Profitability analysis of Commercial Bank

(A Case study of Citizen Bank Limited)

A Project Report Proposal

Submitted By:
Sunil Thapa
Roll no:26/073
T.U. Regd. No.: 7-2-271-218-2016
Group : Finance

OF
People's Campus
Paknajol, Kathmandu

Submitted To:
The Faculty of Management
Tribhuwan University
Kathmandu

In partial fulfillment of the requirements for the degree of

Bachelors of Business Studies (BBS)
Kathmandu
Dec,2019
Background

It is obvious that economic development is impossible without the development of different

sectors like Agriculture, Industry, and Trade etc. of the country. So, development of these sectors
needs a regular supply of financial resources. In developing countries there is always shortage of
the capital for the development activities. It is not possible to handle and develop all the sectors
by the Government alone at a time. Private people also can not undertake large business because
per capita income of the people is very low while their propensity to consume is very high. Due
to low income their saving is very low and capital formation is very low. So their saving is not
sufficient for carrying on development works. "Economic development demands transformation
of savings or investible resources into the actual investment. It is the financial institution that
transfer funds from surplus spending units to deficit units" (Nepal Rastra Bank, 1996) Banking
sector plays an important role in the economic development of the country. Commercial Banks
are one of the vital aspects of this sector, which deals in the process of channeling the available
resources in the needed sector. It is the intermediary between the deficit and surplus of financial
resources. Financial institutions like banks are a necessity to collect scattered saving and put
them into productive channels. In the absence of such institutions it is possible that the saving
will not be safely and profitably utilized within the economy. It will be diverted aboard or
channeled into unproductive conspicuous consumption including real estate speculation. Loans
are an essential aspect of commercial bank. "First, income from loan contributes substantially to
the revenues and profit of the bank. Second, lending money to people in the community
strengthens the community- bank relationship. Third, lending money spurs business development
and supports a growing economy" (Edmister, 1980). Credit being the most important function of
commercial banks, affects overall development of the country. So far as pace of economic
development is considered, it is directly related to the quality and quantity of the credit, which is
derived from various financial institutions, especially commercial banks in Nepal.

Organization profile

Citizens Bank International Limited has been established as a reliable and trustworthy partner
for all financial solutions. Institutionalized by a highly professional and experienced team, we
have gained credibility in banking sector through quality financial service. Established on April
20, 2007 (2064/01/07) as 20th commercial bank of the nation, “Citizens Bank International
Limited”, has its corporate office at the heart of the financial sector of the country, Narayanhiti
Path, Kathmandu. It is promoted by eminent personalities, business and industrial houses and
reputed individual having high social standing and has been managed by a team of experienced
bankers and professionals. There are 67 branches and 62 ATMs all over the country.

Objectives

The main objective of the study is to analyze the profitability ratio of Citizen Bank Ltd.
However, the specific objectives of the study are:
 To analyze the profitability of the bank,
 To analyze the bank's investment on priority sector bank.
Rational

This study mainly fills a research gap on the study of investment policy of CTZN. Definitely,
the study will provide a useful feedback to the policy makers of the bank and also becomes a
useful reference for other commercial banks of Nepal and central bank (NRB) for the
formulation of appropriate strategies. This study evaluates the investment policy of and finds its
loopholes and significantly contributes to make the policy sound.

Review of literature

In this chapter, focus has been made on the review of literature that is relevant to the investment
policy of commercial banks. Review of literature is basically a stock taking of 3 available
literature in the field of research. Every possible effort has been made to grasp knowledge and
information that is available from libraries, document collection centers, other information
managing bureaus and concerned commercial bank. This chapter helps to take adequate feedback
to broaden the information base and inputs to the study.

Related theories

Commercial Bank Act of Nepal (1974) has defined that "A commercial bank is one which
exchanges money, deposits money, accepts deposits, grant loans and performs commercial
banking functions and which is not a bank meant for co-operative, agriculture, industries or for
such specific purpose." Commercial bank is a corporation, which accepts demand deposits
subject to check and makes short-term loans to business enterprises, regardless of the scope of its
other services (American Institute of Banking, 1972).

Profitability. A commercial bank can maximize its volume of wealth through maximization of
return on their investments and lending. So, they must invest their funds where they can gain
maximum profit. The profit of commercial banks depends on the interest rate, volume of loan, its
time period and nature of investment in different securities.

Liquidity. Liquidity is the ability of a firm to satisfy its short-term obligations when they
become due for payment. People deposit money at the bank in different account with confidence
that the bank will repay their money when they need. To maintain such confidence of the
depositors, the bank must keep this point in mind while investing its excess funds in different
securities, so that it can meet current or short-term obligations when they become due for
payment.

Purpose of loan. From the viewpoint of security, a banker should always be known that why a
customer is in need of loan. If a borrower misuses the loan granted by the bank, it can never
repay and bank will possess heavy bad debts. Therefore in order to avoid this situation each and
every bank should demand and examine all the essential detailed information about the scheme
of the project or activities, before lending.
 Diversification. "A bank should not lay all its eggs on the same basket". This saying is very
important to the bank and it should always be careful not to grant loan in only one sector. To
minimize risk, a bank must diversify its investment on different sectors. Diversification of loan
helps to sustain loss according to the law of average because if securities of a company deprived,
there may be appreciation in the securities of other companies. In this way the loss can be
minimized or recovered.

Tangibility. Though it may be considered that tangible property does not yield an income apart
from direct satisfaction of possession of property, many times, intangible securities have lost
their value due to price level inflation. A commercial bank should prefer tangible security to
intangible one.

Review of related studies

There are not much articles published related to investment management in Nepal. The portfolio
management becomes very important both for individuals as well as institutional investors.
Investors would like to select a best mix of investment assets subject to the following aspect:

 Higher return, which is comparable with alternative opportunities available according to the
risk class of investors.
 Good liquidity with adequate safety of investment.
 Maximum tax concession.
 Economic, efficient and effective investment mix.
 Flexible investment.
 Certain capital gains.
 In view of above aspect, following strategies can be adopted.
 Choose such a portfolio of securities, which ensures maximum return with minimum risk or
lower return but with added objective of wealth maximization.
 Economic, efficient and effective investment mix.
 Do not hold any single security i.e.; try to have a portfolio of different securities.
 In view of above aspect, following strategies can be adopted
.  Do not put all the eggs in one basket i.e.; to have a diversified investment.
 Choose such a portfolio of securities, which ensures maximum return with minimum risk or
lower return but with added objective of wealth maximization.

To study fund mobilization and investment policy with respect to fee based off-balance sheet
transaction and fund based on balance sheet transaction. To evaluate the liquidity efficiency of
assets management and profitability position. To evaluate the trends of deposit utilization
towards total investment and loan & advances and its projection for next five years. To evaluate
the growth ratios of loan & advances and total investment with respect to growth ratios of total
deposit and net profit.
Research methodology

Research methodology refers to the various sequential steps to be adopted by a researcher in

studying a problem, with certain objectives in view. In other words, research methodology
describes the methods and processes applied in the entire subject of the study. Research
Methodology is a way to systematically solve the research problem. It may be understood as a
science of studying how research is done significantly. It is necessary for the researcher to know
not only the research methods / techniques but also the methodology. Researchers not only need
to know how to develop certain indices or tests, how to calculate the mean, the mode, the
research techniques, but they also need to know which of these methods or techniques are
relevant and which are not, and what would they mean and indicate and why?

Research design

A research design is purely and simply the framework or plan for a study that guides the
collection and analysis of data. Research design is the plan, structure and strategy of
investigations conceived so as to obtain answers to research questions and to control variances.
A true research design is basically concerned with various steps to collect the data for analysis
and draw a relevant conclusion. It is the arrangement of conditions for collection and analysis of
data that aims to combine relevance to the research purpose with economy in procedure.

Population and sample

The population refers to the industries of the same nature and its services and product in general.
Thus, the total Commercial Banks constitutes the population of the data and the bank under study
constitutes the sample for the study.

Sources of data

Data are only from secondary sources. The data presented in this study are of secondary type.
The secondary sources of data are those that have been used from published sources or used by
someone previously. The annual reports of the concerned Bank are the major sources of data for
the study. However, besides the annual reports of the subjected bank, the following sources of
data have also been used in the course of the study:

 Various articles published in the News Papers.

 Periodic returns submitted by the Bank's Head Office to NRB.

Data collection technique

This study is mainly based on secondary data obtained from various sources mentioned above.
The annual reports of CTZN Bank Limited for the period of five years from fiscal year 2011/12
to 2016/17 A.D were obtained from the field visit of its shares department at its corporate office
located at Kamaladi, Kathmandu. NRB publications such as Quarterly Economic Bulletins,
Banking and Financial Statistics, Economic report, etc. have been collected by the personal visit
of concerned departments of Nepal Rastra Bank at Baluwatar. The unpublished data of sector
wise loans and advances has been collected from reporting department of CTZN. The data on
some aspects of the bank has also been obtained from the publications and websites of Nepal
Stock Exchange. Some supplementary data and information and literature review have been
collected from different Journals, magazines and other published and unpublished reports
documented by the concerned authorities.

Data analysis tools. Presentation and Analysis of the collected data is the core of the research
work. The collected raw data are first presented in systematic manner in tabular forms and are
then analyzed by applying different financial and statistical tools to achieve the research
objectives. Besides these, some graph charts and tables have been presented to analyze and
interpret the findings of the study.

Financial tools. Financial tools basically help to analyze the financial strength and weakness of
a firm. Ratio analysis is one of the important financial tools that have been used in the study. A
ratio is simply one number expressed in term of another and such it expresses the quantitative
relationship between any two numbers. Ratio can be expressed in terms of percentage,
proportion and as coefficient. Logarithmic graph and break-even chart are the graphic form of
expressing a ratio. They help to analyze the financial strength and weakness of a firm proportion
and as coefficient. Logarithmic graph and break-even chart are the graphic forms of expressing a
ratio. Financial ratio is the mathematical relationship between two accounting figures. Ratio
analysis is a part of the whole process of analysis of financial statements of any business or
industrial concern especially to take output and credit decisions. Even though there are many
ratios to analyze and interpret the financial statement, only those ratios that are related to the
investment operation of the bank are have been covered in this study. Different types of ratios
have been used in this study.

Profitability ratios. Profitability ratios are used to indicate and measure the overall efficiency
of a firm in terms of profit and financial performance. For better performance, profitability ratios
of firms should be higher. Under this topic the following profitability ratios of CTZN Bank Ltd.
have been studied.

(i) Interest income to total income ratio. This ratio measures the volume of interest income in
total income of the bank. The high ratio indicates the high contribution made by the lending and
investing activities and vice versa.
 (ii) Total interest earned to total outside assets ratio This ratio measures the interest earning
capacity of the bank through the efficient utilization of outside assets. Higher ratio implies
efficient use of outside assets to earn interest.

(iii) Interest expenses to total expenses ratio This ratio measures the portion of total interest
expenses in the volume of total expenses. The high ratio indicates the low operational expenses
and vice versa.

(iv) Total interest earned to total working fund ratio This ratio is calculated to find out the
percentage of interest earned to total assets (working fund). Higher ratio implies better
performance of the bank in terms of interest earning on its 13 total working fund.

(v) Total interest paid to total working fund ratio This ratio is calculated to find out the
percentage of interest paid on liabilities with respect to total working fund.

Growth ratios. To examine and analyze the expansion and growth of the banking business,
following growth ratios are calculated in this part of the study.

(i) Growth ratio of total deposits

(ii) Growth ratio of loan and advances

(iii) Growth ratio of total investment

(iv) Growth ratio of net profit

Limitations of the study

This study has the following limitations:

a) This is a case study of CTZN and findings of the study cannot be generalized.

b) The study is limited to five years period from 2012/2013 to 2016/2017.

c) Among many factors affecting investment decision, only certain factors i.e. liquidity,
profitability, diversification, growth etc. have been considered.
 References
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An Unpublished Masters Degree Thesis, T.U. Kathmandu, 2003

Bhattarai, K.D (2003) Non Performing Assets (NPA) Management. Economics Journal.
Kathmandu

Dahal, S. (2002) A study of Financial Performance of JVBs in Nepal: A study Between NSBL
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Dhungana, P (2002) Investment policy of Nepal Bangladesh Bank Limited & other Joint
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Faulke, R.A. (1957) Practical Financial Statement Analysis, New Yorks: McGrawHall
Company

Ghimire, GP. (2003) Financial Performance of Commercial Banks: A Comparative Case Study
of NBBL, HBL, and EBL. An Unpublished Master's Degree Thesis, T.U. Kath, 2003

Sharma, P. (2001) An Appraisal of Financial Aspects of BOKL An unpublished Master's

Dergee Thesis, T.U. Kathmandu.

Shrestha, S. (1993) Investment Planning of Commercial Banks in Nepal. An unpublished Ph. D

Thesis, Delhi University, India

Shrestha, S.B (1998) Portfolio management in commercial banks; theory and practice. An
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 Annexure A
A Questionnaire on "Profitability analysis of Commercial Bank"

Dear Sir,

I am student of BBS at people's campus,Kathmandu.I am conducting research on "Profitability

analysis of Commercial Bank (A Case Study of Citizen Bank Ltd)". Please complete the
questionnaire by sharing your honest opinion and experiences. All the information provided by
you will be confidential. Your cooperation in this regard will be highly appreciated .

Regards,

Sunil Thapa

PART A

1.Name (Optional):

2.Educational level:

3.Sex:

4.Age:

PART B

5.Does Citizen bank gains profit on the basis of people depositing money?

a. Yes b. No c. Do not know

6.Do you think Citizen bank bears risk?

a. Yes b. No c. Do not know