Effect of Bank Specific Factors and Market Structure Factors on Profitability in Nepalese Commercial Banks

Abstract

This study examines the effect of bank specific factors and market structure factors on the profitability of Nepalese commercial banks. Return on assets (ROA) and net interest margin (NIM) are the selected dependent variables. The selected independent variables are bank size, non-performing loans, capital adequacy ratio, loan-to-deposit ratio, operating efficiency, book value per share, and market capitalization. The study is based on secondary data of 14 commercial banks with 112 observations for the study period from 2015/16 to 2022/23. The data were collected from Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected commercial banks. The correlation coefficients and regression models are estimated to test the significance and importance of bank specific factor and market structure factors on the profitability of Nepalese commercial banks. The study showed that non-performing loan has a negative impact on return on assets and net interest margin. It indicates that increase in non-performing loan leads to decrease in return on assets and net interest margin. Similarly, capital adequacy ratio has a positive impact on return on assets and net interest margin. It indicates that increase in capital adequacy ratio leads to increase in return on assets and net interest margin. In contrast, loan to deposit ratio has a negative impact on return on assets and net interest margin. It indicates that increase on loan to deposit ratio leads to decrease in return on assets and net interest margin. Further, operating efficiency has a negative impact on return on assets. It indicates that increase in operating efficiency leads to decrease in return on assets. In addition, bank size has a positive impact on return on assets and net interest margin. It indicates that increase in bank size leads to increase in return on assets and net interest margin. Moreover, market capitalization has a positive impact on return on assets. It indicates that increase in market capitalization leads to increase in return on assets. Similarly, book value per share has a positive impact on return on assets and net interest margin. It indicates that higher the book value per share, higher would be the return on assets and net interest margin.