1.

1 NAME, LOCATION AND HISTORICAL BACKGROUND

National Bank Limited has its prosperous past, glorious present, prospective future and under

processing projects and activities. Established as the first private sector bank fully owned by Bangladeshi

entrepreneurs, NBL has been flourishing as the largest private sector Bank with the passage of time after

facing many stress and strain. The members of the board of directors are creative businessmen and

leading industrialists of the country. To keep pace with time and in harmony with national and

international economic activities and for rendering all modern services, NBL, as a financial institution,

automated all its branches with computer networks in accordance with the competitive commercial

demand of time. Moreover, considering its forth-coming future, the infrastructure of the Bank has been

rearranging. The expectation of all class businessmen, entrepreneurs and general public is much more to

NBL. At present we have 145 branches under our branch network. In addition, our effective and

diversified approach to seize the market opportunities is going on as continuous process to

accommodate new customers by developing and expanding rural, SME financing and offshore banking

facilities.

The emergence of National Bank Limited in the private sector was an important event in the Banking

arena of Bangladesh. When the nation was in the grip of severe recession, the government took the

farsighted decision to allow the private sector to revive the economy of the country. Several dynamic

entrepreneurs came forward for establishing a bank with a motto to revitalize the economy of the

country.

National Bank Limited was born as the first hundred percent Bangladeshi owned Bank in the private

sector. From the very inception, it was the firm determination of National Bank Limited to play a vital

role in the national economy. We are determined to bring back the long forgotten taste of banking
services and flavors. We want to serve each one promptly and with a sense of dedication and dignity.

The then President of the People's Republic of Bangladesh Justice Ahsanuddin Chowdhury inaugurated

the bank formally on March 28, 1983 but the first branch at 48, Dilkusha Commercial Area, Dhaka

started commercial operation on March 23, 1983. The 2nd Branch was opened on 11th May 1983 at

Khatungonj,Chittagong.

At present, NBL has been carrying on business through its total 167 service locations (branches and Agri

branches) spread all over the country. Since the very beginning, the bank has exerted much emphasis on

overseas operations and handled a sizable quantum of home bound foreign remittance. It has drawing

arrangements with 415 correspondents in 75 countries of the world, as well as with 37 overseas

Exchange Companies located in 13 countries. NBL was the first domestic bank to establish agency

arrangements with the world famous Western Union in order to facilitate quick and safe remittance of

the valuable foreign exchanges earned by the expatriate Bangladeshi nationals. This has meant that the

expatriates can remit their hard-earned money to the country with much ease, confidence, safety and

speed.

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 1.1.1HIGHLIGHTS OF MILESTONE ACHIEVED BY NBL

NBL was also the first among domestic banks to introduce international Master Card in Bangladesh. In

the meantime, NBL has also introduced the Visa Card and Power Card. The Bank has in its use the latest

information technology services of SWIFT and REUTERS. NBL has been continuing its small credit

programmes for disbursement of collateral free agricultural loans among the poor farmers of Barindra

area in Rajshahi district for improving their livelihood.

The Transparency and accountability of a financial institution are reflected in its Annual Report

containing its Balance Sheet and Profit & Loss Account. In recognition of this, NBL was awarded Crest in

1999 and 2000, and Certificate of Appreciation in 2001 by the Institute of Chartered Accountants of

Bangladesh.

Since its inception, the bank was aware of complying with Corporate Social Responsibility. In this

direction, we have remained associated with the development of education, healthcare and have

sponsored sporting and cultural activities. During times of natural disasters like floods, cyclones,

landslides, we have extended our hand to mitigate the sufferings of victims. It established the National

Bank Foundation in 1989 to remain involved with social welfare activities

The foundation runs the NBL Public School & College at Moghbazar where present enrolment is 1140.

Besides awarding scholarship to the meritorious children of the employees.

The bank has also extended financial support for their education. It also provided financial assistance to

the Asiatic Society of Bangladesh at the time of their publication of Banglapedia and observance of 400

years of Dhaka City.

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 1.2 NAME & CHARACTERISTICS OF FOUNDERS

Many leading industrialist and dynamic entrepreneurs of Bangladesh came together to build

one of the first generation private bank known as United Commercial Bank Limited and

themselves became the founder sponsored directors of the bank. Out of the many founder

directors, some of them are playing a more vital role in achieving the success of the company.

A brief description of some of the sponsored founder directors are given below:

Abu Taher Miah was an industrialist and politician in Bangladesh. Miah was a founding member,

Sponsor Director, and Chairman of the first private bank in Bangladesh fully owned by Bangladeshi

entrepreneurs, National Bank Ltd, and a chairman and managing director of Orion Ltd, Universal

Machinery Pvt Ltd, and Mohammad Basir & Co Pvt. He was also a social worker and philanthropist.He

served in the Jatiya Sangsad as Bangladesh Nationalist Party member for Comilla-7 (Barura).

Md. Abul Hossain, Sponsor Director of National Bank Ltd. is the current Chairman, Executive

Committee of the Board of Directors of the Bank. He is the Chairman & Managing Director of J. K. Group

of Industries and also a CIP of the country. Furthermore, He is the founder of J. K. Memorial Hospital

(Charitable) at Gohira, Chittagong established under J. K. Foundation. Well known as a reputed

philanthropist, Mr. Khan is actively associated with many educational and socio-cultural organizations of

Chittagong and Dhaka and is a widely travelled personality and visited many countries of the world in

connection with business and industrial development.

The Chairman of National Bank Limited is Zainul Haque Sikder who is also a successful businessman and

philanthropist, well known in Bangladesh for his achievements in real estate developments, construction

Page 5
and banking. He is also recognized for his involvement in humanitarian causes, in which he contributes

not only financial support, but his personal attention as well. Mr. Sikder founded Z. H. Sikder Women's

Medical College and Hospital in Dhaka, Bangladesh, and financed the project with his own private funds.

His motivation in creating this institution was the concern for medical education opportunity of

Bangladeshi female students and health care of general public. He has also founded several other

schools, charitable organizations, orphanages, and free medical dispensaries for the poor. He continues

unselfishly to share his personal wealth with the poor population, and applies his great energy to better

the health, education and social welfare of the people. In 1982, he moved to the United States and

became an American citizen; he now hold dual citizenships, and maintain homes in both countries. He

has also established successful business ventures in the United States.

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 1.3 MISSION, VISION, OBJECTIVES AND STRATEGIES OF NBL

1.3.1 Mission

Efforts for expansion of our activities at home and abroad by adding new dimensions to our banking

services are being continued unabated. Alongside, we are also putting highest priority in ensuring

transparency, account ablility, improved clientele service as well as to our commitment to serve the

society through which we want to get closer and closer to the people of all strata.

1.3.2Vision:

Ensuring highest standard of clientele services through best application of latest information technology,

making due contribution to the national economy and establishing ourselves firmly at home and abroad

as a front ranking bank of the country are our cherished vision.

1.3.3 Core Values:

 We put our customers first

 We emphasize on professional ethics

 We maintain quality at all levels

 We believe in being a responsible corporate citizen

 We foster participative management

 We say what we believe in

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1.3.4 Goals:

 Develop a plan for offering better customer services

 Develop a realistic deposit mobilization plan

 Develop appropriate ending risk assessment system

 Develop capital plan

 Develop a system to make good advance

 Develop appropriate management structure, system, procedures and approaches

 Develop scientific MIS to monitor bank’s activities

1.3.5 Objectives:

 Ensure 100% recovery of all advances

 Ensure a satisfied work force

 Make sound loan and investment

 Build up a low cost fund base

 Meet capital adequacy recruitment at all the time

 Focus on fees based income

 Install MIS to monitor banks activities

 Adopt an appropriate management technology

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1.3.6 Strategies:

 Utilize all available resources to develop various plan and polices

 Procedures in each of the objective and goal areas

 Synchronized and steady growth of the bank

 Implement plans, policies and procedures

 Utilize term of professional employees

 Search for a total customized solution for the purpose of full automation step

To make all the To foster

stakeholder happy and to To be compliant creativity,innovatio
make the entire banking with all the rules n and diversity
process a enjoyable and regulations with the view to
experience for everyone sustanable business

To ensures satisfaction of
Continuous development all the customers
through delivering To establish good
without compromising services with the
needs of future generation governance
implementation of world
class IT infrustracture

Ensuring effective risk Foster on To build and

managementsystem
within entire phases of
Corporate social Enhance brand
activity responsibility image

Figure 1.1 Strategic priority

Page 9
 1.4 Management of NBL

Board of Directors of NBL includes the high professional and high-qualified business men

of Bangladesh. Well-designed directions of those bodies help the management to achieve the

ultimate goal of the bank. The members of the Board of Directors are the very renowned

business men of Bangladesh. The board of directors of the NBL is follows:

Chairman

Zainul Haque Sikder

Chairman, Executive Committee

Ms. Parveen Haque Sikder

Chairman, Auditee Committee

Mr. Md. Anwar Hossain

Mr Md Badiul Alam Mr Md Gulam Mustafa

Mr A K M Shafiqur Rahman Mr Md Gulam Mustafa

Mr S M Jaffar Mr Md Abdus Sobhan Khan
Mr Shamsul Huda Khan
Mr Sk Abdul Salim
Mr Nazib Uddin Bhuiyan
Mr Sk Abdul Majid
Mr A S M Bulbul
Mr Sarker Md Abdus Sobhan
Mr Syed Mohammad Bariqullah
Mr Kazi Kamal Uddin Ahmed
Mr Mohammad Masoom
Mr Munshi Abu Zakaria
Mr Nizam Ahmed

Figure 1.2 Management’s Body

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 1.5 Company’s Organogram

The Bank has in its Management with a combination of dedicated highly skilled and eminent bankers of

the country of varied experience and expertise successfully led by Mr.Neaz Ahmed 2982 dedicated

employees are working in NBL. The bank is operating its business by divided into three main segments.

These are General Operation Division, Corporate Banking Division, and International Division. There are

three different Deputy Managing Directors (DMD) supervise the work of these departments. The total

work flow of the level of employees of NBL is as shown by an organ gram of NBL is given bellow.

Figure 1.3 Company’s Organogram

Managing Director

Deputy MD(Corporate Deputy MD(Operations) Deputy

Banking Division) MD(Internation al
Banking)
Sr. Ex. Vice president
Sr. Ex. Vice president Sr. Ex. Vice president

Sr. Vice Sr. Vice Sr. Vice Sr. Vice Sr. Vice
Sr. Vice
president president president president president
president

Vice President

First Assistant Vice President

Assistant Vice President

Senior Executive Officer

Executive Officer

Junior Officer

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11
1.6 MAJOR FUNCTIONS, DESCRIPTION OF ITS BUSINESS &

FUNCTIONAL DEPARTMENTS

1.6.1 Functions of NBL:

 To maintain all types of deposit A/Cs.

 Provides loans on easy terms and conditions

 It transfers money through Demand Drafts (DD), Pay Order (PO) and Telegraphic Transfer (TT).

 It assist in Foreign Exchange by issuing Letter of Credit (LC)

 To make investment in profitable sectors.

 NBL insures the securities of valuable documents of clients

 To conduct other Banking services.

 To conduct social welfare activities.

 To work for continues business innovation and improvements.

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1.6.2 Products and Services of NBL:

NBL is always attentive to give the highest value to their customers. That’s why NBL is

offering the modern products and Services to their customers. NBL is offering the

segmented Products & Services to different level of customers along with their general

Products and Services. That is very help-full for NBL to create value for their customers.

DEPOSIT CREDIT
CARDS
PRODUCTS PRODUCTS
Overdraft, Lease
Savings,Current,Term,Foreign Credit Card, NBL
Currency Deposit
financing,House
Power Card.
Building

Small
Monthly Income, Monthly
Medium,Cunsumer
Deposit,Double Benefit,Millionaire
Credit, Trade
Scheme
Finance

Figure 1.4: Breakdown of Products

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13
 a) Savings Deposit:

National Bank Limited offers customers a hassel free and low charges savings account through the
branches all over Bangladesh.

Benefits:
Interest rate of 4.00% on minimum monthly balance.
Minimum balance Tk.5000.
Maintenance charge yealy Tk. 600.
No hidden costs.
Standing Instruction Arrangement are available for operating account.

b) Current Deposit:

Benefits:
Minimum balance Tk.2000.
Minimum maintenance charge half yearly Tk.400
No hidden costs.
Standing Instruction Arrangement are available for operating account.
Easy access to our other facilities.

c) Term Deposit
i. Special Notice Deposit:
National Bank Limited offers interest on customer's special notice deposit account and gives
facility to withdraw money any time.

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Benefits:
Minimum maintenance charge half yearly Tk.500.
Standing Instruction Arrangement are available for operating account.

ii. Fixed Deposit:

National Bank Limited offers fixed term savings that will scale up your savings amount wtih
the time.

Benefits:
Any amount can be deposited.
Premature encashment facility is available.
Overdraft facility available against term receipt.

d) Foreign Currency Deposit:

iii. RFC Deposit:
National Bank Limited gives oppotunity to maintain foreign currency account thorugh it's
Authorized Delear Branches.Bangladesh nationals residing abroad or Foreign nationals
residing abroad or Bangladesh and foreign firms operating in Bangladesh or abroad or
Foreign missions and their expatriate employees.

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15
Benefits:
No initial deposit is required to open the account.
Interest will be offered 1.75% for US Dollar Account , 3.00 % for EURO Account and 3.25% for GBP
Account.
They will get interest on daily product basis on the credit balance (minimum balance of
US$ 1,000/- or GBP 500/- at least for 30 days) maintaining in the account.

iv. NFC Deposit:

National Bank Limited gives opportunity to maintain foreign currency account thorugh it's
Authorized Delear Branches. All non – resident Bangladeshi nationals and persons of
Bangladesh origin including those having dual nationality and ordinarily residing abroad may
maintain interest bearing NFCD Account.

Benefits:
NFCD Account can be opened for One month, Three months, Six months and One Year through US
Dollar, Pound Starling, Japanese Yen and Euro.
The initial minimum amount of $1000 or 500 Pound Starling or equivalent other designated currency.
Interest is paid on the balance maintain in the Account. This interest is tax free in Bangladesh.

e) Monthly Savings:
National Bank Limited offers monthly savings scheme for it's retail customers.
Benefits:
The deposit amount is Tk.500 to highest Tk. 50,0000 and tenor is from 3 years to 10 years maximum.
Account can be operated by debit instruction and online deposit.
Depositor can avail loan amount 80% of his deposited amount.

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Sl no Monthly Installments (Taka) Amount to be paid on completion of Term

3(Three) years 5(Five) years 8(Eight) years 10(Ten) years

01 500/- 21,050/- 39,500/- 76,000/- 1,10,000/-

02 1,000/- 42,100/- 79,000/- 1,52,000/- 2,20,000/-

03 2,000/- 84,200/- 1,58,000/- 3,04,000/- 4,40,000/-

04 3,000/- 1,26,300/- 2,37,000/- 4,56,000/- 4,56,000/-

05 4,000/- 1,68,000/- 3,16,000/- 6,08,000/- 8,08,000/-

06 5,000/- 2,10,500/- 3,95,000/- 7,60,000/- 11,00,000/-

07 10,000/- 4,21,000/- 7,90,000/- 15,20,000/- 22,00,000/-

08 20,000/- 8,42,000/- 15,80,000/- 30,40,000/- 44,00,000/-

09 30,000/- 12,63,000/- 23,70,000/- 45,60,000/- 66,00,000/-

10 50,000/- 21,05,000/- 39,50,000/- 76,00,000/- 1,10,00,000/-

f) Monthly Income Scheme:

Under this scheme one will deposit a minimum of tk.1,00,000/- or its multiple for three
years and will enjoy monthly benefit of Tk.1,000/- for every Tk.1,00,000/-.

Benefits:
Deposit of Tk.1,00,000/- and its multiple maximum of Tk 50,00,000/- shall be acceptable under this
scheme.
The account may be opened either singly or jointly.

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 g) Double Benefit Scheme:
National Bank Limited now offers Double Benefit Scheme for it's customers. The benefits under
this scheme shall become double after 6 years.

Benefits:
Deposit of Tk.50,000/- and its multiple maximum of Tk 50,00,000/- shall be acceptable under this
scheme.
A person is allowed to open more than one DBS Account.
The account may be opened either singly or jointly.
All DBS account holder shall be offered with free Life Insurance Policy under this scheme.

h) Millionaire Income Scheme:

Under this scheme one will deposit a fixed amount on monthly basis for 5, 7 or 10 years and on
maturity he/she will be just a millionaire.

Benefits:
Deposit of fixed monthly amount for 5, 7 or 10 years. Deposit size will be based on tenure. Upon
maturity the depositor will get Tk. 10,00,000/-.
Deposit of fixed monthly amount for 5, 7 or 10 years. Deposit size will be based on tenure. Upon
maturity the depositor will get Tk. 10,00,000/-.
The account may be opened either singly or jointly.

i) Overdraft:
NBL offers overdraft facility for corporate customers for day-to day business operations .

Benefits:
Low charges in overdraft account maintenance.
Facility is available against deposit receipt or mortgage property.

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Low interest rate 13-16%.

j) Lease Financing:
National Bank Limited offers leasing facility for clients with easy installment facility.

Benefits:
Competitive monthly rental.
Tax benefit.
Fast processing.

Easy handover after leasing period.

k) House Loan:
NBL offers home loan facility for purchasing flats or construction of house .

Benefits:
Financing amount extends upto 70% or Tk. 75,00,000 which is highest of total consturction cost.
Grace period avilable upto 9 months in flat purchase or 12 months in consturction.
Competitive interest rate.
No application or processing fee.

l) Small Medium Enterprise Loan:

NBL offers financial support to small businessmen/enterprise with new products named
"Festival Small Business Loan" and "NBL Small Business Loan" has been introduced in the Bank.

Benefits:
Maximum Tk.3.00 lac (Festival Scheme) and Maximum Tk.5.00 lac (Small Business Scheme)
3 Months (Festival Scheme) and 5 years (including 1 month grace period (Small Business Scheme))
Collateral Free Advance.

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 m) Consumer Credit Loan:
NBL offers consumer credit facility for retail customers.

Benefits:
Fast processing.
Competitive interest rate.
No application or processing fee.
Easy monthly installment.

n) Trade Finance:
NBL provides comprehensive banking services to all. types of commercial concerns such as in
the industrial sector for export-import purpose as working capital, packing credit, trade
finance,Issuance of Import L/Cs,Advising and confirming Export L/Cs. - Bonds and Guarantees .

Benefits:
Low interest rate 13.00%-14.50%.
Minimum processing time.
Low service charges.

o) Credit Cards:
NBL Credit Card is accepted in many merchant outlet around the world. Our wide range of
merchants include hotels, restaurants, airlines, & travel agents, shopping malls and
departmental stores, hospitals & diagnostic centers, jewelers, electronics & computer shops and
many more.

Benefits:
Dual Currency Card Facility
Lowest Rate of Interest.
Lowest Card Fees. Special Discount of Card Fee *** condition applicable.

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You can transfer 80% amount of your Local Card Limit to any NBL A/c or have Pay Order Facility.
No Excess Limit Charge.
No Hidden Charges.

p) NBL Power Card:

NBL Power Card is the first debit card for which you dont have to maintain any account with our
any branch.

Benefits:
It is a Pre-paid Card.
Annual / Renewal Fee Tk. 200/- only.
May be issued and refilled from RFCD/FC Account.
Accepted at all VISA POS merchants.
Cash withdrawl at all ATM booths bearing VISA and Q-cash logo(Except HSBC in Bangladesh).

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1.6.3 Functional Department of Finance and Accounts Division of NBL

CFO

Manageme Business
Financial Central Bank Financial Risk IT Payments Funds Reconsilation Operation
nt,Budgetin Intelligent Taxation
Reporting Reporting
g Unit

Figure:1.5: Organization Structure

Munsi Abu Zkaria is the Chief financial Officer and head of this division. The descriptions of sub

departments of different functions in the Finance and Accounts Division (FAD) are given below:

 Management, Reporting, Budgeting and MIS: The Management is responsible for managing all

areas of accounting, financial reporting and budgeting functions of National Bank, Bangladesh.

The Management Information System (MIS) in UCB helps to manage all the information

properly in the bank. Internal controls and policies are maintained as they relate to financial

matters to assure accuracy and integrity of financial information.

 Financial Reporting: This unit helps to prepare the publicly available consolidated bank

statements and annual report in a precise manner.

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  Central Bank Reporting: This unit is responsible to make quarterly reports to the central banks

regarding different rules and regulations of Central bank as well as during times of bank audits.

 Business Finance/ Business Intelligence Unit: Business Intelligence Unit of NBL is a strategic

banking unit that monitors industry events and competitor movements on a regular basis. This

unit provides strategic insight into industry coverage of key events. It offers analysis of key

competitor activity and gauges the future impact of current developments. Accompanying this

analysis are insights into new product development activity, industry trends, marketing, merger

and acquisition trends in the financial industry.

1.6.4 MAJOR FUNCTIONS, DESCRIPTION OF ITS BUSINESS &

FUNCTIONAL DEPARTMENTS:

 Taxation: This unit looks after issues of corporate tax, Value added tax and issues such

employee’s personal tax.

 GL Control, Financial Risk and BASEL II: This unit maintains the General Ledger account (GL)

using the bank software PC Bank 2000. The general ledger (GL) control or controls selected on

this sheet determine the accounts and journal codes used to post transactions to which the

record applies.

 IT and IS Finance: The Information Technology (IT) and Information System (IS) unit at NBL is

responsible for developing software such as “Financial Solution” to make transactions easier to

record and thus more organized.

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  Payments: This unit is responsible for collecting and paying different types of bank bills such as

other financial benefits for employees in the rank of Assistant Vice President and above, office

contingency bills etc.

 Funds: This unit is responsible for the management of funds at National Bank. This unit is

responsible for the maturity schedules of the deposits coincide with the demand for loans by

managing the asset and liability properly in terms of volume and mix.

 Reconciliations: The role and the purpose of the accounting function can be identified 'to

ensure the business's transactions are recorded and processed completely accurately and

securely and that relevant information is given to management.

1.7 SWOT OF NATIONAL BANK LIMITED

STRENGTHS:

It is an internal factor. It deals with the organizations own strength. NBL’s strengths are:

 First Generation Bank.

 Efficient administration

 Corporation with each other

 Fewer default loans.

 Membership with SWIFT

 Good banker-customer relationship

 Energetic as well as smart work force

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  Well furnished and air conditioned bank which indicates favorable working conditions for

employees

 Not engage in unfair business practice

 Presence of Learning and development center that provides training to its employees.

WEAKNESS:

Weakness is also an internal factor of SWOT analysis. NBL’s weaknesses are:

 Existing manual vouchers

 Limited consumer credit scheme

 Enhance of new private banks

 Lack of promotional activities

 Officers in the junior level are not highly qualified

OPPORTUNITIES:

Opportunities are external factors which indicate the industry’s advantages available for the

bank. They are

 Huge business area

 Introducing different debit and credit card

 Industry’s positive growth

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  Introducing any branch banking through online

 Flexible credit schemes

 Reliably to local public

THREATS:

Threats are external factors of SWOT analysis. The threats for NBL are

 Different classic services of foreign banks

 Better developed card division of other private banks

 Uses of modern technologies by the rival banks

 Political unrest and government restricted banking strategies

 The number of rivalry is too high into the banking industry.

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1.8 INDUSTRY ANALYSIS OF BANKING INDUSTRY IN

BANGLADESH:

Threat of
Threat of
new
Substitutes
entrants

Burgaining Bargaining
power of Power of
suppliers Competitve Buyers
revalry in
an Industry

Figure 1.6: Banking Industry Analysis

• THREAT OF POTENTIAL ENTRANTS:

Potential competitors are companies that are not currently competing in an industry but havethe

capability to get into the industry. The banking sector of Bangladesh seriously faces the threat of new

entrants. However the threat comes from two directions. The first threat comes with the arrival of the

multinational banks and their branch expansion particularly due to the booming energy sector.

Secondly, the continuous entries of local banks with lower cost structure also possess a severe threat to

this industry. In the context of NBL the various new and upcoming banks are posing a significant threat.

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Private Commercial Banks are: Union Bank Limited, Modhumoti Bank Limited, the Farmers Bank Limited,

Meghna Bank Limited, Midland Bank Limited and South Bangla Agriculture and Commerce Bank Limited,

NRB Bank. Some of these banks has not properly started its operations yet.So NBL, being a first

generation bank might still have competitive advantage as it knows the industry well and must take

appropriate measures right now to stay ahead of competition. Recently they are planning to expand by

opening new departments and branches. Government policies for banking industry are not so strong in

this country. We do not have strong rules and regulation from Bangladesh Bank for regulating the

private banking sectors. If government does not regulate the banking sector strongly, then lots of new

banks will come and will make the competition more intense. Bangladesh government is quite

supportive towards opening of new banks which is a potential threat.

• RIVALRY AMONG ESTABLISHED COMPANIES:

In the banking sector, the market size is measured in terms of total deposits and total advances. Banking

industry in Bangladesh is highly fragmented with categories like: Nationalized Commercial Banks (NCB)

and Foreign Commercial Banks (FCB). The banking sector is at the growth phase as different types of

businesses are mushrooming all over the places in Bangladesh, the need for banks has emerged,

resulting in lots of banks operating in the market making the present situation quite intense. There are

more than 52 commercial banks in the market, which are constantly fighting for the share in the market.

Among the international banks, Standard Chartered Banks has the largest network in the metropolitans

of Bangladesh, operating quite aggressively which can be a severe threat for the other banks. Among

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the national banks, those who pose rivalry and challenge are National Bank, Prime Bank, Eastern Bank,

City Bank, Premiere Bank, Dutch Bangla Bank Limited, Brac Bank Limited to name a few.

• THREAT OF SUBSTITUTES

There are substitute financial institutions that do many of the activities and transactions of a bank in the

leasing field but these institutions are too small in size. These institutions can shrink the profit margin of

commercial banks. Industrial Leasing and Development Company Ltd. (IDLC), Industrial Promotion and

Development Corporation (IPDC), United Leasing Company are the key players. They provide industrial

leasing to many companies in the country. Vanik Bangladesh Ltd, a merchant bank, provides investment

counseling and credit services among its other financial activities. But some of the operations of the

banks like exporting/importing have no substitutes. In banking industry substitute products are very

easy to find. We need to consider all types of substitute products for the banks. Different private and

nationalized banks are offering similar products, which are close substitutes. On the other hand, some

non-bank like insurance companies and leasing companies are also competing indirectly with the

commercial banks products. All the products of the commercial banks perform the similar functions.

Taking the money from the depositors and sanctioning loan to investors are the main functions. They all

do it in a same manner. NBL is not different from them. Since functional similarity is high in banking

industry, so competition is also high because customer can switch at any time they want.

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• BARGAINING POWER OF BUYERS:

Bargaining power of the buyer can be viewed as a competitive threat when they are in a position to

demand lower prices from the company or when they are in a position to demand better service that

can increase operating costs. On the other hand, when buyers are weak, a company can raise its prices

and earn greater profits. For the banking industry, buyer means customers who take loan from the

banks. Switching cost is very low in banking industry. Every bank is giving the similar types of loan

service at similar interest rate. So, an individual who wants to take loan from banks can switch easily to

other banks if he or she does not like the terms and conditions. Customers of NBL are switching to other

banks because of low interest rate and lots of other reasons. Lower switching cost makes the industry

more competitive. In banking industry, there is always a threat of backward integration. Big

multinational companies can give threats to the commercial banks that they will arrange their funds by

forming another bank where the cost of fund is lower compared to other banks. For this reason, giant

customers of this industry always possess more power than their banks. Creditors are considered to be

the buyers of the banks. There are thousands of creditors from all walks of life. Mainly businessmen are

the major buyer of bank’s credit. Big amount creditors have strong power in determining interest rate of

their credit amounts. Banks distinguish their prime customers from others by setting a prime interest

rate for them.

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• BARGAINING POWER OF SUPPLIERS:

Bargaining power of suppliers can be viewed as a threat when they are able to force up the price that a

company must pay for its inputs or reduce the quality of the inputs they supply, thereby depressing the

company’s profitability. On the other hand, if suppliers are weak, this gives the company the

opportunity to force down prices and demand higher input quality. For the bank, the main supplier of

fund is depositor. Bank also gets the fund from the directors. NBL has one of the largest capitals among

all the private banks. The bank does not want more money right at this moment because there is a very

few good opportunities for investment. So it is offering lower interest rates on depositors for their

funds. Bargaining power of the fund supplier is low in banking industry because there are lots of

individual savings in the economy but banks do not have opportunities for investment. Sometimes

suppliers of funds can give threat to the banks as well. Corporate or big multinationals companies can

give threat to the private bank that they will form another bank for depositing their money. They will

not supply any fund to other banks. This can lead to a higher competition in procurement of fund.

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1.9 CURRENT STATE OF OPERATIONS AND FUTURE DIRECTIONS:

There has been a change in management of UCB quite recently. UCB also lost their beloved chairman.

Now the bank is led by new managing director, Mr Neaz Ahmed. He is trying to adjust to culture of NBL

as well as trying to bring a lot of changes that might bring positive outcomes for NBL in the long run. The

new management is focused on lowering the volume of non-performing loans and has stressed on

recovery division at the moment the bank is trying to open new departments such as risk department

etc. and planning to open a new branch between Rampura and Badda, Dhaka.

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2.1 Introduction:

CAMELS Rating System is a supervisory rating system, initially used by United States tomeasure the

overall conditions of banks. Regulators such as Federal Reserve, the Office ofComptroller of Currency

and Federal Deposit Insurance Corporation (FDIC) uses this ratingto categorize fewer than 8000 banks

operating in the United States of America. Recently,CAMELS Rating System has evolved into a common

phenomenon for all banking system allover the world and is now recognized as an international bank

rating system.

The bank supervisory authorities rank bank on the basis of six factors that falls underCAMELS Rating

scale framework. The six factors, represented by the acronym “CAMELS”are as follows: C: Capital

Adequacy, A: Asset Quality, M: Management Quality, E: Earnings, L: Liquidityand S: Sensitivity to market

risk

Bank supervisory authorities assign a score on a scale of 1 (best) to 5 (worst) for each factorto each

bank. If a bank has an average score less than two, it is considered to be a high qualityinstitution

whereas the banks with a score greater than three or more are less satisfactoryestablishments and

hence are in need of attention.

In Bangladesh, since the early nineties, the same 5 components of CAMEL have been usedfor evaluating

five crucial dimensions of bank’s operations. Recently Bangladesh Bank hasupgraded CAMEL into

CAMELS effective from June 2006. A single CAMELS rating, on ascale of 1 to 5 (highest to worst

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operating condition), for each bank is the result of both offsite monitoring, which uses monthly financial

statement information, and on site examination, from which bank supervisors gather further “private

information” not reflected in the financial reports.In this report, the study is all about to assess the

soundness of banking operations of Nationall Bank limited (NBL) using the six dimensions of CAMELS

Rating System framework on a quarterly basis starting from December 2004 to September 2012.

2.2 OBJECTIVES:

The main objectives of this report are:

 To analyze the financial performance of National Bank Limited, Bangladesh;

 To undertake the factors which lead to current financial performance; and

 To suggest measures, on the basis of the study results, to improve further the financial

performance of National Bank, Bangladesh in order to pursue goals of profitability.

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2.3 SIGNIFICANCE OF THE STUDY:
The study and its results are very significant to the following stakeholders:

(1) Management: The management of National Bank would understand wherethey stand in terms of

their historical performance as well as understand their current positionin comparison to their major

competitors. This study will give management insights intoproblem areas where National Bank needs to

focus their attention in order to solvetheir problems and also identify their strength which is helping

them to gain competitiveadvantage.

(2) Employees: Moreover, once the study identifies the weakness of NBL through theresults of this

study, it will help management communicate the effective strategies taken as ameasure, to the

employees more clearly so that the employees can understand their goals.

(3) Investors: This study will give an overview of overall performance of NBL compared toits major

competitors in terms of overall risk which will indicate whether or not it is safe tomake further

investment into NBL stocks.

(4) Customers: This study will reveal whether the entire banking operation at NBL is safeand sound

compared to its competitors, thus indicating the current service level at NBL.

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2.4 LITERATURE REVIEW:
2.4.1 Origin of CAMELS Rating System:
There were many banks rating system available in the world. However, Camels rating system is the most

successful bank rating system in the world. The ‘Uniform Financial Institutions Rating System (UFIRS)’

was created in 1979 by the bank regulatory agencies. Under the original UFIRS a bank was assigned

ratings based on performance in five areas: the adequacy of Capital, the quality of Assets, the capability

of Management, the quality and level of Earnings and the adequacy of Liquidity. Bank supervisors

assigned a 1 through 5 rating for each of these components and a composite rating for the bank. This 1

through 5 composite rating was known primarily by the short form CAMEL. A bank received the CAMEL

rate 1 or 2 for their sound or good performance in every respect of criteria. The bank which exhibited

unsafe and unsound practices or conditions, critically deficient performance received the CAMEL rate 5

and that bank was of the greatest supervisory concern.

While the CAMEL rating normally bore close relation to the five component ratings, it was not the result

of averaging those five grades. Supervisors consider each institution’s specific situation when weighing

component ratings and review all relevant factors when assigning ratings to a certain extent. The

process and component and composite system exist similar for all banking companies.

In 1996, the UFIRS was revised and CAMEL became CAMELS with the addition of a component grade for

the Sensitivity of the bank to market risk. Sensitivity is the degree to which changes in market prices

such as interest rates adversely affect a financial institution. The communication policy for bank ratings

was also changed at end of 1996. Starting in 1997, the supervisors were to report the component rating

to the bank. Prior to that, supervisors only reported the numeric composite rating to the bank.

CAMELS’ ratings in the Ninth District as of the third quarter of 1998 reflect the excellent banking

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conditions and performance over the last several years. Comparison between the distribution of ratings

in the most recent quarter and 10 years ago during the height of the national banking crisis is illustrative

(221 banks failed nationally in 1988 while 3 banks failed in 1998). Nearly 100 percent of Ninth District

banks currently fall into the top two ratings with 40 percent receiving the top grade. Ten years ago one-

third of Ninth District banks fell into the bottom three ratings and only about one of 10 banks received

the highest grade.

2.4.2 CAMELS Rating System in Bangladesh:

In Bangladesh, the five constituents of CAMEL have been used for evaluating the five, vital dimensions of

a bank’s operations in order to assess its overall financial performance in agreement with banking rules

and regulations since the early nineties. However, in 2006 the CAMEL framework is modified into a new,

effective and efficient system, CAMELS Rating System where the new component S stands for Sensitivity

to market risk. According to predetermined stress testing on asset, liability and foreign exchange

exposure, specific set of rules, regulations, standards and core risk management guidelines, risk based

audits are conducted to analyze bank’s regular operating condition and performance. A bank’s

singlerating is the combined output from offsite monitoring, which requires monthly financial statement

information and an on site examination, from which bank supervisor collects further private information

not available in financial statements. The development of “credits points” analysis outcome is ranging

from 0 to 100. The acronym CAMELS represent six key factors: capital adequacy, asset quality,

management earnings, liquidity and sensitivity to market risk, on the basis of which performance are to

be evaluated on a scale of 1 to 5 in ascending order.

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Rating Composite Rate
1 1 to 1.4
2 1.5 to 2.4
3 2.5 to 3.4
4 3.5 to 4.4
5 4.5 to 5
Description Interpretation
Strong Sound in every respect, no supervisory responses
required
Satisfactory Fundamentally sound with modest, correctable,
weaknesses, supervisory response limited
Fair Combination of weaknesses if not redirected will
become severe. Watch category. Requires more than
normal supervision.
Marginal Immoderate weakness unless properly addressed could
impair future viability of the bank. Needs close
supervision.
Unsatisfactory High risk of failure in the near term. Under constant
supervision/cease and desist order .

2.4.3 Process of CAMELS Rating System:

The reporting process of CAMELS rating is given below:

Data Collection Schedules of lending Data Collection of

Start
of Overdue Loan rates and deposit rates average borrowed
loans and interest

Prepare Collect information of Data Collection of

Meeting with MANCOM
CAMELS training programs maturity wise
with the draft
Report arranged by banks investments from
training institute treasury

Necessary changes are

made and report is END
submitted to BB

Figure no. 2. 1: Reporting Process of CAMELS Rating

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Process:
1. Data collection of reschedule status of overdue loans from CRM, Retail, SME and Ops.

2. Data collection of lending rates and deposit rates from Treasury.

3. Data collection of average borrowed amount and rate of interest expenses from Treasury.

4. Data collection of maturity wise investments from Treasury.

5. Collect information of training programs arranged by the Bank’s training institute from

Human Resources Division.

6. Collection of other required reports and statements from other divisions.

7. Preparation of CAMELS report as per guideline of BB & Core Risk Management Guidelines.

8. Meeting arranged with MANCOM.

9. Necessary changes are made and report is submitted to BB.

2.4.4 Limitations of CAMELS Rating System:

First of all, the rating can not essentially capture the seriousness of the bank’s situation which

may often lead to bank’s failure.

 CAMELS Rating System only considers the internal operation and takes into account

currentfinancial condition. Regional and local, economic developments are not taken into

accountthat may impact a bank’s condition.

 CAMELS Ratings does not consider long term risk factors that might pose problem in longterm,

causing severe losses. For example, even though many banks are performingsatisfactorily,

during the period of inspection, might tend to get involved in risky behaviorsthat in the past has

resulted in failures, such as unwarranted asset growth rate, high ratios ofcommercial real estate

loans and total loans to total asset, or a heavy reliance upon volatiledeposit liabilities. This can

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 only suggest that the above stated risk factors were not weightedin current examination

ratings.

 If a bank faces unexpected problems from the stated above limitations of CAMELS Ratingsystem

at a certain point in future, then a bank has to expend its resources such as time andmoney to

solve the problem.

2.4.5 Six factors of CAMELS Rating System:

(a) Capital Adequacy and its Effect on Profitability:
According to Kosmidou (2009), Capital adequacy refers to the sufficiency of the amount of equity to

absorb any shocks that bank may experience. The bank is highly regulated, owing to the fact that capital

plays a vital role in reducing the frequency of bank failures as well as reduces the losses to depositors

which might occur if bank fails. In very simple terms, a bank can finance its loan portfolio (assets) either

by taking deposits (savings) from its clients or by issuing shares (equity capital). For various reasons

there is a strong incentive for banks to keep the equity capital as low as possible. Mainly because the

interest rates on the loans are higher than the interest rates on the deposits, the return on equity can be

pushed higher by increasing the leverage (i.e. the ratio of deposits to equity capital). Highly leveraged

firms such as the banks are likely to engage in excessive risk in order to maximize shareholder value at

the expense of finance provider (Kamau, 2009). However, small equity capital increases the risk of bank

going bankrupt when value of its outstanding loan fall below the value of deposit. Hence regulators

always prefer having higher minimum capital requirement than the statutory capital requirement in

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order to prevent bank failures, whilst bankers, on the other hand, argue that it is difficult to achieve

additional equity and moreover, higher requirement hurt the bankers ability to remain competitive

(Koch, 1995). According to Beckmann (2007), banks with high capital ratio are highly risk averse and

overlook potential, risky investment opportunities that leads to two things: first, investors expects lower

return on their capital in exchange of lower risk and bank earns lower profit.

Even though capital is expensive in terms expected return, well capitalized banks does not face

problems such as chances of bankruptcy, in need of external funding in times of emerging economies

when external borrowing is difficult and hence tends to be more profitable than poorly capitalized banks

(Gavia et al, 2009). Prior studies conducted by Neceur (2003), using a sample size of 10 Tunisian banks

from a time period of 1980 to 2000, revealed that there is a positive relationship between Capital

adequacy and profitability, represented by the ratio, Return on Asset (ROA), on the basis of the result

shown by the panel linear regression model. Same results were achieved on the study of impact of

capital on performance of banks in Philippines from 1990 to 2005, made by Sufian and Chong (2008).

Capital adequacy is divided into Tier 1 (primary capital) and Tier 2 (supplementary capital). However, in

this study total capital is employed as opposed to minimum requirement. Thus the ratio used in this

study to measure capital adequacy under AIA’s CAMEL framework for bank analysis (1996) is Equity

Capital to Total Asset.

(b) Asset Quality and its Effect on Profitability:

Baral (2005) states that credit risk, the risk arising from loan losses of delinquent loans, is one of the

main reasons for affecting the health of a bank in terms of profit. The extent of credit risk depends on

the quality of assets held by individual banks. Loan portfolio is the most important and by far the largest

asset category, often amounting to three fourth of the total asset in a bank. If a bank holds poor quality

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loans, then it is subject to a lot of credit risk. In a supportive argument, Grier (2007) states “Poor asset

quality is the major cause of most bank failures”. Even though quality of loan portfolio is carefully

analyzed by using trend analysis of non performing loans, peer comparison and other specific risk

exposure under proper guidelines of credit risk management, often the subjective judgment on the

credit analyst part is responsible for a bank holding poor quality loans in their portfolio. In addition to

this, quality of assets held by a bank is affected by health and profitability of bank borrowers. The overall

profitability of bank depends on its ability to predict, avoid and observe risks in order to insure against

losses caused the risk arisen. So a bank must carefully allocate its resources and take into account all the

risk associated with each asset category while decision making (Aburime, 2008).

Non performing loans has been the main reason for financial crises in Kenya during the period of 1986-

1989,1993-1994 and 1998 where 37 banks went bankrupt (Mwega, 2009). Non performing loans does

not only impact and restrict a bank’s profitability, it can thwart economic recovery, especially in a bank

centered financial system like Bangladesh, by shrinking operating margin and eroding the capital base of

the banks to advance new loans. This is sometimes referred to as “credit crunch” (Bernanke et al., 1991:

204-248). According to Koch (1995), loan loss reserve to gross loan is a good measure of credit risk

because it attempts to capture management’s expectation in respect to loan performance. However

according to an observation made by Hempel et al (1994), banks with high loan growth rate and an

assumed, high credit risk on the basis of credit analysis and less rigorous review, often receives higher

return due to more available capital, thus indicating a risk return trade off. Kosmidou (2008) applied a

linear regression model on Greece 23 commercial banks data for 1990 to 2002, using Return on Asset

(ROA) and the ratio of loan loss reserve to gross loans to proxy profitability and asset quality

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respectively. The results revealed that there exists a negative relationship between ROA and loan loss

reserve to gross loans, thus agreeing to theory that poor asset quality leads to lower profitability due to

increased exposure to credit risk. This study further suggested that banks might improve their profit

margins through careful monitoring and screening of credit risk.

In the following study, Non Performing loans to Total Asset will be used as a representative of Asset

Quality which in consistent with AIA’s CAMEL Approach for Bank Analysis (1996).

(c) Management Efficiency and its Effect on Profitability:

The major contributor to poor profitability is poor expense management according to Sufian and Chong

(2008). Operational Cost Efficiency (OCE) is a common key indicator used to measure the efficiency of

management in most banks. It was seen in a study in Kenya that the cost income ratio of Kenyan, local

banks were high compared to other banks for which the Kenyan bank could be competitive globally. In

order to remain competitive, local banks operating in Kenya needed to focus on keeping their

operational cost down (Mathuva, 2009).

Furthermore studies by Beck and Fuchs (2004) analyzed several elements that contribute to high

interest spread in banks of Kenya. Through further analysis, it was confirmed that overhead expenses

influenced by staff wages was the most crucial component responsible for the wide difference in

interest income and expenses. A lot of studies found out that expense control must be one of the major

determinants of a bank’s profitability. The general implication was that higher expenses meant lower

profits for banks and other financial institutions. Studies conducted by Bourke (1989) indicated that level

of staff expenses have a negative impact on return on asset (ROA). However, Molyneux (1993) found a

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positive relationship between staff expenses and total profits. The suggestion derived from the study

was high profits earned by firms in a regulated industry may be appropriated in the form of higher

payroll expenditures. Another reason might be high expenses means larger volume of banking

transactions and activities that might lead to higher revenue. In a relatively uncompetitive market where

banks has the opportunity to exercise market power and charge customer with higher prices, there

would be a positive correlation between overhead and profitability (Flamini et al, 2009). Neceur (2003)

found a positive and significant impact of overhead cost to profitability, thus revealing that such costs

are passed on to depositors and lenders at low depositor’s rate and high lender’s rate.

(d) Earning’s Ability and its Effect on Profitability:

In the study to be conducted on United Commercial Bank Limited (UCBL), Bangladesh, the ratio used to

represent earning’s ability is Net Interest Margin (NIM) which also falls under AIA’s CAMEL Approach for

Bank Analysis (1996). Net interest margin, calculated as a difference between the interest income

generated by banks or other financial institutions and the amount of interest paid out to their lenders

(for example, deposits), relative to the amount of their (interest-earning) assets, is a performance metric

that examines how successful a firm’s investment decisions are compared to its debt situation. A

negative value suggests that firm did not make an ideal decision. Interest margin reflects a mixture and

volume of bank’s asset and liabilities as well as cover the cost of intermediation function. It is generally

implied that the higher the net interest margin, the greater is the profitability and more stable is the

banking sector. It was found in a study where a multiple regression model was used to find out the

determinants of Islamic bank profitability in Jordon during the period 2005 to 2009 that net interest

margin had significant impact on profitability. However, it must be noted that a higher net interest

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margin could lead to riskier lending practices related with considerable loan loss provisions, and, by end,

could be a signal of inefficiency in the banking sector (Khrawish and et al, 2008).

(e) Liquidity and its Effect on Profitability:

Proper liquidity management is a matter of concern for all commercial bank where managers have to

make wise decisions by carefully assessing and matching their needs for deposit and loan in order to

avoid serious consequences that might threaten a bank’s survival (CBK, 2009). Kamau (2009) argues

that bank usually hold higher liquidity in terms of deposit at the opportunity cost of potential

investment that can produce higher returns. Usually the tradeoff between liquidity and risk and return

can be best understood by witnessing the transition from short term securities to long term securities.

For instance, a loan raises a bank’s return on investment as well as can simultaneously increase its

liquidity risk and the opposite is also true. Hence a high liquidity ratio indicates a less risky and less

profitable bank (Hempel et al, 1994). This is the common dilemma that management usually faces

between liquidity and profitability. According to Myers and Rajan (1998), too much liquidity means the

highly available liquid asset can be utilized properly and quickly to raise capital within a short span of

time but on the other hand, management compromises with potential investment opportunity that

could maximize the wealth of shareholders. If this goes on for a long time, then the bank eventually

loses its ability to gather external finance in the long run (Uzhegova, 2010). Kargi (2011) used a model

to measure impact of credit risk of Nigerian banks on its profitability. The model consisted of Return on

Asset (ROA) as a dependent variable, measuring profitability of banks and ratio of Non-performing loan

to loan & Advances (NPL/LA) and ratio of Total loan & Advances to Total deposit (LA/TD) used as

indicators of credit risk were the independent variables. The findings revealed that credit risk

management has a significant impact on the profitability of Nigerian banks. The conclusion of the study

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was that banks’ profitability is inversely influenced by the levels of loans and advances, non-performing

loans and deposits thereby exposing them to great risk of illiquidity and distress. In the following study

of Profitability Analysis of National Bank (UCB) under CAMELS framework, Total Loans by Customer

Deposit is used as a measure of liquidity which falls under AIA’s CAMEL Approach For Bank Analysis

(1996).

(f) Sensitivity to Market risk and its Effect on Profitability:

In the year 1996, sixth factor relating to sensitivity to market risk was added to CAMEL making it

CAMELS (Cole & Gunther, 1998). The sensitivity to market risk is calculated from changes in market

prices, particularly interest rates; exchange rates; commodity prices and equity prices adversely affect a

bank’s earnings and capital. Management emphases on holding fixed net interest margin (NIM) to reach

desired level of profitability using Interest Sensitive Gap Management in order to hedge interest risks. In

order to protect against fluctuating interest rates, Management focuses on banking portfolio of

repriceable asset and liability and tries to match the volume of repriceable asset and liability as closely

as possible so that the interest risk exposure is negligible. Repriceable Assets that fluctuates with

changes in interest level include short term securities issued by government and private borrower

(about to mature); short term loans (about to mature) as well as variable rate loans and securities. On

the other hand, Repriceable liabilities are borrowings from money market such as federal funds or Repo

borrowing, short term saving accounts and money market deposits (whose interest rates are adjustable

every few days). Relative interest sensitive gap ratio (GAP), calculated by interest sensitive asset to

interest sensitive liability, is used as a measure to represent sensitivity to market risk under CAMELS

Rating System.

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In case of positive gap i.e. repriceable assets is greater than interest sensitive liabilities, if interest rate

rises then bank’s net interest margin would rise owing to the fact that, other things being constant,

interest revenue generated by asset will be higher than the cost of borrowed firm which in turn will

positively impact firm’s profitability. If on the other hand, interest rate falls, net interest margin will fall

because interest revenue falls at a greater extent than fall in interest expense. So banks with positive

gap experience loss when interest rate falls.

In case of negative gap where repriceable liabilities exceed repriceable asset, rising interest rate will

lower bank’s net interest margin as well as profit due to the fact that rising cost linked with interest

sensitive liabilities will exceed increase in interest revenue from repriceable asset. Declining interest

rates will generate a higher net interest margin and probably greater earnings as well, because

borrowing costs will decline by more than interest revenue (Rose, 2010, p.218-221).

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2.4.6 Factors Representing Profitability:
a. Return on Asset (ROA):
Return on Asset (ROA), calculated by Net Income after Tax by Total Asset, is the rate of return earned on

a bank’s total asset. Return on Asset indicates management efficiency in producing net income from all

its resources (assets) available to the bank according to Rose, Peter S. , ( 2008 ) , Hempel, G., D.

Simonson, and A. Coleman (1994), And Hudgins, Sylvia C. (2006 ).

The measure of ROA is attributed to the fact that using net income for the purpose of funding within the

financing structure to establish an incentive and target for many institution to increase their return on

investment (ROI). In the meantime, the capital structure policy involve risk and return trade-off simply

because using debt comprehensively increases the risks faced by the banking, but magnifies total

invested funds and expected return as well. Prior studies conducted by Bourke (1989), Neceur (2003),

(Khrawish and et al, 2008), Kosmidou (2009), Kargi (2011) and many researchers have used Return on

asset as a measure of Profitability.

b. Return on Equity(ROE):
Return on Equity (ROE), calculated by Net Income after Taxes by Total Equity demonstrate the rate of

return generated by the funds invested on the bank by its shareholders. Nonbank financial institutions

have investors, too who are interested in the return on the funds that they financed according to Rose,

Peter S. And Hudgins, Sylvia C. (2006). Prior studies conducted by Demerguç-Kunt and Huizingha

(1999), Cavallo and Majnoni (2001), Bashir, Abdel Hamid M., (2003). Laeven and Majnoni (2003), Ben

Naceur (2003), Davis and Halbin, Bikker and Metzemakers (2004), Davis and Zhu (2005) and Aburime,

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Toni Uhomoibhi (2008) have used Return on Asset as a measure of profitability. The main distinction is

that ROE reflects on how effectively bank is utilizing its stockholders’ funds. A bank’s ROE is affected by

both ROA and its financial leverage, calculated by equity by asset. Since ROA have a tendency to be

lower for most financial intermediaries, most bank employs financial leverage heavily to generate a

competitive ROE.

ROE indicates the level of risk of banks associated with borrowed money in order to finance their assets.

A lower index means that banks rely on borrowed money, thus aggravating capital risk.

2.5 HYPOTHESIS:
From the above literature review and prior empirical study, the following hypothesis are

derived.

 Hypothesis 1: There must be a relationship between capital adequacy and profitability.

 Hypothesis 2: There exist a relationship between Asset Quality and Profitability
 Hypothesis 3: There exist a relationship between Management Efficiency and Profitability.
 Hypothesis 4: There is a strong, positive relationship between Earning Ability and Profitability.
 Hypothesis 5: Liquidity is inversely proportional to bank’s profitability.
 Hypothesis 6: There is a significant impact of sensitivity of market risk on bank’s profitability.

2.6 METHODOLOGY:
For achieving the specific objective of this study, data were gathered from only Secondarysources.

Secondary Data Sources: The report is based entirely on secondary data sources. Data aregathered from

eight year quarter financial statements (from 1998 to 2012) of National Bank. In addition, I will use

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online journals on CAMELS framework; online research journals involving study of banks using CAMELS

Framework published by different local and international authors, Library books etc.Model Specification:

CAMELS Rating System is used as the model’s framework where thevariable used for each component in

order to analyze profitability of bank are accountingratios that falls under the CAMELS Rating framework

and are supported by prior empiricalstudies and relevant theories as explained in literature review. The

model specification isgiven in details in the following:

Capital
Adequecy

Sensitivity to
Asset Quality
Mrket Risk

Profitability

Management
Liquidity
Efficiency

Earning
Ability

Figure 2.2: Model Specification

The Dependent variable is Bank’s Profitability whereas there are six independent variables:

1) Capital Adequacy 2) Asset Quality 3) Management Efficiency 4) Earning Ability 5)

Liquidity and 6) Sensitivity to Market risk.

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DEPENDENT VARIABLE
Return on Asset
Return on Equity (ROE)
INDEPENDENT VARIABLE
Equity Capital To Total Asset
NPLs to Total loans
Operational Cost Efficiency
Net Interest Margin
Total loan to customer deposit
Relative Interest sensitive GAP
ratio
EXPLANATION FORMULA
A measure of bank’s Ratio of profit before tax to total
Profitability assets.
A measure of bank’s Ratio of profit before tax to total
Profitability Equity.
EXPLANATION FORMULA
A measure of bank’s Total Capital/Total Asset
capital adequacy
A measure of Asset NPLs/Total Loans
Quality. Higher ratio
indicates poor asset
quality
A measure of Operating costs (staff wages and
Management administrative expenses) / net
Efficiency. Higher operating
ratio indicates income (net interest income, net
inefficiency foreign
exchange income, net fees and
commission, and other income).
A measure of Earnings (Interest Income from loan and
Ability Security
investment-interest expense on
deposit
and other deposit)/Total Asset
A measure of liquidity Total loan/customer deposit
A measure of market Interest sensitive asset/Interest
risk sensitivity sensitive
Liabilities.

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The Time Series Multiple Regression Model to Measure NBL’s Profitability:

(a) Model 1:

ROANBL, t=CNBL, t+ ECNBL, t + NPL NBL, t/LNBL, t +OCENBL, t+ NIMNBL, t+ LNBL, t/DNBL, t

+GAPNBL, t

Where ROANBL, t: Return on Asset of NBL at time t

ECNBL, t: Equity Capital to Total Asset of NBL at time t

NPL NBL, t/LNBL, t: Non Performing Loans to Total Loans of NBL at time t

OCENBL, t: Operational Cost Efficiency of NBL at time t

NIMNBL, t: Net Interest Margin of NBL at time t

LNBL, t/DNBL, t: Loan to Deposit ratio of NBL at time t

GAPNBL, t: Interest sensitive asset/ Interest sensitive liabilities

CNBL, t: Constant

(b) Model 2:

ROENBL, t=CNBL, t+ ECNBL, t + NPL NBL, t/LNBL, t +OCENBL, t+ NIMNBL, t+ LNBL, t/DNBL, t

+GAPNBL, t

Where ROENBL, t: Return on Equity of NBL at time t

ECNBL, t: Equity Capital to Total Asset of NBL at time t

NPL NBL, t/LNBL, t: Non Performing Loans to Total Loans of NBL at time t

OCENBL, t: Operational Cost Efficiency of NBL at time t

NIMNBL, t: Net Interest Margin of NBL at time t

LNBL, t/DNBL, t: Loan to Deposit ratio of NBL at time t

GAPNBL, t: Interest sensitive asset/Interest sensitive liabilities

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CNBL, t: Constant

Sample Size: 15 years of data on yearly basis, are taken so the sample size is 15 in totalSoftware used: In

order to analyze gathered data, I used Microsoft Excel and statistical software named SPSS 17 where

various test were run for analysis. All the data were individually tested for and then analyzed to reach to

a conclusion, which is shown in the later part of the report.

Communicating the result:

The result will be communicated in the following way.

a. Means and Standard Deviation: The mean score represents a numerical average for a set of

responses. The standard deviation represents the distribution of the responses around the

mean. It indicates the degree of consistency among the responses. The standard deviation, in

conjunction with the mean, provides a better understanding of the data.

b. Data Represented Graphically: The data will be presented in graphs for better understanding

and clarity.

c. Factor Analysis: Factor analysis is a statistical data reduction technique used to explain

variability among observed random variables in terms of fewer unobserved random variables

called factors.

d. Regression Analysis: Regression analysis examines the relation of the dependent variable

(response variable) to specified independent variables (explanatory variables) in my research.

e. ANOVA: It helps to analyze the variance, in which the observed variance is partitioned into

components due to different explanatory variables.

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53
f. T-Tests: This will help me to test my hypothesis and reach to a fair conclusion.

2.7 BUDGET ALLOCATION:

Project Questionnaire Data Data Report Report

Proposal Design Collection Analysis (Draft) (Final)

Weeks 1 & 2

Week 3 Not Needed

Weeks 4 & 7

Weeks 8 & 9

Weeks 10 &
11

Weeks 12 &
13

Financial Budget: The final cost of conducting the study is approximately TK 8000, plus a

minimum 20 percent contingency fee. All the money was afforded from my own custody.

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2.8 FINDINGS & ANALYSIS:
2.8.1 Trend Analysis of All Variables under CAMELS Rating

Framework affecting Profitability:

(a) Trend Analysis of Capital Adequacy i.e. Equity Capital to Total Asset (EC) of

National Bank Limited (NBL)

Capital Adequacy tells us about the sufficiency of capital that a bank has in order to absorb shocks that

may arise from capital risks which might in turn affect a bank’s long term survival. Capital risk is not

considered separately by government regulatory authorities owing to the fact that fluctuations in a

bank’s capital arises from other types of risk that a bank is likely to face. Equity Capital to Total Asset can

be used as a measure of Capital Adequacy that may reflect some ideas about a bank’s exposure to

capital risk.

EQUITY CAPITAL TO TOTAL ASSET

60
49.69
EQUITY CAPITAL TO TOTAL ASSET

50

40

30

20 14.42 12.79
10.92
7.12 8.08 8.48 9.7
4.56 4.97 4.82 4.69 5.3
10 1.16 1.18
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
YEAR

Figure 2.3: Trend of Equity Capital

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55
The graph on figure 2.3 shows the overall trend of Capital Adequacy of National Bank Limited over a

period of fifteen years, starting from 1998 to 2012. It is seen that from 1998 to 2012, there is a series of

fluctuations of rise and fall in Equity Capital to Total Asset ratio. The Equity Capital to Total Asset was

10.92% in 2012. After a series of fluctuations in each quarter of rise, the ratio was at 9.70% in 2009

indicating that in year 2009, debt financing of National Bank has increased. Equity Capital to Total Asset

remained stable upto 2007, rose steadily to 49.69% in 2006 which suggest that equity financing has

increased. However amidst all the deviations in previous year, Equity Capital to Total Asset dropped to

7.12% in 2005 and 5.30% in 204, suggesting further debt financing and high financial leverage due to

increased bank’s deposit which suggest that shareholders are less exposed to risk than debtors or

depositors are. From March 2003 to December 2000, Equity Capital to Total Asset has more deviation

followed by gradual decrease to 1.18% from 1999 t0 1998 to 1.16%.

Further observations of the graph in figure 2.3 reveals that 1998 to 2005; National Bank had lower

Equity Capital to Total Asset compared to other periods, suggesting that the bank is exposed to higher

capital risk. Even though NBL might earn a greater return through high leverage and increased deposit,

there is a chance if any investment gets into default then UCB would have problems in paying its deposit

which might in turn affect its profitability as well as sustainability. However, from 2006 to 2012, NBL has

higher Equity to Asset ratio that indicates that NBL can successfully meet its short term obligation and

hence is less exposed to capital risk.

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(b) Trend Analysis of Asset Quality i.e. Non-performing Loans to Total Assets

(NPL/L) of National Bank Limited (NBL)

Non-performing loans are a sign of poor quality loans that are subject to a high credit or default risks

that a bank holds in its asset portfolio. High credit or default risk can negatively impact a bank’s

profitability.

NPLs TO TOTAL LOANS

10 8.66 8.79
8.23
9 7.35 7.19
NPLs TO TOTAL LOANS

8 6.69 6.77 6.71

6.3 6.02 6.24
7 5.56
6 4.7
5 3.83 3.67
4
3
2
1
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
YEAR

Figure 2.4: Trend of NPLs To Total Loans

According to the chart in Figure 2.4 shown above, there is a declining trend in non-performing loans of

NBL from , 8.79% in 2012 to 6.02% in 2009 which suggest that NBL’s credit risk has been reduced quite

significantly since rate of decrease in non-performing loans was greater than increase in overall loans.

There was a significant increase in NPL/L to 8.66% in 2008 followed by a drop to 6.71% in 2007,

accompanied by gradual decrease to 6.30% in 2006 and then rise to 6.77% in 2005, indicating an

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decrease in non-performing loan in 2007 compared to 2006. Non-performing Loan to Total Asset

steadily dropped to 4.70% in 2004, followed by gradual increase to 5.56 % in 2003, shirking slightly once

to 3.67% in the following year and then rising steadily to 7.19 % in 2000. Despite a increase to 7.35% in

1998, Non-performing Loan to total Loan dropped at its lowest to 3.83% in 1999. Throughout the period

of fifteen years starting from 1998 to 2012, non-performing loans of NBL has increased drastically which

is a negative sign of increasing credit risk. However in the mid years ( 2011- 2004), non-performing loans

to total loans started to maintain steadly. The management of NBL needs to be cautious about this and

focus on strategy to lower its classified loans so as to hold its competitive position and increase its

overall profit.

(c) Trend Analysis of Management’s Efficiency i.e. Operational Cost Efficiency

(OCE) of National Bank Limited (NBL)

The chart above shows the trend of Operational Cost Efficiency (OCE) of National Bank Limited from

December 2004 to September 2012. Operational Cost Efficiency is an indicator of Management

performance in NBL. If the management takes wise decisions then it would be able to keep the

operational cost efficiency quite low. High Operational Efficiency ratio is often a sign of inefficiency

which can be attributed to a higher salaries and administrative expenses. It is seen that there is an

irregular pattern of a series of fall and rise throughout the period. From 2012 to 2004, there is an

almostcyclical pattern of fall and rise each year starting from 68.77% in 2012 to 62.53 % in 2004 except

in 2009 and 2006 when there is consecutive increase in each year of 48.94% in 2009 and 65.03% in

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2006. In following year, OCE dropped steadily to 48.11% followed by slight increase to 49.41% in 2002

and then steady decrease to 43.47% and 43.40% consecutively in 2001 and 2000. In 1999 and1998, OCE

was 92.82% which was peak throught the fifteen years indicating that the operating cost was

uncontrolled and the management could not maintain their cost efficiently. In 1998, OCE dropped

gradually to 78.00%.

OPERATIONAL COST EFFICIENCY

92.82
100
OPERATIONAL COST EFFICIENCY

90 78
80 68.77
62.53 63.06 65.03
70
60 49.41 48.11 49.39 48.94
43.4 43.47 41.03
50
31.63
40 25.16
30
20
10
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
YEAR

Figure 2.5: Trend of Operational Cost Efficiency

In periods of lower OCE, management has been more efficient compared to periods of higher OCE. The

average OCE for the entire period is 54.00% which is a NOT good sign since NBL has not enough income

to cover its salaries and wages properly and earn profit. However, it is seen that OCE was 25.16%,

31.63% and 48.94% respectively in last four years except 2012 . This tells us that OCE for these years is

lower than average which is favorable. Management has taken caution to lower OCE to earn profits . It

might be argued that even though, increased staff wages might lower company profit, it is often seen in

many cases that employees are highly motivated by increased salary and performs better than usual. In

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order to pursue goals of profitability, management needs to come up with strategies to increase

operating income more compared to increased salaries and administrative expenses.

Trend Analysis of Earning’s Ability i.e. Net Interest Margin (NIM) of National

Bank Limited (NBL):

NET INTEREST MARGIN

3.5
3
2.5
2
1.5
1
0.5
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Figure 2.6: Trend of NIM

From the above graph, it is seen that net interest margin in 2012 was 2.65%, which tells that every TK

100 asset generates a net interest margin of 2.65%. It is clearly seen that a cyclical pattern exist in net

interest margin where there is a gradual increase from 2012 to the following year’ and then there is a

drop in the following year which is 3.00%. Net Interest Margin drops from 3.00% in 2010 to 2.52% in

2009 followed by gradual increase to 3.04 % in 2008. The same pattern is repeated for 2008, 2007,

2006, 2005, 2003 and 2002 where there is a increase in Net Interest Margin in year of2001. However in

year 2000, Net Interest Margin drops from 1.80% in 2001 to 1.48% in 2000 followed by increase to

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2.82% in 1999 but in1998, Net Interest Margin is reported to be 2,80% which is lower than the previous

year. The average Net Interest Margin for the entire period from 1998 to 2012 is 2.32% on yearly basis.

Trend Analysis of Liquidity i.e. Total Loan to Customer Deposit (L/D) of National
Bank

Limited (NBL)

TOTAL LOAN TO CUSTOMER DEPOSIT

93.26
100
82.5 80.17 85.88 82.52 87.45 89.74
78.56 81.14 81.92 81.06
TOTAL LOAN TO CUSTOMER DEPOSIT

90 80.8 80.68
80 65.5
70 57.12
60
50
40
30
20
10
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
YEAR

Figure 2.7: Trend of Liquidity

The graph above shows the trend of total loan to customer deposit (L/D) starting from 2012 to 1998. In

2012, the loan to deposit ratio was 80.68% This tells us that loan is 80.68% greater than volume of

deposit. The trend is quiteirregular, fluctuating every year. In 2011, L/D rose steadily to 89.74%,since

rate of change of loans was greater than rate of change of deposits and then dropped to 87.45% by 2%

due to the fact that rate of change of deposit was higher than the rate of change of loan. In 20010, there

is a gradual decrease in loan to deposit ratio from 87.45% in 2010 to 84.55% in 2009. However in 2008,

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loan to deposit ratio dropped in82.52% followed by rise in the following consecutive year. In 2004, loan

to deposit ratio was at its maximum i.e. 93.26%. Then there was a gradual decrease to 80.17% in 2003.

In remaining years, loan to deposit ratio was 82.50%, 81.14% and 78.56%. In 1999, loan to deposit ratio

dropped to 57.12% which is a lowest throughtout the fifteen years, rising again to 65.50%.

Higher levels of loan to deposit ratio means that bank has a chance of getting exposed to more credit

risk since loan is the least liquid asset and deposit is the most stable income. However this also means

that there is a higher return for NBL since it has greater volume of loans compared to deposit according

to risk and return trade off. Since non performing loans have been lower in recent years, there is a likely

chance that NBL is profitable due to larger volume of loans it holds. The average loan to deposit ratio is

80.80% for the entire period. The loan to deposit ratio of 2012 have been closer to the average.

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(e) Trend Analysis of Sensitivity to Market Risk i.e. Relative Interest Sensitive
GAP ratio (GAP) of National Bank Limited (NBL)

GAP RATIO
20 16.35

15
10 6.45
2.63 3.08 1.91 1.92 1.89 2.08 2.37 2.35 2.16 1.74 1.58
5
GAP RATIO

-2.94
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
-5
-10 -15.7
-15
-20
YEAR

Figure 2.8: Trend of Gap Ratio

Relative Interest Sensitive GAP ratio is an indicator of sensitivity to market risk. The purpose of

calculating a gap ratio is to gauge how well NBL can withstand sudden fluctuations in interest rates. The

line chart shown in figure no. 2.8 shows the trend of Relative Interest Sensitive GAP ratio (GAP). Despite

the fluctuations , the line chart shows a gradual increasing trend from 1.58 in 2012 to 16.35 in 1998. The

occasional drop was observed in 2.94 in 2006, 1.89 in 2004, 2.63 in 2000. Itis seen that over the period

of fifteen years starting from 1998 to 2012, NBL had a GAP ratio of more than 1 which tells that NBL has

been in positive gap for the entire period except in 2006. This means NBL has more repriceable assets

than repriceable liabilities. Since there is a positive gap, then NBL’s net interest margin would rise when

interest rates rises, owing to the fact that other things being constant, NBL’s revenue generated by asset

would be more than NBL’s borrowing cost which will lead to increased profitability. However, if interest

rate falls, then it would negatively impact NBL’s profits.

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(f) Trend Analysis of Profitability: Return on Asset (ROA) of National

Bank Limited (NBL)

ROA
6 5.18
5
3.63
4
3 2.19 2.1 2.25
ROA

2 1.08
0.73 0.87 0.71 0.7
0.43 0.24 0.48
1
-0.56
0
-1.19
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
-1
-2
Year

Figure 2.9: Trend of ROA

Return on Asset (ROA) is used as a measure of a bank’s profitability. ROA measures the efficiency with

which the company is managing its investment in assets and utilizing them togenerate profit. It

measures the amount of profit earned relative to the firm’s level of investment in total assets. The trend

of NBL’s ROA is given on figure 2.9 which shows a lot of fluctuations each year. Even though there are

fluctuations, there is an irregular pattern of rise and fall. In 2012, the ROA was 0.70%. This means every

TK 100 asset earns a net income of TK 0.66 for NBL bank. ROA increased sharply from 0.70% in 2012 to

3.63% in 2011 followed by gradual increase to 5.18 % in 2010. ROA gradually started to decrease to

2.25% in September 2009 then again followed by a steady decline to 2.10% in 2008. Next, ROA again

slowly rose to 2.19% in 2007 accompanied by gradual decrease to 1.08% in 2006. Again, ROA decreased

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gradually to 0.71% in 2005 and to 0.48% in 2004. After that ROA again decreased steadily to 0.24% in

2003 followed by a sharp rise to 0.43% in the following year. ROA then slowly began to increase to

0.87% in 2001 followed by a sharp fall to 0.73% in next year.Again ROA gradually decreased to -.56% in

1999, next year to -1.19%.

Throughout the period of 1998 to 2012, amidst the irregular fluctuations of continuous rise and fall,

there is a declining trend in ROA of NBL which is not a positive sign. The average Return on Asset for the

entire time period is 1.2233% approximately. This indicate that every TK 100 asset earns a net income of

TK 1.22 on an average. However the average return for 2012 is 0.70% which is lower than the actual

mean, thus revealing that NBL’s profit has declined over the years.

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(g) Trend Analysis of Profitability: Return on Equity (ROE) of National

Bank Limited (NBL)

ROE
50 35.91
40 27.12 24.77 28.25
23.22
30 16.02 17.45
20 8.97 9.13 9.93 6.4
5.18 2.18
10
0 -10.52
ROE

-101996 1998 2000 2002 2004 2006 2008 2010 2012 2014
-20
-30
-47.32
-40
-50
-60
Year

Figure 2.10: Trend of ROE

The trend of Return on Equity (another measure of profitability) is a mirror image of the trend shown by

Return on Asset (ROA). ROE increased slowly from 6.40% in2012 to 28.35% in 2011 followed by gradual

increase to 35.91 % in 2010. ROE then gradually started to decrease to 23.22% in 2009 then again

followed by a steady increase to 24.77 % in 2008. Next, ROE again slowly rose to 27.12% in 2007

accompanied by gradual decrease to 2.18% in 2006. Yet again, ROE increased gradually to 9.93% in

2005 and then gradually declined to 9.13% in 2004. After that ROA again decreased steadily to 5.18% in

2003 followed by a sharp rise to 8.97% in the following year. ROE then slowly began to increase to

17.45% in 2001 followed by a sharp fall to 16.02% in next year. Then ROE gradually decreased to -

47.32% in 1999 and in the next year to -10.51%. ROE also displayed a trend of declining profitability over

the period of fifteen years. The mean return on Equity over a period of eight year is 9.1253%. So each

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100 TK of equity of NBL earns a return of TK 9.1253 on an average. However the average return for

2012 is 6.40 which is lower than the actual mean which is quite unfavorable.

2.8.2 Summary Statistics for all Variables:

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
capital adequecy ratio 15 1.16 49.69 11.2313 12.61701
asset quality ratio 15 3.67 8.79 6.4540 1.55334
earning ability ratio 15 1.48 3.14 2.3380 .64713
liquidity ratio 15 57.12 93.26 80.8033 8.97144
sensitivity to market risk 15 -15.74 16.35 1.9787 6.47436
management efficiency 15 25.16 92.82 54.0500 17.73587
return on equity 15 -47.32 35.91 9.1253 19.42697
return on asset 15 -1.19 5.18 1.2233 1.59411
Valid N (listwise) 15

The sample sizes of all the fifteen variables are 15 as denoted by N. Return on Asset and Return

on Equity are the measures of profitability of National Bank Limited. Things that the descriptive

statistics tells us about each variable are given below:

(a) Return on Asset: The average return on asset throughout a period of fifteen years is 1.2233

% which means each 100 TK asset of NBL earns a return of TK 1.2233 approximately. The

range usually lies between -1.19% (minimum) to 5.18% (maximum). The spread between

observations that accounts for risk can be understood from standard deviation which is 1.594%

over the period which is very large due to inconsistent returns.

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(b) Return on Equity: The average return on Equity over a period of fifteen year is 9.1253%. So

each 100 TK of equity of NBL earns a return of TK 9.1253 on an average. This tells us

thatNational Bank is utilizing shareholder’s capital wisely to earn a greater rate of return

compared to the return it achieve overall. The minimum return it earns in a quarter is -47.32%

whereas the maximum return the bank earns is 35.91%. The standard deviation is 19.42% which

tells us the total risk associated over the period especially the risk of investment.

(c) Equity Capital to Total Asset: The mean value of Total Equity Capital to Total Asset is

11.23% over the period of fifteen years starting from 1998 to 2012. This tells us that NBL is

highly financially leveraged since it is only approximately 11.23% equity financed The range of

Capital Adequacy of NBL in the stated period is 1.16% (at its minimum observed ) to its

maximum value of 49.69% observed on. The standard deviation of Equity Capital to Total Asset

ratio is 12.61% which is an indication of Capital risk for NBL that exist in that period.

(d) Non-performing loans to Total Loans: The average non performing loans that existed in

the period of fifteen years were 6.45% of total loans as stated by the mean value. This tells us

that NBL has quite a low volume of non performing loan since out of the 100% loans and

advance, only around 6.45% are non-performing. This is quite a good sign. The non-performing

loans were at its minimum point of 3.67% on whereas the ratio was at its maximum value of

8.79% . The credit risk that existed in the period starting from1998 to 2012 is 1.55% (given by

non-performing loans to total loans’ standard deviation).

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(e) Operational Cost Efficiency: The mean value of Operational Cost Efficiency is 54.05% over the period

of FIFTEEN years starting from 1998 to 2012. This tells us that out of 100% income earned from all the

sources included in balance sheet, the salaries and administrative cost is 54.05% which is quite HIGH

since NBL has not enough income to cover its operating cost and earn profits. The minimum operational

cost efficiency was 25.16% when managerial risk was at its lowest and the maximum operational cost

efficiency was 92.82% which might indicate the highest level of managerial inefficiency in the time

period under study . The management at NBL must focus to lower its operational cost so as to increase

bank’s overall profitability in near future. The standard deviation of operational cost efficiency is 17.73%

which shows that data are quite inconsistent over the period and is an estimate of managerial risk as

well.

(f) Net Interest Margin: During the period of 1998 to 2012, the average net interest margin is 2.33% and

is quite consistent as specified by the small standard deviation of 0.64%. From the mean value, it is

understood that every TK 100 asset generates a netinterest margin of 2.33% on an average. The

minimum and maximum net interest margin was 1.48% and 3.14%.

(g) Total Loan to Customer deposit: The average loan to customer deposit ratio is 80.80% for the period

of 1998 to 2012. This tells us that NBL has greater volume of loans than deposit. The range of total loan

to customer deposit lies between a minimum of 57.12% and a maximum of 93.26%. This tells us that the

loan portfolio of NBL is mostly financed by customer deposit, thus indicating that NBL is highly financially

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leveraged. The liquidity risk of NBL can be measured from the standard deviation that is 8.97% for the

entire period.

(h) Relative Interest Sensitive Gap ratio: The average sensitivity to market risk is 1.97 which shows that

NBL is in the positive interest gap. The minimum and maximum value is -15.74 and 16.35. The standard

deviation of the interest sensitive gap ratio shows a high fluctuation of 6.47% revealing that NBL’s profit

is greatly exposed to market risk in the overall period.

2.8.3 Population Mean Test of all variables:

Estimation methods are used to identify the population mean of each of the six independent variables

and two dependent variables used in statistical analysis. There are two models represented by two

dependent variables each, using the same set of six, independent variables that falls under CAMELS

Rating System framework.

Justification of using t-test instead of z-test: As the variance of population is not known,

one-sample t test have been used instead of z-test to estimate the population means using

95% confidence level. The t-test is perfect over the z-test in this case since it cannot be

assumed that the population distribution is also normal.

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(a) Population Mean Test of Capital Adequacy i.e. Equity Capital to Total Asset
(EC) of National Bank Limited (NBL):

Null Hypothesis, H0: The Population Mean of Equity Capital to Total Asset (EC) representing Capital
Adequacy of National Bank (NBL) is 6% or 0.06.

Alternative Hypothesis, H1: The Population Mean of Equity Capital to Total Asset (EC) representing
Capital Adequacy of National Bank (NBL) is not 6% or 0.06.

One-Sample Test
Test Value = 0.06
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
capital adequecy ratio 3.429 14 .004 11.17133 4.1843 18.1584

The t value of 3.429 defines that sample mean is 3.429 units away from population mean of

6% or 0.06 for Equity Capital to Total Asset. The degrees of freedom is n-1=15-1=34. Since

the p-value of the test is 0.004 which is less than α = .05, the null hypothesis is accepted and

the alternative hypothesis is rejected. There is enough evidence to indicate that Population

Mean of Equity Capital to Total Asset is 6% or 0.06. The result shows that Population Mean

of Equity Capital to Total Asset lies in the range of 4.1843 < µ < 18.1584 with 95%

confidence level.

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(b) Population Mean Test of Asset Quality i.e. Non-performing Loans to Total
Loans (NPL/L) of National Bank Limited (NBL):

Null Hypothesis, H0: The Population Mean of Non-performing Loans to Total Loans representing Asset
Quality of National Bank (UCB) is 5.5% or 0.055.

Alternative Hypothesis, H1: The Population Mean of Non-performing Loans to Total Loans representing
Asset Quality of National Bank (UCB) is not 5.5% or 0.055.

One-Sample Test
Test Value = 0.055
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
asset quality ratio 15.955 14 .000 6.39900 5.5388 7.2592

Here the t value is 15.955 which indicate that the sample mean is 15.955 units away from population

mean of 5.5% or 0.055 for non-performing loan. The degrees of freedom equals to 14. Since the p-value

of the test is 0.000 which is less than α = .05, the null hypothesis is accepted and the alternative

hypothesis is rejected. There is enough evidence to indicate that Population Mean of Non-performing

Loan to Total Asset is 5.5% or 0.055. The result shows that Population Mean of Non-performing Loan to

Total Asset lies in the range of 5.5388 < µ < 7.2592 with 95% confidence level. There is no significant

difference between sample mean and population mean.

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(c) Population Mean Test of Management’s Efficiency i.e. Operational Cost

Efficiency (OCE) of National Bank Limited (NBL)

Null Hypothesis, H0: The Population Mean of Operational Cost Efficiency (OCE) representing

Management’s Efficiency of National Bank (NBL) is 45% or 0.45

Alternative Hypothesis, H1: The Population Mean of Operational Cost Efficiency (OCE) representing

Management’s Efficiency of National Bank (NBL) is not 45% or 0.45

One-Sample Test
Test Value = 0.45
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
management efficiency 11.705 14 .000 53.60000 43.7782 63.4218

The t value of 11.705 defines that sample mean is 11.705 units away from population mean of 45% or

0.45 for Operational Cost Efficiency. The degrees of freedom is n-1=15-1=14. Since the p-value of the

test is 0.000 which is less than α = .05, the null hypothesis is accepted and the alternative hypothesis is

rejected. There is enough evidence to indicate that Population Mean of Operational Cost Efficiency is

45% or 0.45. The result shows that Population Mean of Operational Cost Efficiency lies in the range of

43.7782 < µ < 63.4218 with 95% confidence level.

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(d) Population Mean Test of Earning’s Ability i.e. Net Interest Margin (NIM) of

National Bank Limited (NBL)

Null Hypothesis, H0: The Population Mean of Net Interest Margin (NIM) representing Earning’s Ability of

National Bank (NBL) is 3% or 0.03.

Alternative Hypothesis, H1: The Population Mean of Net Interest Margin (NIM) representing Earning’s

Ability of National Bank (NBL) is not 3% or 0.03.

One-Sample Test
Test Value = 0.03
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
earning ability ratio 13.813 14 .000 2.30800 1.9496 2.6664

Here the t value is 13.813 which indicate that the sample mean is 13.813 units away from population

mean of 3% or 0.03 for Net Interest Margin. The degrees of freedom equals to 14. Since the p-value of

the test is 0.000 which is less than α = .05, the null hypothesis is accepted and the alternative hypothesis

is rejected. There is enough evidence to indicate that Population Mean of Net Interest Margin is 3% or

0.03. The result shows that Population Mean of Net Interest Margin lies in the range of 1.9496 < µ <

2.6664 with 95% confidence level. There is no significant difference between sample mean and

population mean.

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(e) Population Mean Test of Liquidity i.e. Total Loan to Customer Deposit (L/D) of

Natioanl Bank Limited (NBL)

Null Hypothesis, H0: The Population Mean of Liquidity i.e. Total Loan to Customer Deposit (L/D) of

National Bank (NBL) is 81% or 0.81.

Alternative Hypothesis, H1: The Population Mean of Liquidity i.e. Total Loan to Customer Deposit (L/D)

of National Bank (NBL) is not 81% or 0.81.

One-Sample Test
Test Value = 0.81
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
liquidity ratio 34.533 14 .000 79.99333 75.0251 84.9615

The t value indicates that the sample mean is 34.533 units away from population mean of 81% or 0.81

for Total Loan to Customer Deposit. The significance value is 0.000. There is a significant difference (the

significance is less than 0.05) so we accept null hypothesis and reject alternative hypothesis. There is

enough evidence that the population mean of Total Loan to Customer Deposit of NBL is 81%. The results

show that the Population Mean of NBL lies in the range of 75.0251 < µ < 84.9615 with 95% confidence

level.

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(f) Population Mean Test of Sensitivity to Market Risk i.e. Relative Interest

Sensitive GAP ratio (GAP) of National Bank Limited (NBL):

Null Hypothesis, H0: The Population Mean of Relative Interest Sensitive Gap ratio representing

Sensitivity to Market Risk of National Bank (UCB) is 1.20.

Alternative Hypothesis, H1: The Population Mean of Relative Interest Sensitive Gap ratio representing

Sensitivity to Market Risk of National Bank (UCB) is not 1.20.

One-Sample Test
Test Value = 1.20
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
sensitivity to market risk .466 14 .649 .77867 -2.8067 4.3640

The t value of 0.466 defines that sample mean is 0.466 units away from population mean of 1.20 for

Relative Interest Sensitive GAP ratio. The degrees of freedom is n-1=15-1=14. Since the p-value of the

test is 0.649 which is greater than α = 0.05, the null hypothesis is rejected and the alternative hypothesis

is accepted. There is no enough evidence to indicate that Population Mean of Relative Interest Sensitive

GAP ratio is 1.20. The result shows that Population Mean of Relative Interest Sensitive GAP ratio lies in

the range of -2.8067 < µ < 4.3640 with 95% confidence level.

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(g) Population Mean Test of Profitability: Return on Asset (ROA) of National Bank

Limited (NBL)

Null Hypothesis, H0: The Population Mean of Return on Asset representing Profitability of National Bank
(NBL) is 0.75% or 0.0075

Alternative Hypothesis, H1: The Population Mean of Return on Asset representing Profitability of
National Bank (NBL) is not 0.75% or 0.0075.

One-Sample Test
Test Value = .0075
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
return on asset 2.954 14 .010 1.21583 .3330 2.0986

The t value indicates that the sample mean is 2.954 units away from population mean of 0.75% or

0.0075 for Return on Asset. The p value is 0.010 which is less than α of 0.05 so we accept null hypothesis

and reject alternative hypothesis. There is enough evidence that the population mean of Return on

Asset of NBL is 0.0075. The results show that the Population Mean of Return on Asset of NBL lies in the

range of 0.3330 < µ < 2.0986 with 95% confidence level.

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(h) Population Mean Test of Profitability: Return on Equity (ROE) of National Bank

Limited (NBL)

Null Hypothesis, H0: The Population Mean of Return on Equity representing Profitability of National
Bank (NBL) is 10.5% or 0.105.

Alternative Hypothesis, H1: The Population Mean of Return on Equity representing Profitability of
National Bank (NBL) is not 10.5% or 0.105.

One-Sample Test
Test Value = 0.105
t df Sig. (2-tailed) Mean 95% Confidence Interval of the
Difference Difference
Lower Upper
return on equity 1.798 14 .094 9.02033 -1.7380 19.7786

The t value of 1.798 defines that sample mean is 1.798 units away from population mean of 10.5% or

0.105 for Return on Equity. The degrees of freedom is n-1=15-1=14. Since the p-value of the test is 0.094

which is greater than α = 0.05. Hence the null hypothesis is rejected and the alternative hypothesis is

accaepted. There is not enough evidence to indicate that Population Mean of Return on Equity is 10.5%

or 0.105. The result shows that Population Mean of Return on Equity lies in the range of -1.7380 < µ <

19.7786 with 95% confidence level.

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2.8.5 Correlation Matrix between all the variables:

Correlations
capital asset earnin liquidity sensitivi manageme return return
adeque quality g ratio ty to nt efficiency on on
cy ratio ratio ability market equity asset
ratio risk
capital Pearson 1 .152 .335 .280 -.050 -.080 .126 .288
adequecy Correlation
ratio Sig. (2-tailed) .589 .222 .313 .860 .778 .654 .298
Sum of Squares 2228.64 41.618 38.30 443.028 -57.060 -249.171 432.844 81.138
and Cross- 6 1
products
Covariance 159.189 2.973 2.736 31.645 -4.076 -17.798 30.917 5.796
asset Pearson .152 1 .401 .180 .448 -.301 .497 .388
quality ratio Correlation
Sig. (2-tailed) .589 .138 .521 .094 .276 .059 .153
Sum of Squares 41.618 33.780 5.645 35.127 63.037 -115.934 209.946 13.463
and Cross-
products
Covariance 2.973 2.413 .403 2.509 4.503 -8.281 14.996 .962
earning Pearson .335 .401 1 -.126 -.014 -.011 -.005 .442
ability ratio Correlation
Sig. (2-tailed) .222 .138 .655 .960 .969 .987 .099
Sum of Squares 38.301 5.645 5.863 -10.228 -.839 -1.746 -.816 6.378
and Cross-
products
Covariance 2.736 .403 .419 -.731 -.060 -.125 -.058 .456
liquidity Pearson .280 .180 -.126 1 .282 -.729** .836** .625*
ratio Correlation
Sig. (2-tailed) .313 .521 .655 .308 .002 .000 .013
Sum of Squares 443.028 35.127 - 1126.81 229.560 -1624.154 2039.78 125.20
and Cross- 10.22 4 6 5
products 8
Covariance 31.645 2.509 -.731 80.487 16.397 -116.011 145.699 8.943

sensitivity Pearson -.050 .448 -.014 .282 1 -.282 .437 .008

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to market Correlation
risk Sig. (2-tailed) .860 .094 .960 .308 .308 .104 .978
Sum of Squares -57.060 63.037 -.839 229.560 586.842 -454.016 769.130 1.125
and Cross-
products
Covariance -4.076 4.503 -.060 16.397 41.917 -32.430 54.938 .080
manageme Pearson -.080 -.301 -.011 -.729** -.282 1 -.895** -.772**
nt efficiency Correlation
Sig. (2-tailed) .778 .276 .969 .002 .308 .000 .001
Sum of Squares - - - - - 4403.853 - -
and Cross- 249.171 115.93 1.746 1624.15 454.016 4318.87 305.74
products 4 4 5 9
Covariance -17.798 -8.281 -.125 - -32.430 314.561 - -
116.011 308.491 21.839
return on Pearson .126 .497 -.005 .836** .437 -.895** 1 .753**
equity Correlation
Sig. (2-tailed) .654 .059 .987 .000 .104 .000 .001
Sum of Squares 432.844 209.94 -.816 2039.78 769.130 -4318.875 5283.70 326.33
and Cross- 6 6 1 0
products
Covariance 30.917 14.996 -.058 145.699 54.938 -308.491 377.407 23.309
return on Pearson .288 .388 .442 .625* .008 -.772** .753** 1
asset Correlation
Sig. (2-tailed) .298 .153 .099 .013 .978 .001 .001
Sum of Squares 81.138 13.463 6.378 125.205 1.125 -305.749 326.330 35.577
and Cross-
products
Covariance 5.796 .962 .456 8.943 .080 -21.839 23.309 2.541
**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

Figure 2.13: Correlation

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Explanation:

We know -1≥ r ≥ +1

If r = -1, that means perfect negative correlation.

If r = +1, that means perfect positive correlation.

If r >0.5, that means close to perfect positive correlation or strongly correlated.

Here ** means the correlation is significant at the 0.01 level (2 tailed). So there is 1 chance in

100 that we would reject the true null hypothesis when it should be accepted. Again we can

say we are 99% confident that we have made the right choice.

Here * means the correlation is significant at the 0.05 level (2 tailed). So there is 1 chance in

100 that we would reject the true null hypothesis when it should be accepted. Again we can

say we are 95% confident that we have made the right choice.

(a) The correlation of Return on Asset and Equity Capital to Total Asset:

From the table 2.13, it is seen that the correlation between Return on Asset (ROA) and Equity Capital to

Total Asset (EC) is 0.22, showing that there is a positive correlation between Return on Asset and Equity

Capital to Total Asset. Hence there is a positive relationship between Capital Adequacy of NBL and

Profitability of NBL. This result is consistent with the theory that well capitalized banks are highly

profitable. However the p value is 0.298 which is greater than α=0.01 or 0.05, thus making the

relationship insignificant.

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(b) The correlation of Return on Asset and Non-performing Loans to Total Loans:

From the table 2.13, it is seen that the correlation between Return on Asset (ROA) and Non-performing

Loans to Total Loans (NPL/L) is 0.388, showing that there is a positive correlation between Return on

Asset and Non-performing Loans to Total Loans. Hence there is a positive relationship between Asset

Quality of NBL and Profitability of NBL. This is not consistent with the theory that poor Asset Quality will

lead to lower bank’s profitability. However the p value is 0.153 which is greater than α=0.01 or 0.05,

thus making the relationship insignificant.

(c) The correlation of Return on Asset and Operational Cost Efficiency:

From the table 2.13, it is seen that the correlation between Return on Asset (ROA) and Operational Cost

Efficiency (OCE) is -0.772**, showing that there is a negative correlation between Return on Asset and

Operational Cost Efficiency. This result is in agreement with the theory that high operational

expenditure and staff expenses leads to lower profitability. However the p value is 0.001 which is lower

than α=0.01 or 0.05, thus making the relationship significant with 99% confidence interval.

(d) The correlation of Return on Asset and Net Interest Margin:

From the table 2.13, it is seen that the correlation between Return on Asset (ROA) and Net Interest

Margin (NIM) is 0.442, showing that there is a strong, positive correlation between Return on Asset and

Net Interest Margin (NIM), thus is consistent with theory that higher interest spread leads to more

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profits for bank. However the p value is 0.099 which is higher thanα=0.01 or 0.05, thus making the

relationship insignificant with a confidence interval of 99%.

(e) The correlation of Return on Asset and Total Loan to Customer Deposit:

From the table 2.13, it is seen that the correlation between Return on Asset (ROA) and Total Loan to

Customer Deposit (L/D) is 0.625*, showing that there is a positive correlation between Return on Asset

and Total Loan to Customer Deposit. This result is not consistent with the theory that highly liquidity of

banks is obtained at the opportunity cost of potential investment and hence less profits. However the p

value is 0.13 which is greater than α=0.01 or 0.05, thus making the relationship statistically insignificant

with confidence interval of 95%.

(f) The correlation of Return on Asset and Relative Interest Sensitive GAP ratio:

From the table 2.13, it is seen that the correlation between Return on Asset (ROA) and Relative Interest

Sensitive Gap ratio (GAP) is 0.008, showing that there is a slight, positive correlation between Return on

Asset and Relative Interest Sensitive Gap ratio. However the p value is 0.978 which is greater to α= 0.05,

thus making the relationship highly Insignificant.

(g) The correlation of Return on Equity and Equity Capital to Total Asset:

From the table 2.13, it is seen that the correlation between Return on Equity (ROE) and Equity Capital to

Total Asset (EC) is 0.126, showing that there is a positive correlation between Return on Equity and

Equity Capital to Total Asset. Hence there is a positiverelationship between Capital Adequacy of NBL and

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Profitability of NBL. However the p value is 0.654 which is greater than α=0.01 or 0.05, thus making the

relationship insignificant.

(h) The correlation of Return on Equity and Non-performing Loans to Total Loans:

From the table 2.13, it is seen that the correlation between Return on Equity (ROE) and Non-performing

Loans to Total Loans (NPL/L) is 0.497, showing that there is a positive correlation between Return on

Equity and Non-performing Loans to Total Loans. This is not consistent with the theory that poor Asset

Quality will lead to lower bank’s profitability. However the p value is 0.05 which is equal to α=0.01 or

0.05, thus making the relationship significant.

(i) The correlation of Return on Equity and Operational Cost Efficiency:

From the table 2.13, it is seen that the correlation between Return on Equity (ROE) and Operational Cost

Efficiency (OCE) is -.895**, showing that there is a negative correlation between Return on Equity and

Operational Cost Efficiency. This result is in agreement with the theory that high operational

expenditure and staff expenses leads to lower profitability. However the p value is 0.000 which is lower

than α=0.01 or 0.05, thus making the relationship significant.

(j) The correlation of Return on Equity and Net Interest Margin:

From the table 2.13, it is seen that the correlation between Return on Equity (ROE) and Net Interest

Margin (NIM) is -.005, showing that there is a negative correlation between Return on Equity and Net

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Interest Margin (NIM) which not proves that Higher Earning Ability leads to greater profitability and is

not in consistent with the theory. However the p value is 0.987 which is greater than α=0.01, thus

making the relationship highly insignificant.

(k) The correlation of Return on Equity and Total Loan to Customer Deposit:

From the table 2.13, it is seen that the correlation between Return on Equity (ROE) and Total Loan to

Customer Deposit (L/D) is 0.836**, showing that there is a positive correlation between Return on

Equity and Total Loan to Customer Deposit. This result is not consistent with the theory that highly

liquidity of banks is obtained at the opportunity cost of potential investment and hence less profits.

However the p value is 0.000 which is lower than α=0.01 or 0.05, thus making the relationship

statistically significant.

(l) The correlation of Return on Equity and Relative Interest Sensitive GAP ratio:

From the table 2.13, it is seen that the correlation between Return on Equity (ROE) and Relative Interest

Sensitive Gap ratio (GAP) is 0.437, showing that there is a strong, positive correlation between Return

on Equity and Relative Interest Sensitive Gap ratio. However the p value is 0.104 which is greater than

α= 0.05, thus making the relationship highly insignificant.

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(m) The correlation of Return on Equity (ROE) and Return on Asset (ROA):

From the table 2.13, it is seen that the correlation between Return on Equity (ROE) and Return on Asset

(ROA) is 0.753**, showing that there is a strong, positive correlation between Return on Equity and

Return on Asset (ROA). However the p value is 0.001 which is less than α= 0.05 or 0.01, thus making the

relationship highly significant, with a confidence level of 99%.

2.8.6 Individual Regression Model Analysis for All Variables:

(a) Regression Analysis between Return on Asset and Equity Capital to Total
Asset:

Capital Adequacy is the first component under CAMELS Rating System framework which is used globally

to assess the overall soundness of a bank’s operation and determine its profitability. It is believed that

well capitalized banks tend to be more profitable sine it possess adequate capital to avoid situations of

bankruptcy due to lack of finding external fund sources. Equity Capital to Total Asset is an accounting

ratio that is used as a representative for Capital Adequacy. The following regression test will test the

phenomenon that high capital adequacy will lead to huge profits.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .288a .083 .012 1.58412
a. Predictors: (Constant), capital adequecy ratio

The model summary shows some important indicators of the explaining power of the model. In

this case R square value of 0.083 or 8.3% means 8.3% of the change in dependent variable

Return on Asset (ROA) is caused by independent variable, Equity Capital to Total Asset. On the

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other hand, the adjusted R-square value of 0.012 means that 1.2% of the change in dependent

variable is caused by statistically significant variable. The standard error of the estimate

measures the accuracy of the predictions within the regression line, which is 1.58412.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 2.954 1 2.954 1.177 .298a
Residual 32.623 13 2.509
Total 35.577 14
a. Predictors: (Constant), capital adequecy ratio
b. Dependent Variable: return on asset

From the table we can see variation of the model is low which is reflected by the value

of the F-statistics and its significance value of 0.298 which is greater than 0.05. Thus we may

accept the null hypothesis, indicating that the model is not adequate and regression is invalid.

H0: Equity Capital to Total Asset of NBL has significant impact towards Return on Asset of

NBL.

H1: Equity Capital to Total Asset of NBL has no impact towards Return on Asset of NBL.

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Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) .814 .556 1.464 .167
capital adequecy ratio .036 .034 .288 1.085 .298
a. Dependent Variable: return on asset

The regression equation is given as follows:

ROA= .814+0.036*EC

According to the result of the test, Equity Capital to Total Asset (independent variable)has a P-Value

with significance of 0.298,therefore it is greater than 0.05. Thus we reject H0 and accept alternative

hypothesis, showing that Equity Capital to Total Asset of NBL has no significant impact towards Return

on Asset of NBL. We can conclude that if Equity Capital to Total Asset increases by 1 percent then,

Return on Asset insignificantly increases by 0.036units.

(b) Regression Analysis between Return on Asset and Non-performing Loans to

Total Loans:

The extent of credit risk to which a bank is exposed to depends on the quality of the bank’s assets it has

in possession. If a bank possess poor quality asset, then it is subject to a lot of credit risk that may affect

the health of a bank in terms of profitability. Non-performing loans to Total Asset can be used as a key

indicator of Asset Quality since the higher volume of classified loans in loan portfolio leads to lower

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returns than expected. The following regression test will test the phenomenon that poor Asset Quality

will lead to reduced profits.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .388a .151 .085 1.52445
a. Predictors: (Constant), asset quality ratio

The model summary above shows some important indicators of the explaining power of the model. In

this case R square value of 0.151 or 15.1% means 15.1% of the change in dependent variable Return on

Asset (ROA) is caused by independent variable, Non-performing Loans to Total Loans (NPL/L). On the

other hand, the adjusted r-square value of .085 means that 8.5% of the change in dependent variable is

caused by statistically significant variable. The standard error of the estimate measures the accuracy of

the predictions within the regression line, which is 1.52.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

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ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 5.365 1 5.365 2.309 .153a
Residual 30.211 13 2.324
Total 35.577 14
a. Predictors: (Constant), asset quality ratio
b. Dependent Variable: return on asset

From the table we can see variation of the model is low which is reflected by the value

of the F-statistics and its significance value of 0.153 which is greater than Alpha of 0.05.

Thus we may accept the null hypothesis, indicating that the model is not adequate and

regression is invalid

H0: Non-performing Loans to Total Loans of NBL has impact towards Return on Asset.

H1: Non-performing Loans to Total Loans of NBL has no impact towards Return on Asset.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) -1.349 1.738 -.776 .452
asset quality ratio .399 .262 .388 1.519 .153
a. Dependent Variable: return on asset

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The regression equation is given as follows:

ROA= -1.349+0.399*NPL/L

According to the result of the test, Non-performing Loan to Total Loan (independent

variable)has a P-Value with significance of 0.153,therefore it is greater than 0.05. Thus we reject

H0 and accept alternative hypothesis, showing that Non-performing Loan to Total Loan of NBL

has no significant impact towards Return on Asset of NBL We can conclude that if Non-

performing Loan to Total loan increases by 1 percent then Return on Asset insignificantly

increases by 0.399 units.

(c) Regression Analysis between Return on Asset and Operational Cost Efficiency:

Management Efficiency is the third components under CAMELS Rating approach. Poor expense

management can be a major contributor to poor profitability. In order to remain globally

competitive management are expected to make wise decisions to keep operating costs quite as

low as possible. Operational Cost Efficiency is used as an indicator of management efficiency

that takes into account ratio of staff wages and administrative expenses to net operating income.

The following regression test will test the phenomenon that poor managerial efficiency will lead

to reduced profits.

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Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .772a .597 .566 1.05061
a. Predictors: (Constant), management efficiency

The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.597 or 59.7% indicates that 59.7% of the change in

dependent variable Return on Asset (ROA) is caused by independent variable, Operational Cost

Efficiency (OCE). On the other hand, the adjusted R-square value of 0.566 means that 56.6% of

the change in dependent variable is caused by statistically significant variable.The standard error

of the estimate measures the accuracy of the predictions within the regression line, which is

1.05061.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 21.227 1 21.227 19.232 .001a
Residual 14.349 13 1.104
Total 35.577 14
a. Predictors: (Constant), management efficiency
b. Dependent Variable: return on asset

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From the table we can see variation of the model is low which is reflected by the value

of the F-statistics and its significance value of 0.001 which is lower than 0.05. Thus we may

reject the null hypothesis, indicating that the model is not adequate and regression is valid.

H0: Operational Cost Efficiency of NBL has impact towards Return on Asset of NBL.

H1: Operational Cost Efficiency of NBL has no significant impact towards Return on Asset

of NBL.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 4.976 .898 5.543 .000
management efficiency -.069 .016 -.772 -4.385 .001
a. Dependent Variable: return on asset

The regression equation is given as follows:

ROA= 4.976-0.069*OCE

According to the result of the test, Operational Cost Efficiency (independent variable) has a P-

Value with significance of 0.001; therefore it is lower than Alpha of 0.05. Thus we accept H0

and reject alternative hypothesis, showing that Operational Cost Efficiency of NBL has

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significant impact towards Return on Asset of UCB We can conclude that if Operational Cost

Efficiency increases by 1 percent then, Return on Asset insignificantly decreases by 0.069 units.

(d) Regression Analysis between Return on Asset and Net Interest Margin:

Net Interest Margin is used as a representative of Earning’s Ability of NBL bank in accordance

to CAMELS Rating. A bank’s Net Interest Margin helps to verify how successful a bank’s

investment decision is compared to its debt situations. It is believed that higher the spread

between interest income and interest expenditure, the higher is the bank’s revenue. In order to

test this phenomenon of Net Interest Margin, the following test is carried out.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .442a .195 .133 1.48422
a. Predictors: (Constant), earning ability ratio

The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.195 or 19.5% indicates that 19.5% of the change in

dependent variable Return on Asset (ROA) is caused by independent variable, Net Interest

Margin (NIM). On the other hand, the adjusted R-square value of 0.133 means that 13.3% of the

change in dependent variable is caused by statistically significant variable. The standard error of

the estimate measures the accuracy of the predictions within the regression line, which is 1.4842.

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Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 6.939 1 6.939 3.150 .099a
Residual 28.638 13 2.203
Total 35.577 14
a. Predictors: (Constant), earning ability ratio
b. Dependent Variable: return on asset

From the table we can see variation of the model is high which is reflected by the value

of the F-statistics and its significance value of 0.099 which is greater than α= 0.05. Thus we may

accept the null hypothesis and reject alternative hypothesis, indicating that the model is

adequate and regression is invalid.

H0: Net Interest Margin of NBL has impact towards Return on Asset of NBL.

H1: Net Interest Margin of NBL has no impact towards Return on Asset of NBL.

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Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) -1.320 1.483 -.890 .390
earning ability ratio 1.088 .613 .442 1.775 .099
a. Dependent Variable: return on asset

The regression equation is given as follows:

ROA= -1.320+1.088NIM

According to the result of the test, Net Interest Margin (independent variable) has a P-Value with

significance of 0.099; therefore it is greater than Alpha of 0.05. Thus we accept H0, thus indicating that

Net Interest Margin of NBL has significant impact towards Return on Asset of NBL. We can conclude that

if Net Interest increases by 1 percent then Return on Asset significantly increases by 1.088 units.

(e) Regression Analysis between Return on Asset and Total Loan to Customer

Deposit (L/D):

Proper liquidity management is one of the most important elements to manager who has to focus on

meeting the needs for deposit and loans to avoid serious negative consequences. Banks usually hold

high level of liquidity at the opportunity cost of potential investment that might maximize shareholders’

wealth. Availability of highly liquid asset allows a bank to raise capital quickly and reduce the need of

external financing. Total Loans to Customer Deposit can be used as a key measure of bank’s liquidity. If a

bank chooses to hold highly liquid asset, it does so at the expense of potential investment, which

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eventually leads to lowerprofit. The following regression test will test the phenomenon that higher

bank’s liquidity will lead to lower bank’s profitability.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .625a .391 .344 1.29093
a. Predictors: (Constant), liquidity ratio

The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.391 or 39.1% indicates that 39.1% of the change in

dependent variable Return on Asset (ROA) is caused by independent variable, Total Loans to

customer Deposit (L/D). On the other hand, the adjusted R-square value of 0.344 means that

34.4% of the change in dependent variable is caused by statistically significant variable.The

standard error of the estimate measures the accuracy of the predictions within the regression line,

which is 1.290.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate.

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ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 13.912 1 13.912 8.348 .013a
Residual 21.665 13 1.667
Total 35.577 14
a. Predictors: (Constant), liquidity ratio
b. Dependent Variable: return on asset

From the table we can see variation of the model is low which is reflected by the value

of the F-statistics and its significance value of 0.013 which is lower than α= 0.05. Thus we

may reject the null hypothesis which tells us that the model is not adequate and regression is

valid.

H0: Total Loan to Customer Deposit of NBL has impact towards Return on Asset of NBL.

H1: Total Loan to Customer Deposit of NBL has no impact towards Return on Asset of NBL.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) -7.755 3.125 -2.481 .028
liquidity ratio .111 .038 .625 2.889 .013
a. Dependent Variable: return on asset

The regression equation is given as follows:

ROA=-7.755+0.111L/D

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According to the result of the test, Total Loan to Customer Deposit (independent variable) has a

P-Value with significance of 0.013; therefore it is lower than Alpha of 0.05. Thus we reject H0

and accept alternative hypothesis, showing that loan to customer deposit of NBL has no

significant impact towards Return on Asset of NBL We can conclude that if loan to customer

deposit increases by 1 percent then, Return on Asset insignificantly increases by 0.111 units.

(f) Regression Analysis between Return on Asset and Relative Interest

Sensitive Gap Ratio:

Sensitivity to Market Risk is the new element under CAMELS Rating System. Ratio of interest

sensitive asset to liability can be used to assess the fluctuations in bank’s portfolio due to market

risk. Market risk affects NBL’s overall profitability. The following regression test will test the

phenomenon how market risk impacts NBL’s profits.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .008a .000 -.077 1.65423
a. Predictors: (Constant), sensitivity to market risk

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The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.000 or 0% indicates that 0% of the change in dependent

variable Return on Asset (ROA) is caused by independent variable, Relative Interest Sensitive

GAP ratio (GAP). On the other hand, the adjusted R-square value of -.077 means that -7.7% of

the change in dependent variable is caused by statistically significant variable. Since the adjusted

r-square is negative, model must contain terms that do not help to predict response properly. The

standard error of the estimate measures the accuracy of the predictions within the regression line,

which is 1.65423.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression .002 1 .002 .001 .978a
Residual 35.574 13 2.736
Total 35.577 14
a. Predictors: (Constant), sensitivity to market risk
b. Dependent Variable: return on asset

From the table we can see variation of the model is high which is reflected by the value

of the F-statistics and its significance value of 0.978 which is greater than α= 0.05. Thus we may

accept the null hypothesis and reject alternative hypothesis, indicating that the model is

adequate and regression is valid.

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H0: Relative Interest Sensitive Gap ratio of NBL has significant impact towards Return on

Asset of NBL.

H1: Relative Interest Sensitive Gap ratio of NBL has no impact towards Return on Asset of

NBL.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 1.220 .448 2.722 .017
sensitivity to market risk .002 .068 .008 .028 .978
a. Dependent Variable: return on asset

The regression equation is given as follows:

ROA= 1.229+0.002GAP

According to the result of the test, Relative Interest Sensitive GAP ratio (independent variable)

has a P-Value with significance of 0.978; therefore it is greater than Alpha of 0.05. Thus we

accept H0, thus indicating that Relative Interest Sensitive GAP ratio of NBL has significant

impact towards Return on Asset of NBL. We can conclude that if Net Interest increases by 1

percent then Return on Asset significantly increases by 0.002 units.

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(g) Regression Analysis between Return on Equity and Equity Capital to Total

Asset:

The following regression test will test the phenomenon that high capital adequacy will lead to

huge profits. Here Equity Capital to Total Asset (EC) is used as a measure of Capital Adequacy

and Return on Equity (ROE) determines NBL’s Profitability.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .126a .016 -.060 19.99930
a. Predictors: (Constant), capital adequecy ratio

The model summary on figure shows some important indicators of the explaining power of the

model. In this case R square value of 0.016 or 1.6% means 1.6% of the change in dependent

variable Return on Equity (ROE) is caused by independent variable, Equity Capital to Total

Asset. On the other hand, the adjusted R-square value of -0.060 means that -6% of the change in

dependent variable is caused by statistically significant variable. However, since the adjusted R

square is negative, the model contains term that do not help to explain response properly The

standard error of the estimate measures the accuracy of the predictions within the regression line,

which is 19.99930.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

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ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 84.066 1 84.066 .210 .654a
Residual 5199.635 13 399.972
Total 5283.701 14
a. Predictors: (Constant), capital adequecy ratio
b. Dependent Variable: return on equity

From the table we can see variation of the model is low which is reflected by the value of the F-

statistics and its significance value of 0.654 which is greater than 0.05. Thus we may accept the

null hypothesis, indicating that the model is not adequate and regression is invalid.

H0: Equity Capital to Total Asset of NBL has impact towards Return on Equity of NBL.

H1: Equity Capital to Total Asset of NBL has no impact towards Return on Equity of NBL.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 6.944 7.022 .989 .341
capital adequecy ratio .194 .424 .126 .458 .654
a. Dependent Variable: return on equity

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The regression equation is given as follows:

ROE= 6.944+0.194 EC

According to the result of the test, Equity Capital to Total Asset (independent variable)has a P-

Value with significance of 0.654,therefore it is greater than 0.05. Thus we reject H0 and accept

alternative hypothesis, showing that Equity Capital to Total Asset of NBL has no significant

impact towards Return on Equity of NBL. We can conclude that if Equity Capital to Total Asset

increases by 1 percent then, Return on Equity insignificantly increases by 0.194 units.

(h) Regression Analysis between Return on Equity and Non-performing

Loans to

Total Loans:

The following regression test will test the phenomenon that poor Asset Quality (measured by

Non-performing Loan to Total Loan) will lead to reduced profits. Return on Equity (ROE) is

used as an indicator to determine profitability.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .497a .247 .189 17.49476
a. Predictors: (Constant), asset quality ratio

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The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.247 or 24.7% means 24.7% of the change in dependent

variable Return on Equity (ROE) is caused by independent variable, Non-performing Loans to

Total Loans (NPL/L). On the other hand, the adjusted r-square value of 0.189 means that -18.9%

of the change in dependent variable is caused by statistically significant variable. The standard

error of the estimate measures the accuracy of the predictions within the regression line, which is

17.494.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 1304.834 1 1304.834 4.263 .059a
Residual 3978.867 13 306.067
Total 5283.701 14
a. Predictors: (Constant), asset quality ratio
b. Dependent Variable: return on equity

From the table we can see variation of the model is low which is reflected by the value of the F-

statistics and its significance value of 0.05 which is equal to Alpha of 0.05. Thus we may regect

the null hypothesis, indicating that the model is adequate and regression is valid.

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H0: Non-performing Loans to Total Loans of NBL has impact towards its Return on Equity.

H1: Non-performing Loans to Total Loans of NBL has no impact towards its Return on

Equity.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) -30.987 19.945 -1.554 .144
asset quality ratio 6.215 3.010 .497 2.065 .059
a. Dependent Variable: return on equity

The regression equation is given as follows:

ROE= -30.987+6.215 NPL/L

According to the result of the test, Non-performing Loan to Total Loan (independent

variable)has a P-Value with significance of 0.05,therefore it is equal to 0.05. Thus we accept H0

and regect alternative hypothesis, showing that Non-performing Loan to Total Loan

of NBL has significant impact towards Return on Equity of NBL We can conclude that if Non-

performing Loan to Total loan increases by 1 percent then Return on Asset insignificantly

increases by 6.215 units.

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(i) Regression Analysis between Return on Equity and Operational Cost

Efficiency:

The following regression test will test the phenomenon that poor managerial efficiency will

lead to reduced profits. Return on Equity determines profitability whereas Operational Cost

Efficiency measures Management’s Efficiency.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .895a .802 .786 8.97931
a. Predictors: (Constant), management efficiency

The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.802 or 80.2% indicates that 80.2% of the change in

dependent variable Return on Equity (ROE) is caused by independent variable, Operational Cost

Efficiency (OCE). On the other hand, the adjusted R-square value of 0.786 means that 78.6% of

the change in dependent variable is caused by statistically significant variable. The standard error

of the estimate measures the accuracy of the predictions within the regression line, which is

8.97931.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

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ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 4235.536 1 4235.536 52.532 .000a
Residual 1048.165 13 80.628
Total 5283.701 14
a. Predictors: (Constant), management efficiency
b. Dependent Variable: return on equity

H0: Operational Cost Efficiency of NBL has impact towards Return on Equity of NBL.

H1: Operational Cost Efficiency of NBL has no impact towards Return on Equity of NBL.

From the table we can see variation of the model is low which is reflected by the value

of the F-statistics and its significance value of 0.000 which is lower than 0.05. Thus we may

reject the null hypothesis, indicating that the model is adequate and regression is valid.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 62.132 7.672 8.098 .000
management efficiency -.981 .135 -.895 -7.248 .000
a. Dependent Variable: return on equity

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The regression equation is given as follows:

ROE= 62.132-0.981 OCE

Figure shows there is a negative relationship between ROE and OCE since higher OCE

means inefficiency.

According to the result of the test, Operational Cost Efficiency (independent variable) has a P-

Value with significance of 0.000; therefore it is lower than Alpha of 0.05. Thus we accept H0

and reject alternative hypothesis, showing that Operational Cost Efficiency of NBL has

significant impact towards Return on Equity of NBL We can conclude that if Operational Cost

Efficiency increases by 1 percent then, Return on Asset insignificantly decreases by 0.981 units.

(j) Regression Analysis between Return on Equity and Net Interest Margin:

The following test is used to analyze the phenomenon that a bank’s earning ability influences

its profitability. The two measures of Earning Ability and Profitability is Net Interest Margin

(NIM) and Return on Equity (ROE).

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .005a .000 -.077 20.16010
a. Predictors: (Constant), earning ability ratio

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The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.000 or 0% indicates that 0% of the change in dependent

variable Return on Equity (ROE) is caused by independent variable, Net Interest Margin (NIM).

On the other hand, the adjusted R-square value of -0.077 means that -7.7% of the change in

dependent variable is caused by statistically significant variable. The standard error of the

estimate measures the accuracy of the predictions within the regression line, which is 20.16010.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression .114 1 .114 .000 .987a
Residual 5283.588 13 406.430
Total 5283.701 14
a. Predictors: (Constant), earning ability ratio
b. Dependent Variable: return on equity

From the table we can see variation of the model is high which is reflected by the value of the F-

statistics and its significance value of 0.987 which is greater than α= 0.05. Thus we may accept

the null hypothesis and reject alternative hypothesis, indicating that the model is not adequate

and regression is invalid.

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H0: Net Interest Margin of NBL has significant impact towards Return on Equity of NBL.

H1: Net Interest Margin of NBL has no impact towards Return on Equity of NBL

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 9.451 20.150 .469 .647
earning ability ratio -.139 8.326 -.005 -.017 .987
a. Dependent Variable: return on equity

The regression equation is given as follows:

ROE= 9.451-.139 NIM

Figure shows there is a negative relationship between ROE and NIM.

According to the result of the test, Net Interest Margin (independent variable) has a P-Value with

significance of 0.987; therefore it is greater than Alpha of 0.05. Thus we reject H0, thus

indicating that Net Interest Margin of NBL has no significant impact towards Return on Equity

of NBL. We can conclude that if Net Interest increases by 1 percent then Return on Asset

significantly decreses by 0.139 units.

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(k) Regression Analysis between Return on Equity and Total Loan to

Customer Deposit:

The following regression test will test the phenomenon that higher bank’s liquidity will lead

to lower bank’s profitability. Indicator of profitability is Return on Asset whereas indicator of

liquidity is Total Loan to Customer Deposit.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .836a .699 .676 11.06355
a. Predictors: (Constant), liquidity ratio

The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.699 or 69.9% indicates that 69.9% of the change in

dependent variable Return on Equity (ROE) is caused by independent variable, Total Loans to

customer Deposit (L/D). On the other hand, the adjusted R-square value of 0.676 means that

67.6% of the change in dependent variable is caused by statistically significant variable. .The

standard error of the estimate measures the accuracy of the predictions within the regression line,

which is 11.063.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

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112
ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 3692.472 1 3692.472 30.167 .000a
Residual 1591.229 13 122.402
Total 5283.701 14
a. Predictors: (Constant), liquidity ratio
b. Dependent Variable: return on equity

From the table we can see variation of the model is low which is reflected by the value of the F-

statistics and its significance value of 0.000 which is lower than α= 0.05. Thus we may reject the

null hypothesis which tells us that the model is adequate and regression is valid.

H0: Total Loan to Customer Deposit of NBL has significant impact towards Return on Equity

of NBL.

H1: Total Loan to Customer Deposit of NBL has no impact towards Return on Equity of

NBL.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) -137.147 26.784 -5.120 .000
liquidity ratio 1.810 .330 .836 5.492 .000
a. Dependent Variable: return on equity

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The regression equation is given as follows:

ROE= -137.147+1.810 L/D

According to the result of the test, Total Loan to Customer Deposit (independent variable) has a

P-Value with significance of 0.000; therefore it is lower than Alpha of 0.05. Thus we accept H0

and reject alternative hypothesis, showing that loan to customer deposit of NBL has significant

impact towards Return on Asset of NBL We can conclude that if loan to customer deposit

increases by 1 percent then, Return on Asset insignificantly increases by 1.810 units.

(l) Regression Analysis between Return on Equity and Relative Interest

sensitive GAP ratio:

Market risk affects NBL’s overall profitability. The following regression test will test the

phenomenon how market risk impacts NBL’s profits. Profitability is determined by Return

on Equity and sensitivity to market risk is determined by Relative Interest Sensitive GAP

ratio.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .437a .191 .129 18.13551
a. Predictors: (Constant), sensitivity to market risk

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The model summary above shows some important indicators of the explaining power of the

model. In this case R square value of 0.191 or 19.1% indicates that 19.1% of the change in

dependent variable Return on Equity (ROE) is caused by independent variable, Relative Interest

Sensitive GAP ratio (GAP). On the other hand, the adjusted R-square value of 0.129 means that

12.9% of the change in dependent variable is caused by statistically significant variable. The

standard error of the estimate measures the accuracy of the predictions within the regression line,

which is 18.13551.

Null Hypothesis: Model is not adequate

Alternate Hypothesis: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 1008.042 1 1008.042 3.065 .104a
Residual 4275.660 13 328.897
Total 5283.701 14
a. Predictors: (Constant), sensitivity to market risk
b. Dependent Variable: return on equity

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From the table we can see variation of the model is high which is reflected by the value of the F-

statistics and its significance value of 0.104 which is greater than α= 0.05. Thus we may accept

the null hypothesis and reject alternative hypothesis, indicating that the model is notadequate and

regression is invalid.

H0: Relative Interest Sensitive GAP ratio of NBL has significant impact towards Return on

Equity of NBL.

H1: Relative Interest Sensitive GAP ratio of NBL has no impact towards Return on Equity of

NBL.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) 6.532 4.911 1.330 .206
sensitivity to market risk 1.311 .749 .437 1.751 .104
a. Dependent Variable: return on equity

The regression equation is given as follows:

ROE= 6.532+1.311 GAP

According to the result of the test, Relative Interest Sensitive GAP ratio (independent variable)

has a P-Value with significance of 0.104; therefore it is greater than Alpha of 0.05. Thus we

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reject H0, thus indicating that Relative Interest Sensitive GAP ratio of NBL has no significant

impact towards Return on Asset of NBL. We can conclude that if Net Interest increases by 1

percent then Return on Asset significantly increases by 1.311 units.

2.8.7 Multiple Regression Analysis Model:

a. Model 1: ROANBL, t=CNBL, t+ ECNBL, t + NPL NBL, t/LNBL, t

+OCENBL, t+ NIMNBL, t+ LNBL, t/DNBL, t +GAPNBL, t

There are six elements under CAMELS Rating Scale that actually impacts soundness of bank’s

overall operation, hence eventually impacting its overall profitability. The factors of CAMELS

are: Capital Adequacy (represented by Equity Capital to Total Asset i.e. EC), Asset Quality

(represented by Non-performing Loans to Total asset i.e. NPL/L), Management Efficiency

(represented by Operational Cost Efficiency i.e. OCE), Earning’s Ability (represented by Net

Interest Margin i.e. NIM), Liquidity (represented by Loan to Customer Deposit i.e. L/D) and

Sensitivity to Market (represented by Interest Sensitive GAP ratio i.e. GAP). A sample model 1

is used to check the effect of each of the independent variables or predictors that falls under

CAMELS framework on NBL’s profitability. Model 1 uses dependent variable, Return on Asset

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(ROA) as a measure of profitability of NBL that takes into account the net profit each quarter.

The regression test below helps to explain the effect of variables in model 1 in details.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .938a .880 .789 .73143
a. Predictors: (Constant), management efficiency, earning ability
ratio, sensitivity to market risk, capital adequecy ratio , asset quality
ratio, liquidity ratio

Here from the table shows some important indicators of the explaining power of the model. In

this case R Square value of 0.880 or 88% means 88% of the change in dependent variable is

caused by independent variables. On the other hand, the adjusted R-Square value of 0.789 means

that 78.9% of the change in dependent variable is caused by statistically significant variables.

The standard error of the estimate measures the accuracy of the predictions within the regression

line, which is 0.73143.

Ho: Model is not adequate

H1: Model is adequate

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ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 31.297 6 5.216 9.750 .003a
Residual 4.280 8 .535
Total 35.577 14
a. Predictors: (Constant), management efficiency, earning ability ratio, sensitivity to market risk,
capital adequecy ratio , asset quality ratio, liquidity ratio
b. Dependent Variable: return on asset

From the table we can see the variation of the model is high which is reflected by the value of the
F-statistics and its significance value 0.003 which is less than .05. Thus we may reject the null
hypothesis and accept alternative hypothesis, stating that the model is adequate and regression is
valid.
Ho: The Profitability of NBL is influenced by factors of the model under CAMELS Rating
approach.
H1: The Profitability of NBL is not influenced by factors of the model CAMELS Rating
approach.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) -3.773 4.026 -.937 .376
sensitivity to market risk -.073 .036 -.296 -2.040 .076
capital adequecy ratio -.004 .018 -.028 -.191 .853
asset quality ratio .121 .162 .118 .745 .478
earning ability ratio 1.070 .373 .434 2.870 .021
liquidity ratio .058 .036 .328 1.604 .147
management efficiency -.052 .017 -.579 -3.013 .017
a. Dependent Variable: return on asset

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The regression equation is given as follows:

ROANBL, t= -3.773*CNBL, t- 0.004* ECNBL, t +0.121* NPL NBL, t/LNBL, t –

0.052*OCENBL, t+ 1.070* NIMNBL, t+ 0.058* LNBL, t/DNBL, t -0.052*GAPNBL, t

From Table, it is observed that Equity Capital to Total Asset, having a p-value of 0.853 which is

greater than Alpha of 0.05, significantly not impacts the Return on Asset and has a positive

relationship which is not consistent with theory. If EC changes by 1 % then ROA changes by -

0.004%. The significance value of Non-performing Loan to Total Loan is 0.478 which is greater

than alpha of 0.05 so null hypothesis is rejected and alternative hypothesis is accepted. So if

NPL/L increases by 1%, ROA increases insignificantly by 0.121 %. Moreover, it is seen that

Operational Cost Efficiency having p value of 0.017 which is less than alpha of 0.05 has

significant impact, thus agreeing with null hypothesis. When OCE increases by 1%, ROA

insignificantly drops by 0.052%. It is also seen that Total Loan to Customer Deposit agrees with

alternative hypothesis since p-value of 0.147 is greater than alpha of 0.05. ROA insignificantly

increases by 0.58 % when L/D increases by 1 %.Net Interest Margin (p-value of 0.021 less than

0.05) have significant impact and Relative Interest Sensitive GAP ratio (p-value of 0.076 have no

significant impact on profitability, thus accepting alternate hypothesis. If NIM increases by 1 %,

ROA increases significantly by 1.070% whereas if GAP increases by 1%, ROA decreases by

0.076% insignificantly.

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b. Model 2: ROENBL, t=CNBL, t+ ECNBL, t + NPL NBL, t/LNBL, t

+OCENBL, t+ NIMNBL, t+ LNBL, t/DNBL, t +GAPNBL, t

Using the same predictors of Model1 which falls under CAMELS Rating Framework, a

controlled model of profitability is analyzed to check the synergic impact of the factors on

NBL’s profit. The dependent variable that represents profitability is Return on Equity which

focuses only on the return earned on proper utilization of NBL shareholder’s wealth.

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
1 .974a .948 .910 5.84203
a. Predictors: (Constant), management efficiency, earning ability
ratio, sensitivity to market risk, capital adequecy ratio , asset quality
ratio, liquidity ratio

Here from the table shows some important indicators of the explaining power of the model. In

this case R Square value of 0.948 or 94.8% means 94.8% of the change in dependent variable is

caused by independent variables. On the other hand, the adjusted R-Square value of 0.910 means

that 91% of the change in dependent variable is caused by statistically significant variables. The

standard error of the estimate measures the accuracy of the predictions within the regression line,

which is 5.84203.

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Ho: Model is not adequate

H1: Model is adequate

ANOVAb
Model Sum of df Mean Square F Sig.
Squares
1 Regression 5010.667 6 835.111 24.469 .000a
Residual 273.034 8 34.129
Total 5283.701 14
a. Predictors: (Constant), management efficiency, earning ability ratio, sensitivity to market risk,
capital adequecy ratio , asset quality ratio, liquidity ratio
b. Dependent Variable: return on equity

From the table we can see the variation of the model is high which is reflected by the

value of the F-statistics and its significance value (0.000) which is less than .05. Thus we may

reject the null hypothesis and accept alternative hypothesis, stating that the model is adequate

and regression is valid.

Ho: The Profitability of NBL is influenced by factors of the model under CAMELS Rating

approach.

H1: The Profitability of NBL is not influenced by factors of the model CAMELS Rating

approach.

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Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
1 (Constant) -52.440 32.156 -1.631 .142
sensitivity to market risk .152 .286 .051 .533 .608
capital adequecy ratio -.081 .147 -.053 -.550 .597
asset quality ratio 3.473 1.297 .278 2.678 .028
earning ability ratio -1.523 2.978 -.051 -.511 .623
liquidity ratio .902 .290 .416 3.106 .015
management efficiency -.546 .138 -.499 -3.960 .004
a. Dependent Variable: return on equity

The regression equation is given as follows:

ROENBL, t= -52.440*CNBL, t- 0.081* ECNBL, t + 3.473* NPL NBL, t/LNBL, t – 0.546*

OCENBL, t- 1.523* NIMNBL, t+ 0.902* LNBL, t/DNBL, t - 0.546*GAPNBL, t

From Table, it is observed that Equity Capital to Total Asset, having a p-value of 0.597 which is

greater than Alpha of 0.05, does not significantly impacts the Return on Asset, thus rejecting H0.

If EC changes by 1 % then ROE changes insignificantly by -0.081%. The significance value of

Non-performing Loan to Total Loan is 0.028 which is less than alpha of 0.05 so null hypothesis

is accepted and alternative hypothesis is rejected. So if NPL/L increases by 1%, ROE increases

significantly by 3.473 %. Moreover, it is seen that Operational Cost Efficiency having p value of

0.004 which is less than alpha of 0.05 has significant impact,thus agreeing with null hypothesis.

When OCE increases by 1%, ROE significantly drops by 0.546%. It is also seen that Total Loan

to Customer Deposit agrees with null hypothesis since p-value of 0.15 is greater than alpha of

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0.05. ROE significantly increases by 0.902 % when L/D increases by 1 %. Both Net Interest

Margin (p-value of 0.623 greater than 0.05) and Relative Interest Sensitive GAP ratio (p-value of

0.608 Have no significant impact on profitability, thus accepting alternate hypothesis. If NIM

increases by 1 %, ROE decreases insignificantly by 1.523% whereas if GAP increases by 1%,

ROE decreases by 0.546% insignificantly.

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2.9 SUMMARY OF FINDINGS:

The topic of my research is “Profitability Analysis of National Bank Limited (NBL) under

CAMELS Rating System Framework.” The total number of historical data that was taken

inconsideration was 15 years starting from 1998 to 2012. Here the Independent variables that

were taken in consideration were: Capital Adequacy, Asset Quality, Managerial Efficiency,

Earning’s Ability and Sensitivity to Market Risk. The representatives for each factors were:

Equity Capital to Total Asset (EC), Non-performing Loan to Total Loan (NPL/L), Operational

Cost Efficiency (OCE), Net Interest Margin (NIM), Total Loan to Customer Deposit (L/D) and

Relative Interest Sensitive GAP ratio (GAP). The Dependent Variable here was Profitability

measured by Return on Asset (ROA) and Return on Equity (ROE). Here various tests were

carried out to see the effect of the CAMELS Rating Scale factors on profitability of NBL. The

result and findings of different tests are given below.

1. The One Sample T Test: The result of one sample T test shows that all the variables are

almost representative with the population/industry which helps to support my research,

analysis and findings strongly.

2. The correlation Test: The result shows that Equity Capital to Total Asset (EC), Net

Interest Margin (NIM), Interest Sensitive GAP (in case of positive GAP when Interest

Sensitive Asset is greater than Interest sensitive Liability) has strong, positive relationship

with profitability (ROA, ROE) and Operational Cost Efficiency has negative relationship

with profitability (ROA and ROE). These results are consistent with theory. However Non-

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performing Loan to Total Loan and Loan to Customer Deposit shows slightly positive

relationship with profitability (ROA and ROE) which is inconsistent with theory which tells

that there should be negative relationship.

3. The Individual Regression Model: Here for each independent variable a regression test

was done against the dependent variable. The result showed that none of the independent has

any impact on the dependent variable apart from Net Interest Margin and Interest Sensitive

GAP ratio. Therefore it can be concluded that CAMELS Rating Scale factors individually do

not affect NBL bank’s profitability apart from Net Interest Margin and Positive Interest

Sensitive GAP ratio.

4. The Multiple Regression Model: Two models were tested here. In Model 1, all the

independent variables were tested against Return on Asset that focuses on bank’s overall

profitability and another model was tested using all the independent variables against Return

on Equity which focuses on the return bank achieves by properly utilizing shareholder’s

wealth, thus focusing on the return available to shareholders. In case of Model 1, all

independent variables except non-performing loans to total asset and total loans to customer

deposit showed some impact on bank’s overall profitability. In case of Model 2, all

independent variables except sensitivity to market risk and non-performing loans to total asset

showed some impact on bank’s profitability focused on shareholders. Since all factors did not

show impact in the model, we conclude that CAMELS Rating Scale factors considered in the

model do not affect NBL bank’s profitability.

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2.10 RECOMMENDATIONS:

CAMELS Rating Scale has been universally adopted to assess accurately a bank’s overall

operating conditions. Results from CAMELS Rating Scale mainly serves two purpose i.e. it

analyze a bank’s exposure to risk such as capital risk, credit risk, investment risk, liquidity

risk, market risk etc. and a banks’ return or profitability. Risk and returns are trade offs. My

main focus of research was to identify the factors from CAMELS Rating Scale that are vital

and greatly influences NBL’s overall profitability. From the result of my research, I have

found out that if NBL wants to focus on goals of pursuing profits rather than the goal of

reducing its exposure to risk, NBL must mainly focus on four factors: Capital Adequacy,

Management’s Efficiency, Earning’s Ability and Sensitivity to Market risk.

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2.11 LIMITATIONS:

The report has few limitations. The limitations are raised from different reasons which are

given below:

 In this report, I only used my own practical and researching knowledge because I did not

attend any seminar or training session regarding CAMELS Rating System and even I did

not work with the reporting unit at NBL for CAMELS Rating. So, it is impossible for me

to represent the absolute details about CAMELS Rating System. Moreover research is

limited to its literature review.

 Some data could not been collected for confidentiality or secrecy of management.

 Only 15 years of data are taken on a yearly basis which might have resulted in the

outcome of results.

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2.12 CONCLUSION:

Private commercial banks are playing a vital role in the development of our economy.

Government and Bangladesh Bank also play a crucial role in banking sector by regulating the

overall banking systems and setting rules and regulation in the activities of commercial banks.

In recent years of banking sector, NBL has shown better performance comparing with other first

generation banking. So I want to find the determinants that determine NBL’s profitability. The

main objective this study was to determinate and evaluate the effects of banking sectoral-factors

on the profitability of NBL. The objective was to determine and evaluate the effects of bank-

specific factors expressed within the CAMELS. From the discussion of the findings above, it

can be concluded that the bank-specific factors such as Capital Adequacy, Earning’s Ability,

Managerial Efficiency and Sensitivity of Market Risk are the most significant factors

influencing the profitability of NBL. The study sought to investigate factors that influence

profitability of NBL. But it can be extended to include other banks to study the determinants of

profitability of banking industry in Bangladesh. However if this study is extended to the entire

banking industry in Bangladesh where all banks operate then the variables used in the study were

not exhaustive. Future research could incorporate macroeconomic variables such as GDP,

inflation and exchange rates. Also a study on the factors influencing the liquidity position of

commercial bank in the country could add great value to the performance of local banks and

academic literature.

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Websites:

 National Bank Limited (1998-2012)

 National Bank Website : http://www.nblbd.com/

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