.

The present research was conducted by using qualitative as well as quantitative method
followed by descriptive research to make brief and accurate study on selected variables
and pooled cross-sectional design as data are collected from Nepalese commercial bank
certified by NRB over the period of time. The present researcher will also use Casual
technique to study causal relationship between variables also referred as
interrelationship because they trace relationship among the facts obtained to gain in-
depth knowledge into the situation.

The paper investigates the relationship by using Descriptive Statistics, Correlation and
Regression. Among 26 commercial bank certified by NRB, the present researcher has
used 6 sample sizes of commercial bank certified by NRB. To conduct this study the
present researcher has examined the effect of CAMEL model (CAR, NPL, TOE/TA,
NIM AND LDR) on profitability. After analysis of the data the key findings of the
present study revealed that all factors like (CAR, NPL, TOE/TA, NIM AND LDR) have
positive relationship with ROA similarly, except NPL other factors like CAR, TOE/TA,
NIM and LDR have negative relationship with ROE in case of public owned
commercial bank. Whereas, In case of private owned commercial bank except CAR
and LDR the other variables such as NPL, TOE/TA and NIM have positive influence
on ROA and except CAR and LDR other variables such as NPL, TOE/TA and NIM
have positive influence on ROE.

pg. V
 Table of Contents

ACKNOWLEDGEMENTS ............................................................................................................... I
DECLARATION ............................................................................................................................ II
RECOMMENDATION ................................................................................................................. III
CERTIFICATE OF ACCEPTANCE .................................................................................................. IV
ABSTRACT................................................................................................................................... V
List of Figures .......................................................................................................................... VIII
List of Tables ............................................................................................................................. IX
LIST OF ABBREVIATIONS ............................................................................................................ X
CHAPTER I: INTRODUCTION ....................................................................................................... 1
1.1 Background of the study .................................................................................................. 1
1.2 Statement of Problem...................................................................................................... 2
1.3 Objectives of the Study .................................................................................................. 3
1.4 Significance of the study .................................................................................................. 4
1.5 Limitations and Delimitations of the Study ..................................................................... 4
1.6 Organization of Research ................................................................................................. 5
CHAPTER II:REVIEW OF LITERATURE.......................................................................................... 6
2.1 Review of Theoretical Perspective of the Study ............................................................. 6
2.1.1 CAMEL Framework.................................................................................................... 6
2.2 Related Theory ............................................................................................................... 10
2.2.1 Pecking Order Theory ............................................................................................. 10
2.2.2 Funds Management Theory .................................................................................... 11
2.3 Determinants of Commercial Banks profitability .......................................................... 12
2.3.1 Return on Assets ..................................................................................................... 12
2.3.2 Return on Equity ..................................................................................................... 13
2.4 Review of Related Studies ............................................................................................. 13
2.5 Conceptual Framework of the Study ........................................................................... 18
Chapter III:Research Methodology .......................................................................................... 20
3.1 Research Design ............................................................................................................. 20
3.2 Research Method ........................................................................................................... 20
3.2.1 Study Area and Population ..................................................................................... 21
3.2.2 Source of Information ............................................................................................. 21
3.2.3 Research Instrument and Data collection............................................................... 21
3.3 Sampling Techniques ..................................................................................................... 22

pg. VI
 3.4 Unit of Result Analysis ................................................................................................... 22
3.5 Data Analysis Method .................................................................................................... 23
3.5.1 Descriptive Analysis ................................................................................................ 23
3.5.2 Correlation Analysis ................................................................................................ 25
3.5.3 Inferential Analysis.................................................................................................. 26
3.6 Plan of Action ................................................................................................................. 27
CHAPTER IV: DATA PRESENTATION AND ANALYSIS ................................................................. 29
4.1 Data Analysis and Discussion ......................................................................................... 29
4.1.1 Component wise analysis of CAMEL Model............................................................ 30
4.1.2 The Regression Analysis .......................................................................................... 32
4.2 Summary of key findings ................................................................................................ 40
Chapter V:DISCUSSION, CONCLUSION AND RECOMMENDATION........................................... 42
5.1 Summary ........................................................................................................................ 42
5.2 Conclusion ...................................................................................................................... 43
5.3 Recommendation........................................................................................................... 43
5.4 Area for Further Study ................................................................................................... 44
5.5 Lesson Learnt ................................................................................................................. 45
References ............................................................................................................................... 46
Appendix .................................................................................................................................. 51

pg. VII
 List of Figures

Figure 1 Pecking Order Theory ................................................................................................ 10

Figure 2.2 Conceptual Framework of the Study ...................................................................... 18

pg. VIII
 List of Tables

Table 3 1 Three Public and Private Owned Commercial Banks ............................................... 22

Table 3 2 Correlation Coefficient Interpretation ..................................................................... 25
Table 3 3 Weekly work Plan ..................................................................................................... 28

Table 4 1Descriptive statistics of CAR, NPL, TOE/TA, NIM and LDR ....................................... 29
Table 4 2 correlation analysis of factor that effects financial performance of public owned
commercial bank in Nepal ....................................................................................................... 30
Table 4 3 correlation analysis of factor that effects financial performance of private owned
commercial bank in Nepal ....................................................................................................... 31
Table 4 4 Estimated relationship between ROA and CAMEL model of public commercial
banks in Nepal.......................................................................................................................... 33
Table 4 5 Estimated relationship between ROE and CAMEL model of public commercial
banks in Nepal.......................................................................................................................... 35
Table 4 6 Estimated relationship between ROA and CAMEL model of private commercial
banks in Nepal.......................................................................................................................... 37
Table 4 7 Estimated relationship between ROE and CAMEL model of private commercial
banks in Nepal.......................................................................................................................... 39

pg. IX
 LIST OF ABBREVIATIONS

KU: Kathmandu University

BBA: Bachelors in Business Administration

KUSOM: Kathmandu University School of Management

SPSS: Statistical Package of the social science

NCM: Nepal college of Management

N: Number

NRB: Nepal Rastra Bank

RBBL: Rastriya Banijya Bank ltd.

NBL: Nepal Bank ltd.

ADBL: Agriculture Development bank ltd.

NABIL: Nabil Bank ltd.

EBL: Everest Bank ltd.

NIBL: Nepal investment Bank ltd.

CAR: Capital Adequacy Ratio

NPL: Non-performing Loan

TOE/T: Total Operating Expenses to Total Assets

NIM: Net Interest Margin

LDR: Loan to Deposit Ratio

ROA: Return on Assets

ROE: Return on Equity

BFIs: Bank and Financial Institutions

FIs: Financial Institutions

ALCO: Asset-Liability Committee

pg. X
 CHAPTER I: INTRODUCTION

1.1 Background of the study

The banking sector is the foundation of the financial system, collecting savings from
surplus economic units in the form of deposits and distributing them to deficit economic
units in the form of loans and advances. As the banking sector has a major impact on
the economy as a whole, evaluation, analysis, and monitoring of its performance is very
important (Dash & Das, 2009).A robust financial system encourages investment by
facilitating the financing of profitable business opportunities, mobilizing savings,
effectively allocating resources, and facilitating the transfer of commodities and
services. According to several studies, McKinnon & Levine (1997) the effectiveness of
a financial system in lowering information and transaction costs is crucial in
determining the rate of savings, investment choices, technical advancements, and
consequently the pace of economic growth. Although market strength is required for
banking system stability, market competition increases efficiency, which is crucial for
growth (Northcott, 2004).
Financial ratio analysis, benchmarking, performance against budgeting, or a
combination of these approaches are typically used to measure the financial
performance of banks and other financial institutions (Avkiran, 1995). Performance of
banks is the ability to generate sustainable profitability, in plain accounting terms
(Rozzani & Rahman, 2013). A bank's capital is essential for a number of essential
functions, including starting up a new bank with the necessary resources, establishing
a foundation for development and expansion, protecting a bank from danger, and
preserving public trust in the bank's management and stockholders (Mishkin & Easkins,
2006)
In this financially competitive era, it is crucial to estimate the financial performance of
the banks, particularly for creditors, investors, borrowers, and other parties (Ozkan,
2019). Wellbeing of individual FIs influences the strength of monetary area. Miniature
and full scale factors influence the monetary strength of individual FIs. Political
strength and the genuine area development are significant large scale factors though
capital base, nature of resources, liquidity position, the board quality, market
responsiveness and income are miniature elements (Saunders & Marcia, 2004)
There are such countless strategies accessible today to assess financial execution of
banks and financial institutions. Among them, CAMEL model of financial analysis is

pg. 1
viewed as more effective. Under CAMEL model, six critical dimensions are used to
evaluate financial performance regarding bank’s operations and performance
(Sahajwala & Van den Berg, 2000). CAMEL is an successful instrument to dissect
financial execution for analysts and regulators (Barr, Killgo, Seims, & Zimmel, 2002).
Various aspects of a bank in light of different data are utilized under CAMEL model to
distinguish financial adequacy.
NRB (2022) the commercial banks in Nepal can be divided into two groups on the basis
of ownership, public and private banks. As of late-July 2022 there are 3 public banks
and 23 private sector banks. In terms of deposit mobilization, Rastriya Banijya Bank
Limited, a governmental bank, is the largest bank under government ownership.
Another public bank, Nepal Bank Limited, is owned by the Government of Nepal to
the tune of 60 percent. Similarly, 51 percent of the shares of Agriculture Development
Bank Limited(ADBL) are currently owned by the Government of Nepal. Local private
banks and international joint-venture banks are additional categories for private banks
in Nepal. Local private banks are those with local private investment, whilst joint-
venture banks are those with investments from both local private investors and foreign
financial institutions. There were 17 locally owned banks as of late-July 2022, along
with six private joint venture banks.
Hirtle & Lopez (1999) stress that CAMEL model is exceptionally secret to project
business system for the bank's senior administration and administrative staff. Cole &
Gunther (1998) done a concentrate as a trailblazer by utilizing CAMEL model in rating
bank's presentation. The study carried out by Gasbarro, Sadguna, & Zumwalt (2002)
and Baral (2005) demonstrated the viability of this model to break down financial
performance of commercial banks and financial institutions. This review, consequently,
endeavours to look at the financial performance analysis in light of CAMEL parts and
their impact on the profitability of the Nepalese BFIs.
Hilbers, Krueger, & Moretti (2000) the CAMEL framework considers six key
components of a financial institutions i.e. Capital adequacy, asset quality, management
soundness, earnings, liquidity, and sensitivity to market risk—as one regularly used
methodology for evaluating the health of specific institutions. has demonstrated that
specific macroeconomic patterns frequently come before banking crises. As a result,
assessments of financial soundness must take the big picture into account, especially an
economy's susceptibility to capital flow reversals and currency crises.
1.2 Statement of Problem

pg. 2
Financial performance is one of the most important objectives of financial management
because one goal of CAMEL model is to maximize the owner’s wealth and profitability
is very important determinants of performance. Variation of profits among banks
suggests that banks specific factors play crucial role in influencing banks’ financial
performance. It is therefore essential to identify what are these factors and how they
help banks to take actions that will increase their financial performance (Mallik, 2011).
The soundness of a financial organization is assessed based on its capital adequacy,
asset quality, managerial effectiveness, earnings, and liquidity (CAMEL). While some
financial institutions have an abundance of nonperforming assets, others have relatively
low capital adequacy ratios. The quality of the credit classification and provision of
some commercial banks also appears to be poorly managed by financial institutions'
systems. Financial statements are typically used to determine a company's profitability
situation, but it is important to consider if they are sufficient to convey the company's
entire performance.
As a result of the fact that private banks are performing better than public banks, the
present researcher has made the decision to ascertain why. In order to do that, the
present researcher is going to perform a CAMEL analysis on these banks, which is a
tool for figuring out how well banks are performing study examines the following
research questions:
a. What is the relationship between camel model and financial performance of
banks?
b. How Capital Adequacy ratio affects the financial performance of banks?
c. How does assets quality effect on financial performance of banks?
d. How management efficiency effects on profitability of banks?
e. How earning capabilities effects on financial performance of banks?
f. What are the effects of liquidity on profitability of banks?
1.3 Objectives of the Study

The primary objectives of the study is to analyse the bank performance on the basis of
CAMEL model with ROA and ROE (Profitability ratios). The objective is further
specified into specific objectives which are to:
• To examine the financial performance of selected commercials banks using the
CAMEL model.

pg. 3
 • To identify the relationship between the components of CAMEL model with
ROA and ROE of the selected commercials banks.
• To assess the mean difference of financial performance between the selected
public and private commercials bank by using CAMEL framework.
1.4 Significance of the study

Making financial decisions for a company enterprise requires careful consideration of

the financial condition and statements. Capital adequacy, Non-performing loan,
liquidity, earnings and profitability are all negatively impacted by poor financial
management. Periodic financial position assessments are necessary to ensure the
smooth operation of any firm of significant national concern. In order to assess the
financial condition of Nepalese commercial banks, the study was created. Every
organization has limited resources available, and these limited resources must be used
to achieve the company's goals. It is vital to analyse their current financial performance
in order to respond to the question. A good performance resembles a good synthesis of
all the elements. Consequently, the success of a policy, managerial ability, and the
mobilization of resources and assets will be reflected by the achievement.
In actuality, effective financial performance is a mirror that reveals the strengths and
weaknesses of the banking industry. Therefore, the effectiveness of a bank's
performance, not its establishment, is of highest concern. As a result, the study only
considers the financial performance of the commercial banks.
1.5 Limitations and Delimitations of the Study

This study has attempted to find out the soundness of financial performance of
commercial banks on the basis of CAMEL model in Nepal. Unlike other research, this
research have its own limitation and delimitation. The University has specified a certain
time frame to complete this research; hence with limited time frame and resources, this
research restrict to only the commercial bank of Nepal i.e. Class ‘A’. The further
following limitation about the present study can be set as:
• Research is based on the secondary data that is available on the official website
of NRB, SEBON, NEPSE, Sharesansar and respective commercial bank.
• Impacts of camel model on financial performance has been done by using only
limited number of banks and period for the study.
• It focus only quantitative method.

pg. 4
 • Researcher assumed that all other things remaining constant, CAMEL model
affecting on the performance of banks.
1.6 Organization of Research

This research has been organized in five distinctive chapters. First Chapter provides a
general introduction to the study. It contains general background, statement of the
problems, objective of the study, significance of the study and limitation of the study.
Second Chapter presents the theoretical analysis and review of the related and pertinent
literature available. It will include a discussion on the conceptual framework and review
of related studies highlighting on its relevant findings. Third Chapter describes the
methodology employed in preparing this study. It deals with research design,
population and sample, source of data for the study. It briefly mentions the data
collection and analysis technique and inherent limitation of such technique. Four
Chapter of study illustrates the collected data into a systematic format. The analysis of
these data is also included in this section. As well as, interpretation of analysis has also
been done in this section. The major findings of the study is presented in this chapter.
Last Chapter presents summary, conclusion and recommendation of the study. This
section incorporates an outlet for future research. Bibliography and appendix are
included at the end of the study.

pg. 5
 CHAPTER II:REVIEW OF LITERATURE

The primary purpose of conducting review of literature is to develop the theoretical

framework of study defining the concepts and terms in relation to the study. Review of
literature plays a principal role in every research at any levels since it provides through
introduction on the topic and presents all the analyses and findings of previous studies
which eventually help to establish a conceptual framework to govern the overall
research in a conceptually grounded manner.
To accomplish this purpose, the present researcher has focused on theoretical and
conceptual knowledge regarding CAMEL model affecting the financial performance of
Class ‘A’ bank in Nepal. For this the entire chapter has been further divided into four
sections where the first section focuses on review of theoretical perspectives related to
the present study followed by review of important policy documents that are relevant
to the study in the second section. Similarly, the third section of the chapter contains
similar review of related studies that are conducted in Nepalese as well as by
international scholars. Finally, after developing theoretical and conceptual framework
as well as development of semantic processing on the basis of related policy documents,
the present researcher will develop an own conceptual framework of the study in fourth
section. Conceptual framework serves as a basis of shaping the overall ongoing study.
2.1 Review of Theoretical Perspective of the Study

For the purpose of establishing understanding of the basic conceptual insights on

impacts of CAMEL model on financial performance of commercial banks in Nepal, the
present researcher found the works of (Gilbert, Meyer, & Vaughan, 2000) (McNally,
1996) (Bhandari, Kleff, & Weber, 2008) (Whalen, 1991) (Grier, 2007) (Wheelock &
Wilson, 2000) as more relevant resources. The detailed reviews of these work has been
presented in the subsequent part of this section.
2.1.1 CAMEL Framework
In 1988, the Basle Committee on Banking Supervision of the Bank of International
Settlements (BIS) suggested adopting the CAMEL criteria (capital adequacy, assets
quality, management quality, earnings, and liquidity) to evaluate FIs (ADB, 2002). In
1997, the sixth element, market risk (S), was added to CAMEL (Gilbert, Meyer, &
Vaughan, 2000). However, the majority of developing nations now evaluate the
performance of the FIs using CAMEL rather than CAMEL. Some central banks, such
as those in Kenya and Nepal, substitute CAEL for CAMEL.

pg. 6
A prominent technique for assessing the soundness of FIs is the CAMEL framework.
This method was created by the U.S banks' regulating bodies. This system is employed
by the Federal Reserve Bank, the Comptroller of the Currency, and the Federal Deposit
Insurance Corporation (McNally, 1996). The majority of countries' monetary
authorities use this system to assess an individual FI's state of health. Additionally, as
part of its surveillance activity, the International Monetary Fund evaluates the
soundness of the financial systems of its member nations using the combined indices
of individual FIs (Hilbers, Krueger, & Moretti, 2000).
1. Capital Adequacy
One of the key elements of the CAMEL model is capital adequacy. It's performed to
determine the bank's capacity to absorb operating losses. It protects the bank from going
bankrupt and maintains the depositors' trust in the institution. A strong capital base
allows the bank to maximize profits, while a weak capital base results in several faults
(Bhandari, Kleff, & Weber, 2008).
Bank capital is divided into two categories, Tier I and Tier II, in order to evaluate capital
adequacy. Paid-up capital, share premium, nonredeemable preference share, general
reserve fund, accumulated profit, capital redemption reserve, capital adjustment fund,
and other free reserve make up Tier I (core/primary) capital. To get core capital, the
amount of goodwill, fictitious assets, and investments in financial instruments issued
by an organized entity that exceeds the NRB-specified limit should be reduced.
Comparably, Tier II (supplementary) capital is made up of the total of the following
reserves: excess loan loss provision, investment adjustment reserve, exchange
equalization reserve, subordinated term loan, and assets revaluation reserve (NRB,
Unified directives. Banks and financial institution regulation department , 2019)
Commercial banks (Class A) need to maintain CAR 11% based on Capital Adequacy
Framework, 2015. Capital sufficiency can be assessed using several metrics, including
the core capital ratio (CCR), capital adequacy ratio (CAR), debt equity ratio, etc. CAR,
or total capital as a proportion of risk-weighted assets, is utilized in this study to
examine the capital adequacy status of BFIs.
2. Assets Quality

Asset quality is a key element of the CAMEL model used to examine management
evaluation and bank performance (Young, 1998). It serves as a measure of the financial
stability of banks (Whalen, 1991). Poor asset quality diminishes capital base and causes

pg. 7
financial issues. The majority of the asset side of the balance sheet is taken up by loans
and advances, and a sizable amount of financial institutions' income statements is made
up of the earnings from these loans and advances. Due to the fact that defaulted loans
do not generate money, they have a negative impact on a bank's earnings. Banks with
underperforming assets are frequently at risk for significant losses. the highest. The
maximum fund-based loan that can be given to one borrower is equal to 25% of that
borrower's primary capital. Similar to that, a bank may offer a non-fund basis loan up
to 50% of its core capital (NRB, 2019).

BFIs are required by NRB to distinguish between performing and non-performing

loans. Pass loan and watch list loan are both considered performing loans. Loans that
are current and past due for up to three months are classified as performing loans, while
those that are past due for longer than three months are classified as non-performing
loans. Three loan types fall under the heading of non-performing loans. They are
substandard, doubtful, and bad debt or loss. Financial institutions must retain a 1%
reserve for pass loans, 5% for loans on watch lists, 25% for substandard loans, 50% for
doubtful loans, and 100% for bad loans (NRB, Unified directives, 2016). General loan
loss provision and particular loan loss provision are the two terms used to describe loan
loss provisions set aside for performing loans and non-performing loans, respectively.
Indicators of the quality of BFIs' assets used by NRB include asset composition,
nonperforming loan to total loan ratio, and net nonperforming loan to total loan ratio.
The non-performing loan ratio, which measures non-performing loans as a proportion
of total loans and advances, is used in this study to evaluate the quality of the assets.

3. Management Efficiency

To measure the effectiveness and efficiency of the bank's management, management

efficiency is used. Any organization's capacity to handle its business affairs can make
the difference between success and failure. The organizational success will increase as
the managerial effectiveness does, and vice versa. There are numerous ways to assess
the bank's management effectiveness. Finding a reliable independent indicator is really
challenging. However, (Lane, Looney,, & Wansley, 1986) and (Wheelock & Wilson,
2000) incorporate measures of management efficiency that are also frequently used in
practice.

pg. 8
Expenses ratio, earning per employee, cost per loan, average loan size, credit to core
capital and deposit ratio can be used to evaluate management quality. Credit to core
capital and deposits ratio (CCD ratio) indicates the ability of the BFIs to convert the
deposits and core capital into high yielding advances. Hence, this study uses CCD ratio
(credit as a percentage of core capital and deposits) is used to evaluate management
efficiency.

4. Earning

It is used to assess the bank's capacity to generate enough revenue to satisfy the required
rate of return for capital providers and to explain how revenues will increase going
forward. Earnings that are stable and increasing help banks gain the trust of their
stakeholders (Grier, 2007). For financial institutions to fund asset growth, accumulate
sufficient reserves, and increase shareholder value, they must turn a respectable profit.
Financial distress and profitability have a inverse relationship. Commonly used
profitability indicators include return on assets (ROA), return on equity (ROE),
operating profit margin, net profit margin, and absolute measures like interest income,
net interest income, non-interest income, net non-interest income, non-operating
income, and net non-operating income. Profitability is mostly determined by return on
assets (ROA) and return on equity (ROE). In order to assess the profitability of BFIs,
this study looks at ROA (net income as a percentage of total assets) and ROE (net
income as a percentage of equity).

5. Liquidity

The term "liquidity" describes a bank's capacity to fulfil both its short-term
commitments and its own lending commitments. When depositors of FIs abruptly
withdraw their deposits, a liability side liquidity risk results, and an asset side liquidity
risk results from commitment holders abruptly requesting loans, respectively. Both
types of liquidity risk are undesirable for FIs (Jekinson, 2008). There is inverse
relationship between size of liquid assets and risk of distress (Chaplin, Emblow, &
Michael, 2000). Similarly, Arif & Anees (2012) provide empirical evidence on this.
Different ratios such as loan to total deposit ratio, cash and equivalents to total assets
ratio, cash and equivalents to total deposit ratio, NRB balance to total deposit ratio,
liquid assets to total deposit ratio are used to measure the liquidity position of BFIs.
The liquidity position of BFIs is measured using a variety of measures, including the

pg. 9
loan-to-total-deposit ratio, the cash and equivalents-to-total-assets ratio, the cash and
equivalents-to-total-deposit ratio, the NRB balance-to-total-deposit ratio, and the liquid
assets-to-total-deposit ratio. This study measures the ratio of total deposits to liquid
assets to assess the liquidity position. Cash balances, bank balances with NRB and other
BFIs, money at call, placements up to 90 days, and investments in government
securities are all considered liquid assets. Borrowings repaid within 90 days are
subtracted from liquid assets to determine net liquid assets (NRB, Unified directives,
2016).

2.2 Related Theory

2.2.1 Pecking Order Theory

According to the pecking order theory, a business should prioritize financing itself first
from retained earnings. A business should finance itself using debt if this source of
funding is not available. A business should only fund itself by issuing additional equity
as a last resort.

Internal Financing

External Financing
Investments 2
(Debt)

External Financing
(Equity)
Figure 1 Pecking Order Theory

As Camel model signals to the public how bank is performing, this pecking order theory
also signals to the public how the company is performing. ‘C’ in CAMEL model stands
for capital adequacy as well as this pecking order theory are using by company to

pg. 10
choose its capital structure. A company is strong if it can finance itself internally. A
company's management is sure that it can fulfil its monthly obligations if it finances
itself through debt. When a firm finances itself by issuing additional stock, it typically
sends out a bad signal since it means the company believes its stock is overvalued and
is trying to make money before the share price falls. Capital is known as blood of any
BFIs. And, each and every actions & decision of banks are depend on capital size and
structure.

2.2.2 Funds Management Theory

The funds management strategy, which currently predominates, was eventually formed
as a result of the development of liability management approaches, together with more
fluctuating interest rates and greater risk. This perspective emphasizes numerous
important goals in a more balanced way than traditional asset-liability management:

1. To accomplish the objective of the financial institution, management should

maintain as much control over the volume, mix, return, and cost of both assets
and liabilities as possible.
2. To ensure that asset management and liability management are internally
consistent and do not conflict with one another, management's control over
assets and liabilities must be coordinated. Maximizing the difference between
revenue and cost can help to reduce risk exposure. Effective coordination of
managerial assets and liabilities would also help.
3. Cost and revenue come from the asset and liability accounts on the balance
sheet, respectively. It is necessary to create management practices that optimize
profits and reduce service delivery expenses.

The traditional belief that loans and investments must make up the majority of a
financial firm's income has given way to the idea that financial institutions now sell a
variety of financial services, including credit payments, savings, financial advice, and
the like, all of which should be priced to cover their respective costs of production. As
much as profits from managing loans and other assets, income from controlling the
liability side of the balance sheet can help in achieving profitability goals. Many
financial institutions use an asset-liability committee (ALCO), which is often made up
of key officers from various departments, to carry out daily asset-liability management

pg. 11
(AML) tasks (Rose & Hudgins, 2014). CAMEL model components assets,
management, and liquidity can manage through this theory.

2.3 Determinants of Commercial Banks profitability

A commercial bank is a particular kind of bank that provides commercial loans, accepts
deposits, and sells basic investment securities. In addition to issuing overdrafts, bank
checks, executive bonds, instalment loans, mobile and Internet banking, merchant
banking, cash management, and treasury, commercial banks also engage in other
activities. A commercial bank's capacity to profitably compete depends on its
competitive advantage. The way the business reacts to external opportunities, technical
advancements, economic changes, and competition threats determines its competitive
advantage. The bank will have a competitive advantage if it takes advantage of the
chance and reacts to threats promptly. Bank profitability is influenced by both internal
and external variables. The profitability of a bank can be determined by its return on
total assets, or how much its assets have increased over a specific period of time, and
by its return on shareholders' equity, or how much shareholders expect to gain from
commercial banks over a specific period of time (Muiruri, 2016).

2.3.1 Return on Assets

One of the most popular methods of evaluating profitability is return on assets because
it considers both profit margin and asset turnover. Finding the operations' performance
is the core of the business. Every company enterprise engages in certain operations that
call for the proper management and investment. Investments are made in assembling
assets, and management assumes responsibility for all operations to guarantee that the
work is completed without incident. Various tools are used to measure performance,
and a report is then produced for various users. These are the indicators that demonstrate
how the total assets have fared over time. The computations can be performed at any
time during the financial year with the aim of monitoring performance.

By dividing net income by fixed assets and working capital, the term "RONA" - return
on net assets - is derived. The market is made up of an entire industry, and RONA is
regarded as a reliable indicator of how one company is doing in relation to rivals in the
same sector. It demonstrates how well the company has used its resources and how the
management is able to decide how to make those resources economically viable. If the

pg. 12
company is unable to do that in comparison to its competitors, it produces an obvious
result.

2.3.2 Return on Equity

A measure of profitability calculated by dividing net income by total equity is called
return on equity (ROE). The company derives the income after engaging in a number
of business activities, and it is a significant sum. It is a complicated process, and not all
outcomes are favourable; the business may also experience losses. The ROE also turns
negative at that point. The proposed dividend for the period is the return that is fixed
for equity shareholders, and once it is proposed, it cannot be changed. The corporation
must take a close look at all the many factors that can always produce a profit.
Unavoidable and substantial expenditure has already been made. A company's financial
budget must include a sizable amount for the fixed assets, and it is crucial to have them
fixed and maintained. The corporation must maintain the different present assets that
are readily available. the amount needed to cover liabilities as they become due and the
cash on hand. For the business, each of these factors is crucial.

The corporation cannot ignore the significance of the RETURN ON EQUITY going
forward. The company must be confident in how its finances are presented to the
market, but window dressing is never acceptable. It's never a good idea to represent a
financial statement fraudulently in order to make it look appealing. Annual financial
statements must be distributed to shareholders and provide a brief summary of the
return on equity. The derivation of return on equity makes it simple to create graphs
and do trend analysis. A layman scan ensure that the contract they have entered into is
profitable or not by understanding the trend analysis' language that is simple to
understand. They are able to be certain about the same owing to the annual sharing of
financial statement performance (IntroBooks., 2018).

2.4 Review of Related Studies

This study particularly focuses on the effects of CAMEL framework on profitability of

commercial banks in Nepal. In Nepalese context, only few studies related to Camel
method has been conducted. In international level, various researches have been
performed associated to the CAMEL model. Among them the present researcher
reviewed the work of (Hirtle & Lopez, 1999), (Prasuna, 2004), (Mathuva, 2009), (Liu,
2011), (Azizi & Yusef, 2014), (Gupta, 2014), (Gumrah, 2016), (Singh & Rastogi,

pg. 13
2017), (Ozkan, 2019), (Yagli, 2020), (Nguyen, Nguyen, & Pham, 2020), (Saha &
Bishwas, 2021), (Baral, 2005), (Jha & Hui, 2012), (Sapkota, 2012), (Maharjan, 2016),
(Pradhan & Parajuli, 2017), (Bhattarai, 2018), (Thapa, 2018), (Gautam, 2020), (Hamal
& Adhikari, 2020).

Hirtle & Lopez (1999) analysed the value of prior CAMEL ratings for assessing banks'
present situations. They boasted that earlier CAMEL ratings' private supervisory data
gave them further understanding of the current state of banking system. According to
these academic investigations, it has been established that using CAMEL ratings to
summarize private supervisory information is an efficient technique to supervise the
health of banks.

Prasuna (2004) used the CAMEL technique to analyse the operation of Indian banks
from 2003 to 2004 in the study "Performance Snapshot 2003–2004." The study came
to the conclusion that consumers benefited from competition because it made the best
services and facilities available to them and allowed them to negotiate on some issues.

Mathuva (2009) studied the connection between profitability, capital adequacy ratio
(CAR), and cost income ratio (CIR) from 1998 to 2007. The research found that capital
adequacy had different impacts on the bank's profitability.

Liu (2011) conducted a study to ascertain how CAMEL variables affected bank
performance in the Chinese banking industry. Capital adequacy, asset quality,
management, earnings, and liquidity were taken as independent variables, while return
on assets and return on equity were taken as dependent variables. To investigate the
link between the dependent and independent variables, multiple linear regression
analysis was used. He came to the conclusion that the key determinants of return on
assets are the capital adequacy ratio, NPL to total loans ratio, costs to income ratio, net
interest rate margins, and loans to deposits ratio based on his investigation. Similar to
this, the key determinants of return on equity are the costs to income ratio, the operating
expenses to assets ratio, and the loans to deposits ratio. Azizi & Yusef (2014) studied
Mellat Bank's financial performance using the CAMEL model. They came to the
conclusion that there is a positive, significant relationship between earnings, managerial
quality, and the profitability of the bank. However, there is no connection between the
financial performance of a bank and asset quality or capital adequacy. This finding
contradicted the findings of (Liu, 2011).

pg. 14
Gupta (2014) attempted to assess the performance of Indian public sector banks using
the CAMEL approach. Secondary data was gathered from various published sources
from 2009 to 2013. The ratios were computed for each individual component of the
CAMEL model. The banks were ranked based on the ratios calculated for each
individual constituent of the CAMEL model. On the basis of individual ranking, group
composite rank was computed for all model components. According to the findings,
Andhra Bank ranked first out of 26 banks, while Bank of Baroda ranked second. It was
also revealed that United Bank of India was ranked last out of all the banks studied.

Gumrah (2016) conducted a study on the performance evaluation of banks in Turkey

and Malaysia. Financial ratios were used as evaluation factors, and the TOPSIS method
was used from 2010 to 2013. According to the findings, participation banks operating
in Turkey ranked among the top three in terms of performance.

Singh & Rastogi (2017) used the CAMEL model, which is based on a longitudinal
research, to examine the performance of banks in the public and private sectors. The
study was carried out on the same set of sample banks after a five-year gap. The study
demonstrated that there is no consistency in financial success over a five-year period.
HDFC Bank, PNB, Axis Banks, and SBI now have different rankings.

Ozkan (2019) used the CAMEL rating system to analyse the financial performance of
Turkish banks. In this context, a comparative analysis was carried out using data from
five participation banks from 2016 to 2018. In conclusion, the banks with the best
financial performance were Vakf, Kuveyt Turk, and Ziraat participation banks, while
Turkey Finance and Albaraka Turk participation banks had the worst financial
performance during the period.

Yagli (2020) compared state participation bank performance to private participation

bank performance. The performance indicators were first determined using the
CAMEL rating system, and Turkish participation banks were then ranked based on their
relative performance using the TOPSIS method. Based on the findings, state
participation banks outperform private participation banks.

Nguyen, Nguyen, & Pham (2020) examined the performance of Vietnam banks, they
found that, with the exception of earning ability, all banks' performances are
significantly influenced by CAMEL components.

pg. 15
Saha & Bishwas (2021), research has shown that ROA is statistically influenced by
loan loss provision, bank size, and leverage ratio, but not by macroeconomic factors,
which are not statistically significant.

Few studies have been done on the financial analysis of Nepalese banking firms using
the CAMEL framework in the context of Nepal.

Baral (2005) examined the financial health of joint venture banks in Nepal using the
CAMEL framework. Three joint venture commercial banks were chosen for the study's
purposes, and data was gathered for the years 2000–2004. Based on the findings, joint
venture banks in Nepal were in a better financial condition than other commercial banks
in terms of asset quality, management skill, and revenue potential. Even though these
banks had adequate capital, their capital base in relation to risk-weighted assets was
insufficient to handle balance sheet shocks. Joint venture banks maintained relatively
strong liquidity positions, which had a negative impact on their profitability.

Jha & Hui (2012) used the CAMEL model to examine the financial performance of
Nepal's public, joint venture, and private sector commercial banks. They found that
public sector banks outperform private sector and joint venture banks in terms of
financial performance. Private sector banks are just as likely as joint venture banks. The
regression analysis revealed a significant relationship between capital adequacy ratio
(CAR), interest expenses to total loan, and net interest margin (NIM) and return on
assets, ROA. Similarly, the capital adequacy ratio has a significant impact on return on
equity, or ROE.

The banking industry's overall performance in the subsequent fiscal year 2011/12 was
satisfactory, with total assets increasing by 23.04 percent, compared to 10.17% growth
the previous year; commercial banks' capital adequacy position also improved
significantly (Sapkota, 2012).

Maharjan (2016) examined the impact of bank-specific micro variables and

macroeconomic variables on Nepalese commercial bank profitability from 2009 to
2014. He came to the conclusion that capital adequacy and liquidity position have a
significant impact on profitability. The findings revealed a positive relationship
between capital adequacy, credit risk, and bank size and return on assets, return on
equity, and net interest margin.

pg. 16
Pradhan & Parajuli (2017) studied how the performance of Nepalese commercial banks
was affected by capital adequacy and cost income ratio. They identified a positive
correlation between bank size and return on asset (ROA). On the other side, capital
adequacy and ROA have a negative relationship. This finding was totally opposite to
the findings of (Maharjan, 2016). The results also revealed a positive relationship
between capital adequacy, bank size, and debt to equity ratio and ROE.

Thapa (2018) examined the comparative financial analysis of RBBL and NIBL by
using CAMEL model, the results show that the selected banks met the NRB's core
capital ratio standard. The decreasing trend of the non-performing loan to asset ratio
indicated that NIBL's asset quality was good during the study period. The total expenses
to total income ratio was reduced, indicating that the management efficiency of all
RBBL was good, with a large positive gap between income per employee and expense.
The majority of NIBL and RBBL's total income has been covered by interest income.
The average ROA of NIBL was higher than that of RBBL. It indicates that NIBL is
more productive. Both banks' ROEs were satisfactory, but NIBL's should be higher.
Since the first fiscal year, the net income to total loan and advance ratio of banks has
fluctuated, indicating the weak earning power of both banks and the need to improve
it. The liquidity ratios of NIBL and RBBL were satisfactory and met the NRB standard.

Bhattarai (2018) examined the effect of bank-specific and macroeconomic variables on

bank performance, or ROA, using regression models. He concluded that bank-specific
variables have a greater influence on ROA than macroeconomic variables.

Gautam (2020) attempts to examine the financial performance and factors influencing
financial performance of Nepalese financial depositary institutions in the framework of
CAMEL. The relationship between the variables was evaluated using both descriptive
and pooled regression analysis. Descriptive analysis reveals that financial institutions
in each category meet the NRB's capital adequacy standard. Finance companies rank
first in terms of capital adequacy and earnings, development banks rank first in terms
of asset quality, and commercial banks rank first in terms of management efficiency.
When compared to other types of financial institutions, finance companies store a lot
of liquidity. According to the regression analysis, return on assets (ROA) has a
significant positive relationship with capital adequacy and ROE, but ROA
has significant negative relationship with asset quality. Return on equity, or ROE, has

pg. 17
a significant positive relationship with asset quality and ROA but ROE has significant
negative relationship with capital adequacy. Capital adequacy and asset quality are
important factors in maximizing financial institutions' ROA and ROE.

2.5 Conceptual Framework of the Study

The conceptual framework should be developed in the context of the study by stating
the dependent variables and independent variables and demonstrating their relationship
(Fauzi & Pradipta, 2018). This section comprises several conceptual model related to
effects of CAMEL model on profitability in the foundation and conceptualization of
the study. Various conceptual framework developed by different scholars are discussed
in this section.

On the basis of overall work performed the present researcher has developed a
conceptual framework to see the research in a more precise and exceptional way. ROA
and ROE are taken as independent variables and Capital adequacy, Asset quality,
Management efficiency ,Earning and Liquidity are taken as the independent variables.

Independent Variables Dependent Variables

Capital Adequacy

Assets Quality

Management Efficiency
Return on Assets
Return on Equity

Earning

Liquidity pg. 18

Figure 2.2 Conceptual Framework of the Study

As this study main aim is to find out the CAMEL model affecting the financial
performance of commercial banks in Nepal.. So, the present researcher offers the
number of affecting variables into the alternative hypothesis to confirm the statistical
significance of the association between different selected variables of the study. They
are listed below:
H1: There is significant relationship between capital adequacy ratios and financial
performance of the banks.
H2: There is significant relationship between asset quality ratios and financial
performance of the banks.
H3: There is significant relationship between management efficiency ratios and
financial performance of the banks.
H4: There is significant relationship between earnings ratios and financial performance
of the banks.
H5: There is significant relationship between liquidity ratios and financial performance
of the banks.

pg. 19
 Chapter III:Research Methodology

The main purpose of preparing this chapter is to provide theoretical and systematic
analysis of the methodological approaches, tools and techniques applied in the study.
This chapter basically focuses on research design used in this study. It explains samples
and selection process, nature of source of data and data collection, data analysis
procedures and test statistics that were used in the study.
In the first section, the present researcher has presented research design related to
present research. In the second section of the chapter, the present researcher has
presented the research method including study of area and population, source of
information, and research instrument are used to execute the present research. In the
third section of the chapter, the present researcher has summarized the sampling
strategies in this study. The chapter along with discussion on unit of analysis in the
fourth section. In fifth section, the present researcher describe the data analysis
methods. Finally, sixth sections present the plan of action .
3.1 Research Design

Research design is the essential part of the research since it helps to show the blue print
of the overall report. The descriptive research design used by the present researcher.
Descriptive design is a scientific method for gathering information without altering or
influencing the environment in any way. Descriptive research is used to demonstrate
associations or relationships between variables. According to (Cooper & Schilndler,
2003), a descriptive study relates and measures the cause and effect relationship
between variables. This research design is appropriate because the study planned to find
the effects of CAMEL model on financial performance of commercial banks in Nepal.
Data has been collected from financial statements of commercial banks in Nepal. The
study period of interest was of ten years i.e. from 2011/12 to 2020/21. Quantitative
research involves both collecting and analysing numerical data. So, we can construct
dependent and independent variable to find the relationship between them by using
different statistical tools like Regression and Correlation Analysis.
3.2 Research Method

The research methods are strategies or techniques used in data collection or analysis to
identify new information or to create better understanding of a topic. There are various
types of research methods that use different data collection tools. In this section we are

pg. 20
going to discuss on the study area and population, sampling techniques, research
instrument and so on.
3.2.1 Study Area and Population
The population of interest for this study was all the Class ‘A’ banks operating in Nepal
which are Certified by NRB. There are altogether 26 commercial banks in Nepal after
merger and acquisitions. Till now, there are 3 public banks listed to NRB whereas 23
private banks are listed in NRB. All commercial banks have been regularly submitting
the financial statements since last 10 years are taken for the study. The study has used
data only from six commercial banks which are established before 2000 A.D.
Furthermore, because every organization cannot study in such a short amount of time,
the researcher has concentrated on companies that have current data on their websites.
3.2.2 Source of Information
The secondary data collection was performed by the present researcher. The secondary
analysis of data can be done by observing the past journals, research papers, articles,
review etc. Several secondary sources have been used by the researcher to collect the
data mentioned below:
❖ NRB Bulletin (Published by the central bank of Nepal)
❖ Official website of NEPSE
❖ Annual audited financial statements published by respective banks
❖ Official website of Sharesansar
❖ Yearly economic Survey
❖ Published text-book, journal and articles
❖ Unpublished Thesis
The researcher has collected the data of each commercial bank which are selected for
sample by visiting the NRB Bulletin. The data has been collected on an annual basis in
order to analyse the impacts of CAMEL model on profitability of commercial banks.
Data was collected for the period of 2011/12 to 2020/21.
3.2.3 Research Instrument and Data collection
The study relied on secondary data. The information is going to be gathered from the
selected banks’ annual report. The focus of the current researcher is solely on Nepal’s
commercial banking industry. There were 26 participants in the study overall, and six
commercial banks were chosen. Among six banks , three public (government) owned
and three private owned commercial banks were used as sample of this study. For

pg. 21
purposes of convenience, the study was conducted utilizing information gathered from
the commercial bank of the Kathmandu valley. They are in the following table :
S.N. Symbol Public Owned Symbol Private Owned
1. RBBL Rastriya Banijya Bank Ltd. NABIL Nabil Bank ltd.
2. NBL Nepal Bank Limited NIBL Nepal Investment Bank ltd.
3. ADBL Agriculture Development Bank EBL Everest Bank ltd.
ltd.
Table 3 1 Three Public and Private Owned Commercial Banks

In this way total sample size of this study are 6, which has guided the entire study.
3.3 Sampling Techniques

Non probability sampling was used to conduct the current study. Because historical
data for each firm were not available due to a poor information system, only those
companies whose data were easily accessible and convenient to the researcher were
considered in the sample size, so the present researcher used convenient sampling of
non-probability sampling. Based on Ownership structure i.e. public and private owned,
banks were selected. Banks with a short period of operation have been excluded due to
a lack of availability of the required data.
3.4 Unit of Result Analysis

The unit of analysis is the primary entity being studied. The "what" or "who" is being
researched. The individual participant, object, or location on which the measurement is
taken is referred to as a population element; it is the unit of study. (Cooper & Schilndler,
2003).
The present researcher was concerned with the selection and measurement of time
series data from 2011/12 to 2020/21 as public and private owned commercial bank
certified by NRB in Nepal. Subsequently, the present researcher has taken annual
reports of the commercial Banks, previous researches and various theoretical researches
as the dominant base for data presentation and analysis to recognize the effects of
CAMEL framework on the profitability of banks, the researchers has based the analysis
in to these financial tools: Capital Adequacy ratio(CAR), non-performing loan
ratio(NPL), total operating expenses to total assets ratio (TOE/TA), net interest margin
ratio(NIM), and Loan to deposit ratio(LDR) as independent variables whereas Return
on Asset(ROA) and Return on equity(ROE) used as tool to measure the profitability.

pg. 22
3.5 Data Analysis Method

The information examination segment of an exploration paper is where the scientist

presents their discoveries and deciphers the information they have gathered. This is
typically finished through measurable methods, but can likewise incorporate subjective
information (Labani, Wadhw, & Asthan, 2017) . The research has used descriptive
analysis, correlation analysis and regression model in order to know the significance of
independent variables on dependent variables. For data analysis, the research used
software such as SPSS and Microsoft Excel. Microsoft Excel was used for data entry
and tabulation. Whereas this section will briefly explain descriptive and inferential
analysis.
3.5.1 Descriptive Analysis
This study has used the summary of descriptive statistics associated with dependent and
independent variables of sample of selected Commercial banks. It is used to interpret
data and helps to explain, view or summarize data in a concise way so that patterns can
emerge from the data (Kaur, Stoltzfus, & Yellapu, 2018) . The descriptive study
such as mean, maximum, minimum, standard deviation and coefficient of variation of
the variables as CAR,NPL, TOE/TA, NIM, LDR, ROA and ROE have been used to
describe the characteristics of sample commercial banks during the period of 2011/12
to 2020/21.
Statistical Tools
Various statistical tools are used for the study down the conclusions more reliable
according to the available financial data. For this, following are the statistical tools
used.
Arithmetic Mean (Average):

Average is statistical constants, which enable us to comprehend in a single effort of the

whole. It represents the entire data by a single value. It provides the gist and gives eagle
view to the huge mass of unwieldy numerical data Invalid source specified.. It is
calculated as:

𝛴𝑥
𝑥̅ = 𝑛

Where,

𝑥̅ = Arithmetic Average

pg. 23
∑x = Summation for total values of the variable/observation

N = Number of items

Standard Deviation (S.D):

S.D is defined as the positive square root of the mean of the square of the deviations
taken from the arithmetic mean. It is denoted by ‘sigma.’

𝛴(𝑥−𝑥̅ )²
S.D (𝜎) = √ 𝑁−1

Where,

𝑥̅ = mean

N = Number of items

Coefficient of Variation (C.V):

C.V is an independent unit. Two distribution can be bitterly compared with the help of
C.V for their variability. The series for which the co-efficient of variation is greater is
said to be more variable or conversely, less consistent, less uniform, less stable, or less
homogeneous. On the other hand, the series for which co-efficient of variation is less
is said to be less variable or more consistent, more uniform, more stable or more
homogeneous.
𝜎
C.V =𝑥̅

Where,

C.V= coefficient of variation

𝜎 = Standard deviation

𝑥̅ = mean

Coefficient of Determination:

The coefficient of determination is the measure of the degree of linear association or

correlation between two variables, one of which happens to be independent and other
being dependent variable. In other words, coefficient of determination measures the
percentage of total variation in dependent variable. The co-efficient of determination

pg. 24
can have value ranging from zero to one. Coefficient of determination is the square of
the co-efficient of correlation.

Symbolically,

R2 =r2

Where,

R2 = coefficient of Determination

R= coefficent of Correlation

3.5.2 Correlation Analysis

The ‘correlation coefficient’ was coined by Karl Pearson in 1896. Accordingly, this
statistic is over a century old, and is still going strong. It is one of the most used statistics
today, second to the mean. The correlation coefficient's weaknesses and warnings of
misuse are well documented. The correlation coefficient, written as r, measures how
strongly two variables are related in a linear or straight-line fashion. Because the
linearity assumption for the well-known correlation coefficient is not verified, it is
frequently utilized incorrectly. Theoretically, the correlation coefficient can, by
definition, take on any value in the range of +1 to -1, including the end values +1 or -
1.

Regression and correlation are two distinct yet complementary approaches. Roughly
speaking, correlation is used to assess the strength of a relationship while regression is
used for prediction (which does not extend beyond the data utilized in the research).
There are instances where the x variable is a random covariate to the y variable rather
than being fixed or readily selected by the experimenter.

Table 3 2 Correlation Coefficient Interpretation

Size of Correlation Interpretation
1 Perfect Positive/Negative Correlation
± .90 to ± .99 Very High Positive/Negative Correlation
± .70 to ± .90 High Positive/ Negative Correlation
± .50 to ± .70 Moderate Positive/Negative Correlation
± .30 to ± .50 Low Positive/Negative Correlation
± .10 to ± .30 Very Low Positive/Negative Correlation
± .0 to ± .10 Markedly Low and Negligible Positive/Negative Correlation

Source: Google

pg. 25
A correlation of -1.0 indicates a perfect negative correlation, and a correlation of 1.0
indicates a perfect positive correlation. If the correlation coefficient is greater than zero,
it is positive relationship. Conversely, if the value is less than zero, it is a negative
relationship.

3.5.3 Inferential Analysis

Inferential examination assists with dissecting test information to expect and gauge
future judges by utilizing an irregular example of information from a populace to depict
and pursue decisions about that populace Invalid source specified.. Inferential statistics
are utilized in this review to make determinations that reach out past the quick
information, endeavoring to derive what the populace could think in view of the
example information. Accordingly, inferential insights depend on proper testing
procedures to guarantee extensive portrayal of the number of inhabitants in
interestInvalid source specified.. Inferential measurements are utilized to draw
surmising from our subtleties to additional overall conditions, while graphic insights
are utilized to make sense of what's happening in our information basically. It is utilized
to analyze connection between at least two factors and permits location of huge or little
distinction in factors or relationships between factors pertinent to explore questions.
The Overall Direct Model, an overall group of factual models, is the wellspring of the
majority of the essential inferential insights Invalid source specified.. Depending on
their intended intent, these assessments can be divided into three basic categories:
assessing differences, testing relationships and making predictions. Several software is
used for inferential statistics such as MS Excel, SPSS and AMOS for data analysis.

Regression Analysis

Regression Analysis is used to estimate the likely value of one variable from the known
value of the other variable i.e. in regression analysis we establish a kind of average
irreversible functional relationship between the two variables. The cause and effect
relationship is clearly indicated through regression analysis. In other words, regression
analysis is a mathematical measure of the average relationship between two or more
variables in terms of original units of data. There are two type of variables in regression
analysis-dependent variable & independent variable. The variable whose value is
influenced or is to be predicted is called dependent variable whereas the variable which
influences the value or is used for prediction is called independent variable. The

pg. 26
 dependent variable is also known as regressed or explained variable while the
independent variable is called as repressor or predictor or explanatory variable.

Regression equation

Y = b0+b1x1+b2x2+b3x3+………+ bnxn +ε

Where,

Y = Dependent Variable

B0 = Constant/the intercept point of the regression line

X1 = Independent Variables

N = number of firms

E= the error item

3.6 Plan of Action

The present researcher will work according to a schedule in this study. Work is
carefully structured in various segments to ensure that this research project is completed
on time. This Gantt chart helps in the efficient flow of work for task completion within
the time constraints. The following table shows the predetermined plan of action for
overall research:
Table 3.3: weekly work plan
Cc Activities Weeks

1 2 3 4 5 6 7 8 9 10 11 12

1 Explore and finalize the area of

research.

2 Perform preliminary review of

literature

3 Design the research

4 Final review of literature

pg. 27
5 Develop survey questionnaire

6 Administer the research

7 Perform data coding & entry

8 Verify &refine the data

9 Perform data presentation & analysis

10 Conduct needs based statistical testing

11 Produce the first draft of study report

12 Perform editing & refinement of the

draft report

13 Make a flash presentation to collect

feedback

14 Incorporate feedback & produce final

report for university submission

Table 3 3 Weekly work Plan

The vertical axis in the above figure represents 14 different tasks to complete, and the
horizontal axis represents approximately 12 weeks of time. This chart provides
information about task organization and the time required to complete those tasks.

pg. 28
 CHAPTER IV: DATA PRESENTATION AND ANALYSIS

This chapter presents the data analysis based on the financial performance of the six
sample banks certified by NRB, over the period of 10 years from F/Y 2011/2012 to F/Y
2020/2021. For this, the overall chapter has been divided into two main sections. The
first section of the chapter presents with analysis which uses the regression and
correlation analysis to examine the effects of CAMEL model on the financial
performance of the commercials bank in Nepal. The second section deals with the
summary of the key findings.

4.1 Data Analysis and Discussion

This section deals with the effect of Camel Model ( CAR, NPL, TOE/TA, NIM, and
LDR) on the financial performance of ‘ Public’ and ‘Private’ owned of Class ‘A’ bank
in Nepal.

Table 4 1Descriptive statistics of CAR, NPL, TOE/TA, NIM and LDR

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

CAR 60 -9.77 20.41 12.1697 5.44656
NPL 60 .12 8.98 2.8200 2.03571
TOE/TA 60 .91 9.14 4.6277 2.13998
NIM 60 6.94 15.47 10.5333 1.94689
LDR 60 46.08 104.06 76.4562 12.04379
ROA 60 .30 3.32 1.9692 .69185
ROE 60 -361.36 410.63 21.8952 73.11717

Table 4.1 shows the descriptive statistics of 6 sampled commercial banks certified by
NRB from F/Y 2011/12 to F/Y 2020/2021. Descriptive statistics shows that, the mean
of the CAR is 12.1697 with standard deviation of 5.44656 and ranges from -9.77 to
20.41. This implies that, value of CAR can vary on both sides by 5.44656 and the mean
of the NPL is 2.8200 with standard deviation of 2.03571 and ranges from 0.12 to 8.98
which means the value of NPL can deviate on both sides by 2.03571. Similarly,
TOE/TA has mean value of 4.6277 and standard deviation of 2.13998 ranging from
0.91 to 9.14 which means the value can be deviated by 2.13998. Likewise, the mean

pg. 29
 of the NIM is 10.5333 with standard deviation of 1.94689 ranging from 6.94 to 15.47
which means the value of NIM can deviate on both sides by 1.94689. Finally, LDR has
mean value, standard deviation and minimum and maximum range of 76.4562,
12.04379, 46.08 to 104.06 respectively shows that minimum and maximum value can
deviated by 12.04379.
4.1.1 Component wise analysis of CAMEL Model
Correlation among CAMEL model and financial performance is explained in this
section and presented in table 4.2 and table 4.3. The correlation coefficients reveal the
degree of relationship between financial performance and variables affecting the
financial performance of the sample banks. The value of correlation coefficient ranges
from -1 to +1.

The table shows bivariate pearson’s correlation coefficient for the dependent and
explanatory variables employed in this study. The sample consists 60 bank years from
the annual report of certified banks by NRB for the period of 2012 to 2021. The CAR,
NPL, TOE/TA, NIM, LDR, ROA and ROE are presented here as defined in table 4.1.

Table 4 2 correlation analysis of factor that effects financial performance of public owned commercial bank in Nepal

Correlations
CAR(%) NPL(%) TOE/TA(%) NIM(%) LDR(%) ROA(%) ROE(%)

CAR(%) 1
NPL(%) -.420* 1
TOE/TA(%) .193 .360 1
NIM(%) .136 .377* .870** 1
LDR(%) .858** -.134 .531** .479** 1
ROA(%) .572** .094 .196 .271 .607** 1
ROE(%) -.227 .232 -.144 -.143 -.208 .044 1
*. Correlation is significant at the 0.05 level (2-tailed).
**. Correlation is significant at the 0.01 level (2-tailed).

Table 4.2 explains the correlation between factors affecting financial performance of
public owned commercial bank in Nepal. The major focus is given to CAR, NPL,
TOE/TA, NIM, LDR, ROA and ROE. Here we can observe that NIM and TOE/TA are
highly positive correlated with correlation score of 0.870. Similarly, CAR and LDR are

pg. 30
 also highly positive correlated with correlation score 0.858. Whereas, CAR and NPL
has low negative correlation with each other with score of -0.420.The correlation
between ROA with CAR and LDR has moderate positive correlation with score of
0.572 and 0.607 respectively whereas it can be examined that ROA and NPL have
markedly low and negligible positive correlation with correlation score of 0.094.
Likewise, the correlation between ROE with CAR, TOE/TA, NIM and LDR have very
low negative correlation with correlation score -0.227, -0.144, -0.143 and -0.208
respectively whereas it can be examined that ROE and ROA has markedly low and
negligible positive correlation with score of 0.044.

Table 4 3 correlation analysis of factor that effects financial performance of private owned commercial bank in
Nepal

Correlations
CAR(%) NPL(%) TOE/TA( NIM(%) LDR(%) ROA(% ROE(%)
%) )
CAR(%) 1
NPL(%) -.338 1
TOE/TA( -.142 -.456* 1
%)
NIM(%) -.470** .429* .230 1
LDR(%) .320 -.439* .427* .060 1
ROA(%) -.478** .129 .085 .296 -.299 1
ROE(%) -.665** .008 .165 .288 -.258 .669** 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

Table 4.3 explains the correlation between factors affecting financial performance of
private owned commercial bank in Nepal. The major focus is given to CAR, NPL,
TOE/TA, NIM, LDR, ROA and ROE. From the table, it can be implied that among
seven factors, ROA is found to be moderate positive correlation with ROE i.e. 0.669
whereas it can be examined that ROE and CAR has moderate negative correlation with
correlation score of -0.665.

pg. 31
Similarly, ROA with CAR and LDR have low negative correlated with the correlation
score of -0.478 and -0.299 respectively whereas ROA with NPL and NIM have very
low positive correlation with score of 0.129 and 0.296 respectively.
Likewise, LDR with CAR and TOE/TA have low positive correlation with correlation
score of 0.320 and 0.427 respectively whereas LDR has low negative correlation with
NPL i.e. -0.439. Similarly, CAR with NPL and NIM have low negative correlation with
score -0.338 and -0.470 respectively. NIM and TOE/TA has very low positive
correlation with each other.
Analysing the above tables, the relationship between NIM with TOE/TA and CAR with
LDR of public owned bank is highly positive where the relationship between the same
variables in private owned bank have very low positive correlation. Likewise, the
relationship between ROA with CAR and LDR of public bank is positive where the
relationship between the same variables in private bank is negative.
4.1.2 The Regression Analysis
The univariate and multivariate regression of the specific variables on the bank
financial performance have been analysed in terms of return on asset and return on
equity. The explanatory variables used in this study impact the financial performance
which are presented in the table below.
The table reveals the result of regression of various components of CAMEL model on
return on assets and return on equity of public and private owned commercial banks in
Nepal. The first five models include one of five independent variable or explanatory
variable at a time and model 6 include two independent variable i.e. CAR and NPL.
Model 7 includes two variables i.e. NPL and TOE/TA. Model 8 includes two variables
i.e. TOE/TA and NIM whereas model 9 includes two independent variables i.e. NIM
and LDR. Whereas model 10 include all variable simultaneously.
The tables are concerned with the data comprises the sample of commercial bank in
Nepal and present regression result of various regression equations of explanatory
variables on bank profitability (ROA,ROE). The data are from NepaliPaisa and annual
report of respective banks and the sample contain 6 banks certified by NRB from 2012
to 2021. The t-value o each regression coefficients are provided to have the information
regarding significance of the coefficients of CAMEL model selected in this study.

pg. 32
 Table 4 4 Estimated relationship between ROA and CAMEL model of public commercial banks in Nepal
Model Intercept CAR NPL TOE/TA NIM LDR R2 F-value Sig
1 1.157 0.572 0.327 13.598 0.001

5.158 3.688*

2 1.644 0.094 0.009 0.249 0.622

3.694 0.499
3 1.339 0.196 0.038 1.118 0.299

2.638 1.057
4 0.750 0.271 0.074 2.222 0.147

0.994 1.491
5 -0.434 0.607 0.369 16.349 0.000

-0.751 4.043*
6 0.043 0.742 0.406 0.462 11.614 0.000

0.091 4.774* 2.609

7 1.305 0.027 0.186 0.039 0.548 0.584

2.225 0.132 0.921

8 0.599 -0.164 0.414 0.080 1.175 0.324

0.714 -0.439 1.106

9 -0.376 -0.026 0.620 0.369 7.900 0.002

-0.531 -0.148 3.557*

10 -1.016 0.496 0.415 -0.541 0.347 0.358 0.528 5.371 0.002

-1.128 1.290 2.271** -1.779*** 1.176 0.862

t-value are given in lower level, *1% significant level,**5% significant level, ***10%
significant level

Table 4.4 above shows model 1,2,3,4,and 5 have beta coefficient positive for CAR,
NPL, TOE/TA, NIM and LDR. The result shows that higher the CAR, NPL, TOE/TA,
NIM and LDR higher would be the ROA of public owned commercial banks.

pg. 33
Similarly, the result of model 10 suggests that independent variable CAR, NIM and
LDR insignificantly explains dependent variable of financial performance(ROA).
Whereas independent variable NPL and TOE/TA significantly explains dependent
variable .i.e. ROA.
But overall model is significant relation show at 99% confidence level. Hence accepted
the alternative hypothesis. The R squared is 0.528 which shows that 52.8% of the ROA
is explained by constant, CAR, NPL, TOE/TA, NIM and LDR. However 47.2% is
explained by other variables not given in research.
The regression model/line is given by the following equation:
Y= -1.016+0.496X1+O.415X2-0.541X3+0.347X4+0.358X5+E
Where,
Y= ROA
X1= Capital Adequacy Ratio
X2= Non-Performing Loan ratio
X3= Total operating expenses to total asset ratio
X4= Net interest margin
X5= Loan to deposit ratio
E= Random error
This implies that a unit changes in CAR, NPL, TOE/TA, NIM and LDR leads to 0.496,
0.415, -0.541, 0.347 and 0.358 changes in ROA in public owned commercial banks in
Nepal.

pg. 34
 Table 4 5 Estimated relationship between ROE and CAMEL model of public commercial banks in Nepal
Model Intercept CAR NPL TOE/TA NIM LDR R2 F-value Sig
1 58.033 -0.227 0.051 1.520 0.228

1.664 -1.233
2 -46.116 0.232 0.054 1.598 0.217

-0.810 1.264
3 71.260 -0.144 0.021 0.591 0.449

1.062 -0.769
4 97.814 -0.143 0.020 0.580 0.453

0.963 -0.762
5 124.531 -0.208 0.043 1.268 0.270

1.337 -1.126
6 -1.780 -0.157 0.166 0.074 1.083 0.353

-0.022 -0.769 0.815

7 16.220 0.327 -0.261 0.113 1.727 0.197

0.223 1.681 -1.346

8 88.058 -0.081 -0.072 0.022 0.302 0.741

0.778 -0.211 -0.186

9 141.000 -0.056 -0.182 0.046 0.646 0.532

1.236 -0.259 -0.847

10 41.376 -0.151 0.297 -0.128 -0.178 0.114 0.318 2.674 0.064

0.257 -0.288 1.193 -0.308 -0.442 0.201

t-value are given in lower level, *1% significant level,**5% significant level, ***10%
significant level
Table 4.5 above shows model 2 has beta coefficient positive for NPL. The result shows
that higher the NPL higher would be the ROE of public owned commercial banks.
However on model 1, 3, 4, 5 beta coefficient for CAR, TOE/TA, NIM and LDR ratio
is negative implies that higher the value of CAR, TOE/TA, NIM and LDR lower will
be the ROE.

pg. 35
Similarly, the result of model 10 suggests that independent variable i.e. CAR, NPL,
TOE/TA, NIM and LDR insignificantly explains dependent variable
profitability(ROE). Hence we reject alternative hypothesis. The R squared is 0.318
which shows that 31.8% of the ROE is explained by constant, CAR, NPL, TOE/TA,
NIM and LDR. However 68.2% is explained by other variables not given in research.

The regression model/line is given by following equation:

Y= 41.376-0.151X1+0.297X2-0.128X3-0.178X4-+0.114X5+E

Where,

Y= ROE

X1= Capital Adequacy Ratio

X2= Non-Performing Loan ratio

X3= Total operating expenses to total asset ratio
X4= Net interest margin
X5= Loan to deposit ratio
E= Random error
This implies that a unit changes in CAR, NPL, TOE/TA, NIM and LDR leads to -0.151,
0.297, -0.128, -0.178 and 0.114 changes in ROE in the public owned commercial bank
in Nepal.

pg. 36
 Table 4 6 Estimated relationship between ROA and CAMEL model of private commercial banks in Nepal

Model Intercept CAR NPL TOE/TA NIM LDR R2 F-value Sig

1 5.000 -0.478 0.228 8.273 0.008

4.913 -2.876
2 1.985 0.129 0.017 0.475 0.496

11.197 0.689
3 1.998 0.085 0.007 0.204 0.655

9.230 0.452
4 1.061 0.296 0.087 2.680 0.113

1.677 1.637
5 4.194 -0.299 0.089 2.751 0.108

3.287 -1.659
6 5.103 -0.490 -0.036 0.229 4.015 0.030

4.423 -2.729 -0.203

7 1.738 0.212 0.182 0.043 0.605 0.554

5.139 1.002 0.859

8 1.057 0.018 0.291 0.088 1.297 0.290

1.638 0.096 1.543

9 3.238 0.315 -0.318 0.188 3.127 0.060

2.424 1.811 -1.830

10 5.603 -0.335 -0.222 0.011 0.250 -0.309 0.298 2.041 0.100

3.107 -1.528 -0.846 0.046 1.033 -1.397

t-value are given in lower level, *1% significant level,**5% significant level, ***10%
significant level

Table 4.6 above shows model 2,3 and 4 have beta coefficient positive for NPL, TOE/TA
and NIM. The result shows that higher the NPL, TOE/TA and LDR higher would be
the ROA of private owned commercial banks. However on model 1 and 5 beta

pg. 37
coefficients for CAR and LDR is negative implies that higher the value of CAR and
LDR lower will be the ROA.

Similarly, the result of model 10 suggests that independent variable i.e. CAR, NPL,
TOE/TA, NIM and LDR significantly explains the dependent variable
profitability(ROA). Hence alternative hypothesis accepted. The R squared was 0.298
which shows that 29.8% of the ROA is explained by constant , CAR, NPL, TOE/TA,
NIM and LDR . however 70.2% is explained by other variables not given in research.

The regression model is given by following equation:

Y= 5.603-0.335X1-0.222X2+0.011X3+0.250X4-0.309X5+E

Where,

Y= ROA
X1= Capital Adequacy Ratio
X2= Non-Performing Loan ratio
X3= Total operating expenses to total asset ratio
X4= Net interest margin
X5= Loan to deposit ratio
E= Random error
This implies that a unit changes in CAR, NPL, TOE/TA, NIM and LDR leads to - 0.335,
-0.222, 0.011, 0.250 and -0.309 changes in ROA in public owned commercial banks in
Nepal

pg. 38
 Table 4 7 Estimated relationship between ROE and CAMEL model of private commercial banks in Nepal

Model Intercept CAR NPL TOE/TA NIM LDR R2 F-value Sig

1 79.632 -0.665 0.442 22.142 0.000

6.470 -4.705*
2 21.872 0.008 0.000 0.002 0.968

8.603 0.041
3 19.590 0.165 0.027 0.784 0.383

6.428
4 7.756 0.288 0.083 2.542 0.122

0.860 1.594***
5 47.789 -0.258 0.066 1.990 0.169

2.601 -1.411
6 89.486 -0.747 -0.245 0.495 13.215 0.000

6.738 -5.141 -1.684***

7 17.760 0.105 0.213 0.036 0.503 0.610

3.680 0.494 1.002

8 7.440 0.104 0.265 0.094 1.393 0.266

0.813 0.554 1.405

9 34.609 0.305 -0.231 0.159 2.553 0.096

1.791 1.725*** -1.560

10 96.073 -0.662 -0.425 -0.077 0.190 -0.211 0.533 5.486 0.002

4.637 -3.706* -1.988*** -0.396 0.976 -1.170

t-value are given in lower level, *1% significant level,**5% significant level, ***10%
significant level
Table 4.7 above shows model 2,3,4 have beta coefficient positive for NPL, TOE/TA
and NIM. The result shows that higher the NPL, TOE/TA, NIM higher would be the
ROE of private owned commercial banks. However on model 1 and 5 beta coefficients
for CAR and LDR is negative implies that higher the value of CAR and LDR lower
will be the ROE.

pg. 39
Similarly, the result of model 10 suggests that independent variable i.e. CAR, NPL,
TOE/TA, NIM and LDR significantly explains dependent variable profitability(ROE).
Hence we accept the alternative hypothesis. The R squared is 0.533 which shows that
53.3% of the ROE is explained by constant, CAR, NPL, TOE/TA, NIM, and LDR.
However 46.7% is explained by other variables not given in research.

The regression model is given by following equation:

Y= 96.073-0.662X1-0.425X2-0.077X3+0.190X4-0.211X5+E

Where,

Y= ROE
X1= Capital Adequacy Ratio
X2= Non-Performing Loan ratio
X3= Total operating expenses to total asset ratio
X4= Net interest margin
X5= Loan to deposit ratio
E= Random error
This implies that a unit changes in CAR, NPL, TOE/TA, NIM and LDR leads to - 0.662,
-0.425, -0.077, 0.190 and -0.211 changes in ROE in private owned commercial banks
in Nepal

As observed from the regression table of public and private owned bank the present
researcher has gained insight in to how the banks operate under the Nepalese context.
Public bank doesn’t consider the various component such as CAR, NPL, TOE/TA, NIM
and LDR in order to improve financial performance with respect to ROE. They are
more concerned in ROA to enhance the profitability. Hence, public banks’ independent
variables are insignificant with respect to ROE whereas the same independent variables
have high influence on their ROA. Similarly, private bank of the market focus on these
independent variables to raise their ROA and ROE. Hence, they are highly dependent
on these CAMEL model variables.

4.2 Summary of key findings

On the basis of overall data presentation and the analysis, the present researcher has
come up with different findings which further assisted in making the conclusion of the

pg. 40
research. The present researcher has considered different CAMEL model affecting the
financial performance:

1. Public commercial banks are highly dependent on CAMEL model to maintain

their ROA but not ROE. However private commercial banks highly focused on
the component of CAMEL model to raise their financial performance ratio
(ROA,ROE).
2. Public banks have low focus on CAMEL model -profitability relationship
whereas private banks have high concerned over the same relationship.
3. The commercial banks have lower ROA and ROE than their ten year average
on year 2021 which shows diversification of products and services of Nepalese
banks.
4. Nepalese commercial banks are more focused on wealth maximization goal than
profit maximization as private banks are more focused on CAMEL model
directives of NRB to run smoothly which emphasizes on equity maximization.

Different findings can be observed in public and private owned commercial banks in
Nepal but high variance and insignificance can be seen in some variables which
questions viability of current finding.

pg. 41
 Chapter V:DISCUSSION, CONCLUSION AND RECOMMENDATION

The current chapter shows the synopsis of the data findings on the current position of
the effect of CAMEL model on profitability of the banks certified by NRB. This chapter
is organized into the summary of the findings, discussion of findings, conclusion,
recommendation and suggestion for further studies.

5.1 Summary

CAMEL is an international rating system used by regulatory banking authorities to rate

financial institutions , according to the five factors represented by its acronym. The
acronym stands for “Capital adequacy, asset quality, management earnings, and
liquidity.” Profitability and camel model components are very important in the banking
world. CAMEL model vital to the profitability of the bank. Therefore, banks must
maintain adequate level for camel model components to gain public faith towards bank.
The essence of CAMEL model is to achieve the optimal level of between two variables.

The study carried out a descriptive research design to establish the effects of CAMEL
model on profitability. The present researcher has used the secondary data from the
information of commercial banks that had been certified by NRB. The data obtained
had information on the profitability (ROA,ROE) and factors affecting the financial
performance like CAR, NPL, TOE/TA, NIM and LDR. The information was presented
by use of tables. This was done by describing and interpreting the data, matched with
the study objectives and assumptions through use of SPSS. Regression and correlation
analysis was carried out to determine the nature of the relationship between the financial
performance and CAMEL model components.

To summarize the overall key findings of the study, Public commercial banks are highly
dependent on CAMEL model to maintain their ROA but not ROE. However private
commercial banks highly focused on the component of CAMEL model to raise their
financial performance ratio (ROA,ROE). Public banks have low focus on CAMEL
model -profitability relationship whereas private banks have high concerned over the
same relationship. Nepalese commercial banks are more focused on wealth
maximization goal than profit maximization as private banks are more focused on
CAMEL model directives of NRB to run smoothly which emphasizes on equity
maximization.

pg. 42
5.2 Conclusion

CAMEL model component and profitability in commercial banks are two delicate
problems in business banks ' activities, and data about them is severely hedged. This
study's main issue was to reconcile the conflicting demands of bank earning, liquidity
and bank profitability resulting from the conflicting wishes of the two main bank
resources suppliers, namely shareholders and depositors. Shareholders want maximum
profitability as a return on their assets, while depositors want maximum liquidity as a
guarantee of security and the capacity to pay on demand for their cash where bank focus
on wealth capitalization for perpetual existence of own self.

Though financial ratios analysis compares the financial performance among

commercial banks, the same bank had different ranks under the different financial
ratios. The ROAs of public sector banks were higher than those of private banks due to
having utmost total assets but the overall performance of public sector banks was not
observed sound because other financial ratios including ROE, NPL, and CAR of most
private owned banks were found superior. High overhead costs, political interventions,
poor management and low quality of collateral created continued deterioration in the
financial health of the public sector banks.

The values determined for the financial ratios reveal that private owned banks are also
not so strong in Nepal to manage the possible large-scale shocks to their balance sheet.
Furthermore, it can be concluded from the multiple regression analysis that the capital
adequacy ratio, total operating expenses to total assets ratio and net interest margin were
significant but had a negative effect on ROA while non-performing loan and loan to
deposit ratio did not have any considerable effect on ROA. The capital adequacy ratio
positively influenced the return on equity but the non-performing loan, loan to deposit
ratio, total operating expenses to total assets ratio and net interest margin had no
significant effect on ROE.

5.3 Recommendation

Good quality institutions are important for development of commercial banks. Well
established institution reduces political risk which is major issue in Nepalese context
and, an important factor in investment decisions. The development of good quality
institutions such as law and order, efficient bureaucracy, and democratic accountability
is therefore crucial for commercial banks development in emerging economies like

pg. 43
Nepal. Further, research can be conducted considering macroeconomic variables like
money supply, exchange rate etc.

Various measurement tool and technique should be developed in order to derive

maximum benefit from commercial banks. In order to enable the overall economy in
general and banking industry in particular to take full advantage of various
opportunities and cope with challenges, macroeconomic variables like inflation,
interest rates should also be reduced and restricting factors like regulating tools should
be discouraged. This must be done in relation to appropriate monetary policies to ensure
macroeconomic stability. Since CAMEL model component don’t impact ROE but
impact ROA in top commercial banks they give importance to ratios only to enhance
ROA. Likewise in private owned commercial banks both ROA and ROE are affected
by CAMEL model components so they give more importance to the ratios to enhance
the profitability.

5.4 Area for Further Study

Due to location and timeframe limitations this study has been concentrated and numbers
of factors for study are relatively less when compared to comprehensive research.

A similar study should be done whereby the data collection relies on primary data that
is, in-depth questionnaires and interview guide so as to complement this study. Due to
the shortcomings of regression and correlation models, other models can be used to
explain the various relationships between CAR, NPL, TOE/TA, NIM, LDR, ROA and
ROE. Since the data collected was time series in nature, future studies should carry out
time series analysis for the data on, CAR, NPL, TOE/TA, NIM, LDR, ROA and ROE.
A follow up study should be carried out to investigate the moderating effect of the
industry specific sector on the relationship between CAR, NPL, TOE/TA, NIM,
LDR,ROA and ROE. Since there are qualitative characteristics such as the company
size, age, CEO tenure, CEO duality among others which can influence the profitability
apart from the CAMEL model components, a study should be carried to determine their
combined effect and their relationship with the profitability.

pg. 44
5.5 Lesson Learnt

By preparing this research, the present researcher learnt many beneficial lessons which
would help the researcher to upgrade personal and professional aspect. The major
lessons learned by the researcher are as follows:

a. The present researcher learned to manage time and resources in order to

complete the research in an efficient and effective manner.
b. This present researcher developed skills to use SPSS and MS-Excel efficiently.
c. The researcher comes to know that larger the sample size, higher will be the
accuracy of the outcome of the research analysis.

pg. 45
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 Appendix

BANKS YEAR CAR(%) NPL(%) TOE/TA(%) NIM(%) LDR(%) ROA(%) ROE(%)

2011/12 -9.77 7.27 5.43 11.43 46.08 1.23 410.63
2012/13 1.51 5.32 5.32 10.22 53.84 1.26 102.95
RBBL 2013/14 4.62 6.38 4.17 9.1 56.73 1.47 76.96
2014/15 10.16 5.35 4.49 8.23 61.05 3.22 70
2015/16 10.46 4.25 3.32 8.32 58.46 1.42 27
2016/17 10.39 3.77 3.09 7.78 69.3 1.6 26
2017/18 11.46 4.75 3.45 9.2 71.38 1.42 14.75
2018/19 13.39 4.59 4.47 8.97 77.15 2.23 18.93
2019/20 12.64 4.08 4.74 9.63 67.16 1.64 10.79
2020/21 13.46 3.23 4.36 6.99 73.62 1.1 16.98
NBL 2011/12 -5.82 5.58 7.68 13.64 52.98 0.3 -6.07
2012/13 -0.59 5.24 6.57 12.52 60.09 1.07 -361.36
2013/14 4.55 5.12 6.79 12.16 59.45 0.92 21.42
2014/15 7.5 3.98 5.47 9.59 68.45 0.55 12.63
2015/16 10.2 3.11 4.38 9.86 71.05 2.79 42.94
2016/17 14.47 3.32 4.24 9.73 79.17 2.78 14.96
2017/18 11.27 3.37 4.25 12.22 75.68 2.41 -1.33
2018/19 16.8 2.64 4.35 11.23 78.14 1.51 4.8
2019/20 17.01 2.47 5.17 11.16 72.25 1.22 5.85
2020/21 16.8 2.05 4.21 8.78 82.76 1.33 11.08
ADBL 2011/12 19 8.98 9.14 15.47 104.06 2.9 14.15
2012/13 16.34 5.85 7.49 13.72 100.81 2.97 16.09
2013/14 14.93 5.46 9.1 13.04 94.8 1.76 10.09
2014/15 17.16 5.35 6.74 12.72 93.77 3.12 22.21
2015/16 17.18 4.36 6.39 12.09 95.46 2.32 11.12
2016/17 20.41 4.6 7.02 12.55 92.9 2.15 15.54
2017/18 20.33 3.5 8.17 13.93 95.64 2.71 12.34
2018/19 20.37 3.29 7.82 13.85 93.62 2.77 14.01
2019/20 19.33 2.84 7.71 11.74 85.84 1.86 8.66
2020/21 16.94 1.88 5.86 9.98 92.93 1.59 10.9
EBL 2011/12 11.02 0.84 6.62 12.3 73.22 2.11 35.83
2012/13 11.59 0.61 4.79 10.49 76.57 2.39 36.62
2013/14 11.31 0.97 4.71 10.11 78.01 2.25 38.39
2014/15 13.33 0.66 3.39 8.76 66.63 1.85 22.85
2015/16 12.66 0.38 2.75 6.94 73.52 1.59 20.32
2016/17 14.54 0.25 3.93 8.13 84.05 1.72 17.38
2017/18 14.2 0.2 5.16 9.89 81.86 1.97 16
2018/19 13.74 0.16 5.86 10.66 87.01 1.94 18.13
2019/20 13.38 0.22 6.14 10.51 83.52 1.42 13.5
2020/21 12.48 0.12 4.85 7.37 85.3 1 13.45
NABIL 2011/12 11.01 2.33 6.73 12.85 77.91 2.8 30.25
2012/13 11.59 2.13 4.84 11.64 74.9 3.25 32.78
2013/14 11.24 2.23 3.87 10.16 74.55 2.89 27.97

pg. 51
 2014/15 11.57 1.82 3.53 8.5 64.43 2.06 22.73
2015/16 11.73 1.12 2.64 8.08 70.49 3.32 25.61
2016/17 12.9 0.8 3.4 9.44 65.38 2.69 22.41
2017/18 13 0.55 4.93 11.36 82.66 2.61 20.94
2018/19 12.5 0.74 5.49 11.41 81.96 2.11 17.76
2019/20 13.07 0.98 5.8 10.98 79.72 1.58 13.61
2020/21 12.77 0.84 5.22 9.37 89.84 1.71 15.19
NIBL 2011/12 11.1 3.32 1.2 13.5 75.3 1.6 20.1
2012/13 11.49 1.91 1.22 12.3 76.4 2.7 31.7
2013/14 11.27 1.77 1.13 10.8 72.4 2.3 27.6
2014/15 11.9 1.25 1.01 9 74.7 1.9 24.8
2015/16 14.92 0.68 0.95 8.4 80.1 2 26
2016/17 13.2 0.83 0.91 9 77.6 2.1 19.1
2017/18 12.66 1.36 1.3 11 74.7 2.13 14.71
2018/19 13.26 2.78 1.4 10.9 71.97 1.79 13
2019/20 13.54 2.91 1.3 10.1 72.93 1.19 8.92
2020/21 14.71 2.46 1.2 8.2 75.12 1.56 11.04

pg. 52