1

CHAPTER ONE
INTRODUCTION

1.1 Background of the Study

Liquidity and profitability has got tremendous importance in the banking sector.
Liquidity refers to the ability of the firm to effectively manage its immediate and short
term obligations. It is important for firms to maintain a reasonable amount of their assets
in form of cash in order to meet their short term obligations. Liquidity must be balanced
in a way that it contributes to the overall effectiveness and profitability of a firm.
Liquidity should neither be too high nor too low. Firms need to set the optimum level of
liquidity that ensures high profitability. The liquidity in bank represents the ability to
fund its obligations at the time of maturity, which includes lending and investment
commitments, withdrawals, deposits, and accrued liabilities.
Profitability refers to the revenues earned by firms in excess of its expenses, in relation to
the bank’s capital base. It is one of the fundamental blocks for analyzing financial
statements and profitability as a whole. Enhance of profitability is the ultimate purpose of
every firm, and each of them strives to achieve optimum profitability. The existence and
survival of any business is related to its level of profit. A sound and profitable banking
sector will be able to withstand negative shock and contribute to the stability of the
financial system. Banking profitability is affected by number of internal factors (financial
statement variables: expense management, loan and deposit composition, bank earning
and operating efficiency, capital and liquidity management; non-financial statement
variables: bank branches, bank size and location) as well as external factors (financial
regulation, competitive condition, concentration, market share). Liquidity risk is said to
be assassin of banks. This risk can adversely affect both bank’s earnings and the capital.
It becomes the top priority of a bank’s management to ensure the availability of sufficient
funds to meet future demands of providers and borrowers, at reasonable costs.
Bank liquidity refers to the ability of the bank to ensure the availability of funds to meet
financial commitments or maturing obligations at a reasonable price at all times. Bank
liquidity means a bank having money where they need it particularly to satisfy the
withdrawal needs of the customers (Wasiuzzaman and Tarmizi, 2010).
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Liquidity is a financial term that means the amount of capital that is available for
investment. Today, most of this capital is credit fund. That is because the large financial
institutions that do most investments prefer using borrowed money (Felix and
Claudine,2008).

Profitability and liquidity are effective indicators of the corporate health and performance
of not only the commercial banks, but all profit-oriented ventures (Eljelly,2004). These
performance indicators are very important to the shareholders and depositors who are
major publics of a bank.

In today’s competitive world, banking sector has been contributing a lot in improving the
financial sector of the country. In this context, it has been a great challenge for banks to
earn maximum profitability. Due to this, banks need to take dynamic decision to effective
manage their assets, maximize profit and sustain in this competitive environment. This
project work tries to assess the relationship between liquidity and profitability and
recommend solutions that would help firms improve their profitability. With the same
cited objective, this research is conducted. Moreover, NMB bank is selected for research,
in order to find link between these variables. NMB bank has been facing problem of
excess liquidity and lack of investment avenues. Conducting research on this bank, we
would be able to deduce much and draw valid inference on the impact of liquidity on
profitability. Moreover, the data of this bank are easily available through its website and
annual reports that bank publishes on consistent basis. So, it would be easy and effective
to conduct research on this bank.
The extent of influence of liquidity on profitability of the firm has always been a
controversial issue and no census has been reached till date. There is a mixed result as to
the relationship of these factors. Some studies claims that liquidity and profitability are
negatively related while others asserts a positive relationship. This lack of consensus has
motivated further research. This work therefore examines the influence of liquidity on
profit of the bank.
The research uses financial ratio to access the liquidity and profitability position of NMB
bank and determine the relationship between them in case of NMB bank. All data
required for this study collected from secondary source in annual report of NMB bank.
This data research helps to evaluate the overall bank financial position. To evaluate data
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Statistical tool like Arithmetic mean is used. MS excel program is also used to calculate
data and find difference between the periods. This bank financial ratio enables us to
identify unique bank strengths and weaknesses achieve over the five year period, which
in itself inform bank profitability and liquidity.

1.2 Organization’s Profile

NMB Bank Limited is the first commercial bank of Nepal that has been able to upgrade
from a Financial Company to full-fledged Commercial Bank. Nepal Merchant Banking
and Finance Ltd., the erstwhile name of the institution, was amongst the leading financial
institutions in its category till May 2008 when the transformation process for the upgrade
was complete and changed its name to NMB Bank Limited.
NMB Bank Limited licensed as “A” class financial institution by Nepal Rastra Bank in
May 2008 and has been operating in the Nepalese Financial market for over twenty years
and is one of the leading commercial banks in the banking industry.

NMB Bank was awarded 'Bank of the Year - 2017' and 'Bank of the Year
2018' consecutively by The Banker, Financial Times,London.

1.3 Objectives of the Study

This research will focus on identifying the most important indicators of the liquidity,
investigate the effect of each indicator on the banks' profitability, identify the effect of the
liquidity as a whole on profitability in NMB bank, and lastly to suggest a
recommendations needed to achieve the required consensus between liquidity and
profitability. The objectives of the study are listed as follows:
 To identify the impact of liquidity on profitability of NMB Bank.
 To analyze the liquidity problem which affect the bank’s profitability.

1.4 Rationale of the Study

This study focuses on how well the NMB Bank Ltd is able to estimate and maintain its
liquidity needs. It helps to get acquainted with some aspects of liquidity by performing
financial analysis .It helps to find the relationship between liquidity and profitability.
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From this study it helps to find out the liquidity position of NMB Bank Ltd with regard to
its other financial aspects and it helps other researchers as well. And lastly, it helps to
know the banking strategy for liquidity management.

1.5 Review of Literature

Bank liquidity refers to the ability of the bank to ensure the availability of funds to meet
financial commitments or maturing obligations at a reasonable price at all times. Bank
liquidity means a bank having money where they need it particularly to satisfy the
withdrawal needs of the customers. Liquidity is a financial term that means the amount of
capital that is available for investment. Today, most of this capital is credit fund. That is
because the large financial institutions that do most investments prefer using borrowed
money. Profitability and liquidity are effective indicators of the corporate health and
performance of not only the commercial banks, but all profit-oriented ventures. These
performance indicators are very important to the shareholders and depositors who are
major publics of a bank. It is necessary that bank has a framework of risk management.
Management is the system which helps to complete the task effectively. Credit risk
management is also the system which helps to manage credit effectively. Therefore the
bank must have an explicit credit risk strategy by organizational changes, risk
measurement techniques and fresh credit processes and system.

Karki (2004) has found that liquidity ratio was relatively fluctuating over the period,
return on the equity is found satisfactory and there is positive relationship between
deposits and loan advances. The recommendations made that are the existing condition of
the liquidity of the banking and financial institutions needs to be reduced through an
appropriate investment policy.

Joshi (2004) has analysed financial performance through the use of appropriate financial
tools and to show the cause of change in cash position of the two banks. In which he
stated that bank profitability uses the return on assets, the return on equity and net interest
margin. The study found that liquidity and bank loan are positively related to bank
profitability.
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It is evident that liquidity and liquidity risk is very emerging and important topic.
Therefore banks and regulators are keen to keep a control on liquidity position of banks.
However, this fragility is also a source of efficiency. Diamond and Rajan (2001) argue
that the financial intermediation structure is efficient in that it disciplines banks when
carrying out their lending function. The threat of a run is an incentive for the bank to
choose projects with high return. More generally, this also suggests that an “even more
liquid” bank might not always be desirable for the efficiency of the financial system.
Therefore, effective liquidity risk management helps ensure a bank's ability to meet cash
flow obligations, which are uncertain as they are affected by external events and other
agents' behaviour and to keep their optimal profitability.

Ahmad (2009)Through the financial inter-mediation role, the commercial banks

reactivate the idle funds borrowed from the lenders by investing such funds in different
classes of portfolios. The liquidity risk of banks arises from funding of long-term assets
by short-term liabilities, thereby making the liabilities subject to rollover or refinancing
risk. Liquidity risk is usually of an individual nature, but in certain situations may
compromise the liquidity of the financial system. Liquidity risk management in banks is
defined as the risk of being unable either to meet their obligations to depositors or to fund
increases in assets as they fall due without incurring unacceptable costs or losses.
Effective liquidity risk management helps ensure a bank’s ability to meet its obligations
as they fall due and reduces the probability of an adverse situation developing..
Studies of Nepalese banks’ profitability are important as guidance towards enhancing the
economy since banks do contribute to economic growth and stability. Few studies have
been conducted on determinant of profitability of the commercial banks in Nepal, for
example, Karki (2004) also found that the positive relationship between capital adequacy
and profitability, Joshi (2004) found that the liquidity and banks loan are positively
related to banks profitability and Maharjan (2007) revealed that the capital adequacy and
liquidity is positively associated with banks profitability.

Banks face two central issues regarding liquidity. Banks are responsible for managing
liquidity creation and liquidity risk. Liquidity creation helps depositors and companies
stay liquid, for companies especially when other forms of financing become difficult.
Managing liquidity risk is to ensure the banks own liquidity so that the bank can continue
to serve its function Vossenand & Nessm (2010). During the early “liquidity phase” of
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the financial crisis that began in 2007, many banks – despite adequate capital levels – still
experienced difficulties because they did not manage their liquidity in a prudent manner.
The crisis drove home the importance of liquidity to the proper functioning of financial
markets and the banking sector. Prior to the crisis, asset markets were buoyant and
funding was readily available at low cost.

Kumar and Yadav (2013) A bank is responsible for the sound management of liquidity
risk. A bank should establish a robust liquidity risk management framework that ensures
it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid
assets, to withstand a range of stress events, including those involving the loss or
impairment of both unsecured and secured funding sources. Supervisors should assess the
adequacy of both a bank’s liquidity risk management framework and its liquidity position
and should take prompt action if a bank is deficient in either area in order to protect
depositors and to limit potential damage to the financial system

1.6 Research Methodology

The research methodology is systematic way of solving research problem. Research

methodology refers to the overall research process, which a researcher conducts during
their study. Research can be conducted on the basis secondary data. Here in the study all
the data and observed data are analyzed with using appropriate financial tools. To
evaluate, analyze and interpret on every subject and discipline a detailed research plan is
required. Without gathering detailed data and without applying different analytical tool it
is impossible to confess anything about the related subject.

1.6.1 Research Design

This study is descriptive for the analysis of the liquidity and profitability because it
describes the characteristics of the study. Descriptive research is called an observational
research method because none of the variables that are part of the research study are
influenced in any capacity. This study seeks to analyze Return on Asset (ROA) and
Return on Equity (ROE) for individual groups and overall banking industry. This study is
based on time series data extracted from annual reports for the relevant five years period
(from the 2013/14 to 2017/18)
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1.6.2 Population and Sample

Population of this study includes 28 commercial banks functioning all over the
country. Among which NMB Bank Ltd. is considered reference for study which is
sample of our study as well.The bank is well regulated and managed with increasing
profit trend and being a leading bank.

1.6.3 Source of Data

Data has been collected from secondary sources. Likewise, data has been
emanated from listed banks’ financial reports, published and unpublished books,
scholarly journals, business and financial newspapers and other magazines and
corporate journals. As the study needs historical financial data, which are from
corporate reports, accessing publicly available data is assumed as the suitable
method for the accuracy of the data.

1.6.4 Data Analysis Tools

The collected data has been analyzed with the help of different financial and statistical

tools. Statistical tools are the measures or the instruments to analyze the collected data
from the different sources. In statistics, there are numerous statistical tools to analyze the
data of various natures. In this study, mainly statistical tools such as Trend analysis has
been used keeping into consideration the key tools required for the study.

Financial Tools
The financial tools are used to find the financial strength, weakness, opportunity and
threats of a firm. An analysis of financial statements helps to take managerial and
financial decisions. In this study, various financial tools will be employed for the sake of
analysis. The basic tool for financial analysis will be ratio analysis. Beside it, risk index
techniques also will be adopted.

Ratio analysis has been accepted as the most dominant financial tools to analyze and
interpret the financial statements. The relationship between two figures expressed
mathematically is known as financial ratio. It is the systematic use of ratio to interpret the
financial statement so that the strength and weakness of the firms as well as its historical
performance and current financial conditions can be determined.
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Ratio analysis has various uses such as it is useful in financial position which helps the
banks and other financial institutions in lending and making investment decisions; for
forecasting purpose and making plans; for locating weak spot in business and also in
comparison of performance with the contemporary firms or department. In spite of uses,
there are some limitations, which rusticates it uses. If data are incorrect, it present false
result; there is no common standard of comparison; it is only one method of analysis. But
despite that its significance is much accepted in analyzing the financial performance of
any firm. A large no. of ratio can be generated from the components of profit and loss
account and balance sheet. For this study, ratios are categorized into the following major
headings.

A. Liquidity Ratio
A company’s liquidity is its ability to meet its short-term financial obligations. Liquidity
ratios attempt to measure a company's ability to pay off its short-term debt obligations.
This is done by comparing a company's most liquid assets, those that can be easily
converted to cash, with its short-term liabilities.
In general, the greater the level of coverage of liquid assets to short-term liabilities the
better. A company with a low coverage rate should raise a red flag for investors as it may
be a sign that the company will have difficulty meeting its short-term financial
obligations, and consequently in running its day-to-day operations.

1. Loan to Deposit Ratio

Loan-to-deposit ratio (LDR) is used to assess a bank's liquidity by comparing a
bank's total loans to its total deposits for the same period. The LDR is expressed as
a percentage. If the ratio is too high, it means that the bank may not have enough
liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too
low, the bank may not be earning as much as it could be.

Loan
Loan to Deposit Ratio = Deposits

2. Liquid Asset to Deposit Ratio

It is the ratio of the value of liquid assets to total deposits. Liquid assets include cash and
due from banks, trading securities and at fair value through income, loans and advances
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to banks, reverse repos and cash collaterals. Deposits and short term funding includes
total customer deposits (current, savings and term) and short term borrowing.

Liquid Asset
Liquid Assets to Deposit Ratio = Deposits

3. Net Loan to Total Asset Ratio

The net loans to assets ratio measures the net loans outstanding as a percentage of total
assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. The
higher the ratio, the more risky a bank be to higher defaults.

Net Loan
Net Loan to Total Asset Ratio = Total Assets

4. Cash to Deposit Ratio

Cash Deposit ratio (CDR) is the ratio of how much a bank lends out of the deposits it has
mobilized. It indicates how much of a banks’ core funds are being used for lending, the
main banking activity. It can also be defined as total of Cash in hand and Balances
divided by total deposits.
Cash
Cash to Deposit Ratio =
Deposits

B. Profitability Ratio
Profitability ratio is used to evaluate the company's ability to generate income as
compared to its expenses and other cost associated with the generation of income during
a particular period. This ratio represents the final result of the company. Profitability
ratios are the indicators degree of managerial success for achieving firm’s overall
efficiency of the business. The following ratios are calculating under the profitability
ratio.

1. Net Interest Margin

Net interest margin is a measure of the difference between the interest income generated
by banks or other financial institutions and the amount of interest paid out to their
lenders, relative to the amount of their (interest-earning) assets. It is similar to the gross
margin (or gross profit margin) of non-financial companies.
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It is usually expressed as a percentage of what the financial institution earns on loans in a

time period and other assets minus the interest paid on borrowed funds divided by the
average amount of the assets on which it earned income in that time period.

Net Interest Revenue

Net Interest Margin = Total assets

2. Cost to Income Ratio

The “cost income ratio (CIR)” or “cost-to-income ratio” shows the relation between
income and the cost of acquiring that income. CIR is an important measure of bank
performance. As a rule, the lower a bank’s cost-to-income ratio, the more efficiently a
bank operates. This ratio can be calculated as follows:
Operating Expense
Cost to Income Ratio = Non-Interest Income + Net Interest Income

3. Return on Equity
Return on equity (ROE) is a measure of financial performance calculated by dividing net
income by shareholders' equity. It measures of how effectively management is using a
company’s assets to create profits. It can be calculated as follows.
Net profit after tax
Return on Equity = Shareholder’s equity

4. Return on Total Assets

Return on total assets explains the contribution of assets to generating net profit. This
ratio indicates the efficiency of the assets mobilization. In other word, ROA is an overall
profitability which measure earning power and overall efficiency of the organization.
Higher ratio indicates higher efficiency in utilizing of assets of the firm and vice versa.
This ratio can be calculated as follows.

Net profit after tax

Return on Total Assets Ratio = Total assets

5. Efficiency Ratio
The efficiency ratio is typically used to analyze how well a company uses its assets and
liabilities internally. An efficiency ratio can calculate the turnover of receivables, the
repayment of liabilities, the quantity and usage of equity, and the general use of inventory
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and machinery. This ratio can also be used to track and analyze the performance of
commercial and investment banks.
Non-Interest Expense
Efficiency ratio = Non-Interest Income + Net Interest Income

C) Statistical Tools
Statistics are mathematical computations used to analyze data. Tools of statistical
analysis can describe, summarize and compare data. There are various tools that can
analyze statistical data. These range from relatively simple computations to advanced
analysis. Basic analyses can be easily computed, while more advanced methods require a
solid understanding of advanced statistics as well as specialized computer software.

1. Mean
Mean is the simple or arithmetic average of a range of values or quantities, computed by
dividing the total of all values by the number of values. Mean is computed by following
formula:

x1 + x2 + x3 +…+ xn
Mean =
n

1.7 Limitations
This research has its limitation due to lack of resources and time. This study will be
limited by following factors:

 Secondary data is used to analyze for result interpretation, so the accuracy of the
findings depend on the reliability of the information.
 Among many commercial banks, only one commercial bank is taken as a sample
for the study so findings of the study cannot be generalized.
 The study covers the collection of data of only five years.
 The source of data i.e. published annual report and internet website is assumed to
be correct.
 Only limited financial tools are used i.e (LTD, CD,ROA,ROE) are taken in this
study.
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CHAPTER TWO

RESULTS AND ANALYSIS

2.1 Presentations of Results

In order to analyze and interpret the obtained data, data processing had been made in
terms of table, and graphs. Along with interpretation we can give the detailed theoretical
concept of the topic as well. The chapter includes the presentation and analysis. Whatever
data have been obtained are tabled in homogeneous nature and sequential order are
analyzed by using simple mathematical tool to desired findings.

2.1.1 Data Analysis

Financial analysis is structural and logical way to present the overall financial
performance of the financial institution. It helps to evaluate the decision making of the
business. In financial analysis, ratio analysis is the most dominant and logical structure to
assess the liquidity and profitability of the banks. These ratios not only help in decision
making process but also emphasized on risk avoiding and profit raising related factors.
To calculate this ratio need to take quantitative data from bank trading activity and other
sources.
This research paper uses a financial ratio analysis to measure, describe and analyze the
performance of NMB Bank during the period 2013/14-2017/18. Quantitative analysis
techniques were adopted for the study. These included profitability and liquidity ratios
analyses. Absolute profit and liquid assets figures of the listed banks were analyzed and
compared to see the trend within the period. Profitability and liquidity ratios of the banks
were also analyzed and compared to notice the trend in profitability and liquidity within
the period 2013/14 to 2017/18.

2.1.2 Presentation of Data in Tables and Figures

The data are tabulated and presented are as follows:

(A) Liquidity Performance Indicators

1. Loan to Deposit ratio (LTD)

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Table 2.1 Total Loan, Total Deposit, and LTD Ratio

LTD
Year Loan Index Deposits Index ratio
2013/14 12,070,838,923 100% 15,965,311,135 100% 0.7560
2014/15 16,491,044,097 137% 21,949,114,580 137% 0.7513
2015/16 20,467,040,786 170% 26,271,818,899 163% 0.7790
2016/17 27,288,891,489 227% 35,361,443,165 219% 0.7717
2017/18 53,749,132,753 447% 64,944,730,681 402% 0.8276
Mean 0.7771
(Source: Annual reports of NMB)

The LTD ratio in the year 2013/14 of the company is 0.7560 which means the ratio is
high and the bank may not have enough liquidity to cover any unforeseen fund
requirements. It means that the bank is issuing out more of its deposit in the form of
interest bearing loans, which, in turn means it needs to generate more income. However,
the problem is banks’ loan aren’t being repaid. In 2014/15, the ratio decreased to 0.7513.
The loan amount increased by 37% and deposit increased by 37% in comparison to the
base year. This means that NMB bank is doing well in terms of LTD ratio, rate of deposit
being equal to loan. In the year 2015/16, the LTD ratio further increased to 0.7790 which
means the bank is at high liquidity risk. The LTD ratio in the year 2016/17decrease to
0.7717Finally, in the year 2017/18 bank increase LTD ratio to 0.8276.

Figure 2.1 Loan to Total Deposit ratio

0.84

0.82

0.8

0.78

0.76

0.74

0.72

0.7
2013/14 2014/15 2015/16 2016/17 2017/18
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In perspective of bank, higher the ratio mean more less liquid and taking more risk. NMB

also has to maintain certain ratio for following the Nepal Rastra Bank policy and keep

sustainable position in the competitive market. From the figure, it is understood that bank

total loan against deposit was 75.6% in 2013/14 and minimum 75.1% in the year

2014/15. Bank total loan against deposit was 82.76% in 2017/18 which reached highest

point around this period and minimum 77.90% in year 2015/16. The mean of LTD ratio

for this five year period is 77.71%. According to the above graph, it indicates that NMB

current LDR is at increasing trend compare to its previous years.

2. Liquid Asset to Deposit Ratio

Table 2.2 Liquid Asset, Deposit and L/D ratio

Year Liquid Assets Index Deposits Index L/D ratio

2013/14 3,630,918,570 100% 15,965,311,135 100% 0.227
2014/15 5,787,705,522 159% 21,949,114,580 137% 0.264
2015/16 5,063,199,612 139% 26,271,818,899 163% 0.193
2016/17 10,865,099,266 298% 35,361,443,165 219% 0.307
2017/18 11,082,018,927 304% 64,944,730,681 402% 0.171
Mean 0.2324
(Source: Annual reports of NMB)

The liquid asset to deposit ratio of the banks increased from 0.227 to 0.264 from the year
2013/14 to 2014/15, which shows that liquid asset of the bank has been increasing faster
than deposit (liability) and the bank is now more liquid to pay off its short term
obligation. Further, the L/D ratio decreased to 0.193 in the year 2015/16. But, in 2016/17,
the L/D ratio increased and reached all-time high to 0.3072 as the liquid asset of the
company increased from Rs.5, 063,199,612 to Rs.10, 865099266 while deposit continued
to increase. So, in 2016/17, liquidity position of the bank increased. Finally, in the year
2017/18, the bank decrease its LD ratio to 0.1706 which shows that the bank did not
performed well in comparison to the past years of the bank and is less liquid.
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Figure 2.2 Liquid Asset to Deposit Ratio

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0
2013/14 2014/15 2015/16 2016/17 2017/18

Here, higher the ratio means more liquid and taking less risk. From the figure, it is
understood that L/D ratio increased during the period 2013/14-2014/15 and again
decrease in 2015/16i.e 0.1927. The decrease in liquidity may be because of increase in
expense, purchase of fixed assets, granting loans etc. In 2016/17, L/D ratio reached its
highest points at ratio of 0.3072.Finally in year 2017/18 the ratio is at lowest than other
years i.e 0.1706. The average of L/D ratio for this five year period is 0.2324. This figure
also shows the dedication of the bank to maintain its liquidity position to fund short term
requirements.

3. Net Loan to Total Asset Ratio

Table 2.3 Net Loan, Total Assets and NLTA ratio

Year Loan Index Assets Index NLTA ratio

2013/14 12,070,838,923 100% 18,529,494,417 116% 0.651
2014/15 16,491,044,097 137% 25,135,187,777 157% 0.656
2015/16 20,467,040,786 170% 30,610,840,237 192% 0.669
2016/17 27,288,891,489 226% 45,177,332,581 283% 0.604
2017/18 53,749,132,753 445% 75,682,348,874 405% 0.7102
Mean 0.6580
(Source: Annual reports of NMB)

The table 2.3 shows that NLTA ratio of the bank is showing a decreasing pattern. In
2013/14, NLTA ratio was 0.6514 which may indicate that the company may have more
long term debt in comparison to the asset. This shows that bank is less liquid and it
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should probably decrease long term debt or increase the total asset of the firm. NLTA
ratio reached 0.6565 in 2014/15, 0.6686in 2015/16 and 0.6040 in 2016/17. Finally in the
year 2017/18, the ratio is 0.7102.The NLTA ratio increased in comparison to the base
year, the increase in asset outpaced the increase in net loan
Figure2.3: Net Loan to Total Assets

0.72
0.7
0.68
0.66
0.64
0.62
0.6
0.58
0.56
0.54
2013/14 2014/15 2015/16 2016/17 2017/18

In the figure, Net loans to total asset peak point in 2017/18,71.02.% and lower 60.40% at
2016/17. Decrease in this ratio means increase in the liquidity of bank. On the other hand,
idle cash or asset never will positive trend for bank. So, Bank should maintain enough
liquidity according to NRB guidelines and operate effectively in their business activity.
The average of NLTA ratio for this five year period is 0.6580 which shows quite well
perform from liquidity perspective

4. Cash to Deposit Ratio

Table 2.4 Cash, Deposit and Cash to Deposit ratio.
Cash to
Year Cash Index Deposits Index Deposit ratio
2013/14 323,939,422 100% 15,965,311,135 125% 0.0203
2014/15 516,770,350 159% 21,949,114,580 171% 0.0235
2015/16 497,748,648 153% 26,271,818,899 205% 0.0189
2016/17 817,586,158 251% 35,361,443,165 276% 0.0231
2017/18 1,491,275,494 458% 64,944,730,681 404% 0.0229
Mean 0.02174
(Source: Annual reports of NMB)
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The table no. 2.4 shows that in 2013/14, the cash to deposit ratio is 0.0203 comparing to
the base year in 2014/15, the ratio has increase from 0.0203 to 0.0235 For further the
ratio has decrease from 0.0235 to 0.0189 and this year 2015/16 has the lowest ratio in
table. We can see the fluctuation on ratio. It again increase from 0.0189 to 0.0231. The
decrease in ratio was due to the increase in cash in the year 2016/17 while deposits
continued to increase. Finally the ratio decrease from0.0231to 0.0229. For some year,
there is drastically increment and some year there is drastically decrement of the ratio.
The fluctuation suggest that the bank were able to mobilize the deposit through lending
and rest of the year they couldn’t perform well in liquidity terms.

Figure 2.4 Cash to Deposit ratio

0.025

0.02

0.015

0.01

0.005

0
2013/14 2014/15 2015/16 2016/17 2017/18

Increased in Cash to deposit ratio means more liquid the bank is. Because investment in
stock more closely related to liquid things will make bank more liquid that build good
relation to bank customer. Bank use their deposits in investment highest in 2014/15 and
lowest 2015/16. Other year, the bank did perform well. The average of Cash to Deposit
ratio for this five year period is 0.022
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A) Profitability Performance Indicators

1. Net Interest Margin

Table 2. 5 Net Interest Income, Total Assets and NIM.

Net Interest
Year Revenue Index Total Assets Index NIM
2013/14 462,476,499 100% 18,529,494,417 100% 2.50%
2014/15 764,979,831 165% 25,135,187,777 135% 3.04%
2015/16 811,481,469 175% 30,610,840,237 164% 2.65%
2016/17 988,933,444 213% 45,177,332,581 242% 2.19%
2017/18 2,087,984,876 449% 75,682,348,874 405% 2.76%
Mean 2.63%
(Source: Annual reports of NMB)

The table 2.5 shows that Net Interest margin of NMB bank ranges from 2.19% to 3.04%.
Since, the banks does not have any negative interest margin, it can be said that they are
making good decision in terms of interest and investment. The year 2014/15 have
comparatively higher net interest margin than other years.
There is fluctuation in ratios. The ratio decrease from 2.50% to 3.04% in 2014/15.. The
ratio decrease from 3.04% to 2.65% in 2015/16 as the net interest income increased by
75% and assets increased by only 64% in comparison to the base year. Then, the net
interest margin shows decreasing pattern. The ratio decreased from 2.65% to 2.18% in
2016/17 and 2.76% in 2017/18. It seems that bank is successful in investment decision in
some year and failed in rest year or it cause due to high interest expenses and low interest
revenue comparison to its investment.
 19

Figure 2.5 Net Interest Margin

3.5
3
2.5
2
1.5
1
0.5
0
2013/14 2014/15 2015/16 2016/17 2017/18

The figure shows that NIM decreased in the beginning, then increased and reached
highest point in 2014/15i.e 3.04% then started decreasing and reached lowest 2.18% in
2016/17. It means the ability of the firm to generate interest revenue against expenses has
decreased. Increase in the Net interest income was not sufficient for the increase in assets.
The average of NIM for this five year period is 2.62%

2. Cost To Income Ratio

Table 2.6 Operating Expense, Non-Interest Revenue, Net Interest Revenue and Cost to
Income Ratio
Cost to
Operating Non-Interest Net Interest Income
Year Expenses Index Income Index Income Index Ratio

2013/14 259,125,778 119% 168,204,453 89% 462,476,499 104% 0.411

2014/15 325,356,562 149% 241,747,396 127% 764,979,831 172% 0.323

2015/16 412,107,381 189% 390,735,120 206% 811,481,469 182% 0.343

2016/17 502,438,971 231% 437,395,858 231% 988,933,444 222% 0.352

2017/18 1,004,806,066 386% 1,354,894,297 808% 2,087,984,876 450% 0.292

Mean 0.344
(Source: Annual reports of NMB)
 20

The base year 2013/14 shows the cost to income ratio 41.1%. In 2013/14, costs are rising at a
higher rate than income. That year bank incurred high cost to income ratio compared to other
years. It decrease in further year in 2014/15 from 41.1%.to 32.3%. Further, the ratio decrease
from 35.2% to 29.2% in year 2015/16. The fluctuation seems to be continues. Lower the ratio,
more profitable the bank will be.

Figure 2.6 Cost to Income ratio

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2013/14 2014/15 2015/16 2016/17 2017/18

It is clear from the graph that in year 2013/14, the bank incurred high cost to income ratio
of 41% and in the year 2017/18, bank cost to income ratio is lower than other year i.e
29.2%. The average of cost to income ratio for this five yearperiod is 34.4%.

3. Return on Equity (ROE)

Table 2.7 NPAT, Total Equity and ROE

Year NPAT Index Total Equity Index ROE

2013/14 56,737,188 100% 2,265,154,322 100% 2.50%
2014/15 362,441,797 639% 2,426,332,959 107% 14.94%
2015/16 433,663,041 764% 2,830,525,336 125% 15.32%
2016/17 530,119,832 934% 3,343,152,288 148% 15.86%
2017/18 1,167,124,147 2056% 6,933,819,136 307% 16.83%
Mean 13.09%
(Source: Annual reports of NMB)

From table 2.7, the ROE is 2.505% in 2013/14. Expenses also seem to have increased in
all the areas. Net profit after tax seems to be low while the equity has increased
 21

consistently. Therefore, ROE seems to be low as it is the outcome when net profit after
tax is divided by equity.
In the later years, ROE seems to be increasing. In 2014/15 it has increased to 14.94%
because they have done considerably well in net profit Rs.362,44,1797 which is
significantly higher than last year and this has contributed to the increase in net profit
after tax which is 539% higher than that of base year.
They have slowly increased to 15.32% and 15.86% in the following years respectively.
This is because net profit after tax growth has grown in higher proportion than equity.
Finally, ROE increased to 16.83% in 2017/18.

Figure 2.7 Return on Equity

18
16
14
12
10
8
6
4
2
0
2013/14 2014/15 2015/16 2016/17 2017/18

Here, the return on equity (ROE) is average at 13.09% in this five year period. Lower
ROE in 2013/14 was 2.50%. From 2014/15, the ratio has been constantly increasing due
to the increase in net profit after tax

4. Return on Total Assets (ROA)

Table 2.8 NPAT, Assets and ROA

Year NPAT Index Total Assets Index ROA
2013/14 56,737,188 100% 18,529,494,417 100% 0.31%
2014/15 362,441,797 639% 25,135,187,777 135% 1.44%
2015/16 433,663,041 764% 30,610,840,237 164% 1.42%
2016/17 530,119,832 934% 45,177,332,581 242% 1.17%
2017/18 1,167,124,147 2056% 75,682,348,874 405% 1.54%
Mean 1.17%
(Source: Annual reports of NMB)
 22

From the table 2.8, the ROA is at 0.306% in 2013/14. We can see significant increase in
assets from 2013/14 to 2014/15 by 35%. In case of net profit after tax, it has increased
significantly by 539%. The reason for this increment in net profit after tax is that they
have experienced the increment from NRS 56,737,188 to NRS 362,441,797.

In the year 2014/15, ROA has gone up to 1.44% because they have been able to increase
other operating revenue significantly. Then, the ROA started decreasing to 1.173% in
2016/17.Finally ROA increase to 1.54% in 2017/18.

Figure 2.8 Return on Assets

1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2013/14 2014/15 2015/16 2016/17 2017/18

Figure 2.8 shows in 2013/14-2017/18 financial year, bank earn ROA 0.31%, 1.44%,
1.42%, 1.17% and 1.54%. Bank performs most effectively in 2014/15-2017/18. The
return is at consistent level during the years. The average of return on assets for this five
year period is 1.17%
 23

5. Efficiency Ratio

Table 2.9 Non-interest Income and Expense; Net-interest Income and Efficiency Ratio

Non-interest Non-Interest Net-Interest Efficiency

Year Expense Index Income Index Income Index Ratio
2013/14 573,943,764 100% 168,204,453 100% 462,476,499 100% 91.00%
2014/15 644,285,430 112% 241,747,396 144% 764,979,831 165% 64.00%
2015/16 768,553,548 134% 390,735,120 233% 811,481,469 175% 63.93%
2016/17 896,209,470 156% 437,395,858 261% 988,933,444 213% 62.83%
2,264,812,9 1,354,894,2 2,087,984,8
2017/18 98 394% 97 808% 76 450% 65.78%
Mean 69.51%
(Source: Annual reports of NMB)

The efficiency ratio of base year is 91%. The ratios decreasing after the period of
2013/14. The efficiency ratio of 2014/15, 2015/16, 2016/17, 2017/18 are 64%, 63.93%,
62.83% and 65.78% respectively. The average efficiency ratio during the five year period
is 69.51%

Figure 2.9 Efficiency Ratio

100
90
80
70
60
50
40
30
20
10
0
2013/14 2014/15 2015/16 2016/17 2017/18

The table 2.9 and the figure 2.9 shows that the efficiency was 91% in the year 2013/14.
During the five years of this financial analysis, the efficiency ratio has been playing
between 62-91%. Although the objective of the bank is to be at the efficiency level at
 24

around 30% it does not expect to go above 45% at any further year. So, it shows that
bank is not performing well in its operations as lower ratio is better.

2.2 Major Findings

This research tries to investigate the impact of the banking liquidity management on
profitability in NMB bank through using different indicators of banking liquidity and
profitability during the time period (2013/14-17/18).

1. After conducting early analysis, it showed that there is a lack of uniformity in these
figures and the result shows that there is no significant relation between liquidity and
profitability. However after critically analyzing all the facts and figures, it is known
that all the liquidity indicators showed that the bank is facing excess liquidity.

2. The average of CD ratio, LD ratio, LTD ratio and NLTA ratio are 0.022, 0.232, 0.777
and 0.658. Over this five year time period CD ratio comparatively increased in year
2014/15 , LD ratio at highest ratio i.e. 0.3072 in year 2016/17 while LTD ratio and
NLTA ratio are at highest in year 2017/18i.e. 0.8276 and 0.7102. These fact supports
the premise that bank is highly liquid.

3. In case of profitability, NIM, C/I ratio, ROA, ROE ratio gives different view.
Decrease in NIM, decrease in ROA, increase in C/I all means profitability has
decreased. So from the research it is known that there is negative relation as the
increase in liquidity position of the company decreased the profitability in terms of
NIM, ROA and C/I. As a result, we have found a negative relationship between
liquidity and profitability. Excess liquidity of the banks is dragging down the
profitability of the firm.
 25

CHAPTER THREE
SUMMARY AND CONCLUSION

3.1 Summary
Liquidity position of the banks is the key factor of sound operating position. Considering
the findings of this study for the success of operations and survival, NMB bank should
not compromise efficient and effective liquidity management. They are expected to
maintain optimal liquidity level in order to satisfy their financial obligations to customers
or depositors and maximize profits for the shareholders. The bank have to maintain a
sufficient amount of liquidity because there will be a large proportions of deposits
payable on demand, inability of banks to repay deposits on demand damages the credit
worthiness of the bank.

From the study, it can be concluded that excess liquidity is a "financial disease" that can
easily erode the profit base of a bank as they affect bank's attempt to attain high
profitability-level. Therefore, any bank that has the aim of maximizing its profit level
must adopt effective liquidity management.The optimal liquidity level is reached if NMB
bank religiously maintained the minimum liquidity requirement as stated by NRB. This
attempt helps to reduce cases of bank distress. The study examines the impact of liquidity
on the performance to know the impact on profitability in its day to day operation.

Financial reforms are critical for ensuring that financial system will be able to
intermediate efficiently in mobilizing domestic savings and providing financial resources
and services for private investment and activities. Effective liquidity management also
requires adequate liquidity level which will help commercial banks to estimate the
proportion of depositor's funds that will be demanded at any period and arrange on how
to meet the demand. It can finally be concluded that liquidity is inversely related to
profitability. That means as liquidity increases, profitability decreases and vice versa.

3.2 Conclusion
Based on the critical evaluation of the above findings, we hereby make the following
recommendations with the sincere conviction that they will help to reduce if not totally
eradicate the problems associated with liquidity management and profitability in NMB
 26

bank. Since the survival of commercial banks depend on liquidity management and
profitability, NMB bank should not solely concentrate on the profit maximization concept
but should also adopt measures that will ensure effective liquidity management. The
measures will help to minimize or avoid cases of excessive and deficient liquidity as their
effects. The surplus funds of the NMB bank should be seasonally invested in short-term
instruments of the money market. In addition, instead of keeping excessive liquidity as a
provision for unexpected withdrawal demands of the customers, NMB bank should find it
reasonable to adopt other measures of meeting such requirements, which can include
borrowing and discounting bills. For the fact that the monetary policies of NRB grossly
affect liquidity management of the bank, NRB should take the interest of the later into
consideration while establishing and implementing these monetary policies in general and
the liquidity ratio in particular. To achieve this feat, NRB is expected to create a forum
whereby its policy makers and the management of commercial banks interact and
dialogue for acceptable monetary policies.

NMB bank should find new investment sectors which can help to improve the
profitability. The bank should increase the lending rate to the borrowers and decrease the
deposit rate, if possible. NMB bank should apply the new roles to manage the liquidity of
the banks on interest expenses of the bank should be minimized. NMB Bank should
create a customer forum where their customers will be educated on varieties of deposits
and the operational requirements of each of them. A situation where the customers
operate any of the deposits as required, a bank will be able to estimate the liquidity level
to be maintained. Further research is recommended on how to achieve the optimal
liquidity level in commercial banks. The result will help to solve the problem of excess
liquidity and it’s reducing effects on profits, and arbitrary high profitability with its
consequent reduction of liquidity position. Also it is recommended that research should
be launched on identifying better quantitative measures of profitability, liquidity, risk and
managerial efficiency, which could lead to more satisfactory estimation of cause-effect
relationship.
 27

BIBLIOGRAPHY

Ahmad, A. A., (2009). Impact of internal factors on bank profitability: Comparative

study between Saudi Arabia and Jordan. Journal of Applied Finance & Banking,
4(1), 125-140.

Diamond, R., and J. Rajan, (2008). The procyclical effects of Basel II.
Journal of Economic Policy, 2(4). 12-32

Eljelly, A. (2004). The cyclical behavior of optimal bank capital.

Journal of Banking and Finance, 28(3), 1469-1498.

Joshi, R.K . (2004). Liquidiity ratio and profitability of the banks.

The Journal of Nepalese Business Studies., 2(4). 12-18

Karki, L. (2004). Liquidity ratio with loan and advances.

Journal of Nepalese Business Studies, 2(4), 32-45

Kumar, S., and S. Yadav (2013). Liquidity management and commercial profitability.
International Research Journal of Finance and Economics, 5(8) 226-241.

Maharjan, M. (2007). Impact of liquidity in the economy. Journal of Management, 9(2).

34-41

Vossenand, D. (2010). Theoretical framework of profitability to commercial banks in

Malaysia
.European Journal of Economics, Finance and Administrative Sciences, 19(9),
75-97.

Wasiuzzaman, S., and H. Tarmizi(2010). Profitability of Islamic banks in Malaysia: An

empirical analysis. Journal of Islamic Economics, Banking and Finance, 6(4), 53-68.
 28

APPENDIX
Format of Questionnaire on Impact of liquidity on profitability of NMB
Bank
Questionnaire
Survey on profitability position of NMB Bank
Dear Sir/Madam,
I am a student of Shwoyambhu International College. I am conducting a research on
“Impact of liquidity on profitability of NMB Bank”. This study is compulsory for
academic purpose only. So, I would like to assure you that your valuable information will
be kept confidential.
Thank You.

Questionnaire
Personal Details:
1. Gender
Male Female

2. Marital Status
Married Unmarried

3. Age
Below 20 20-30 31-40 Above 41

4. Education
Literate Illiterate

Core Details:
1. Do you have account in NMB Bank?

Yes No

2. Do you receive any kind of bonus from bank’s profitability?

Yes No

3. When will you receive bonus in your account?

Monthly Quarterly Yearly