A Study of Profitability and Liquidity of Chhimek Laghubitta Bikash Bank Limited,

Everest Bank Limited and Janaki Finance

Business Research

Submitted to:

Pokhara University

In partial fulfillment of the requirements for the

Bachelor of Business Administration-Banking and Insurance

By Group 3 Members:

Anzeela Maharjan

Bidhya Koirala

Dipesh Raj Pandey

Pramod Ghimire

Under the supervision of

Mr. Niranjan Phuyal

“Seminar in Working Capital Management” Instructor

Ace Institute of Management

1. Objectives of the study

The main objective of this study is to analyze the relationship between liquidity and profitability
of three financial institutions (FIs): Chhimek Laghubitta Bikash Bank Limited (CBBL), Everest
Bank Limited (EBL) and Janaki Finance. The other objectives are:

i. To find the Return on Assets (ROA), Return on Equity (ROE), Earning per Share
(EPS), Net worth per Share (NWPS), Size, Liquid Assets to Deposit Ratio (LD Ratio)
and Credit Deposit Ratio (CD Ratio) of these three financial institutions.
ii. To find if these financial institutions are maintaining proper liquidity position or not.
iii. To decide which bank is the best among these three banks in terms of liquidity
position and ROA.

2. Research Methodology

This study is based on the secondary data collected from the audited financial statements of three
financial institutions (FIs): CBBL, EBL and Janaki Finance. The profitability ratios ROA, ROE
and EPS are the dependent variables. The main dependent variable is ROA. The independent
variables are Size, Net worth per share (NWPS), Liquid Assets to Deposit Ratio (LD Ratio) and
Credit Deposit Ratio (CD Ratio). The main independent variables are LD Ratio and CD Ratio as
they show the liquidity position of the FIs and the main objective of this study is to find the
relation between liquidity and profitability.

The descriptive statistical tools that have been used to summarize the collected variables for each
FI are mean, median, standard deviation (S.D.), range, minimum, maximum and count. Pearson
correlation has been used to find the relationship nature between dependent and independent
variables in case of each FI. To analyze the extent of dependency of profitability on liquidity
position and size, multiple regressions have been conducted for each FI. The multiple regression
model used is:

ROA= b0 + b1Size + b2LD + b3CD

Where

ROA = Return on assets

Size = Total size of assets of the financial institution

LD = Liquid Assets to Deposit Ratio

CD = Credit Deposit Ratio

b0, b1, b2 and b3 are the regression coefficients.

After finding and interpreting the financial ratios of the collected variables, descriptive statistics
of the collected variables, and the correlation and regression of dependent and independent
variables of each FI, the best FI among these three FIs is decided.

2.1 Variables of the study

i. ROA = Net Profit / Total Assets
ii. ROE = Net Profit / Total Equity
(Total Equity = Paid Up Capital + Reserve and Surplus)
iii. EPS = Net Profit / Number of shares
(Number of shares = Paid up Capital / 100)
iv. NWPS = Total Equity / Number of shares
v. Size = ln (assets size)
(ln = Natural Log)
vi. Liquid Assets to Deposit Ratio (LD Ratio) = Liquid Assets / Deposit
(Liquid Assets = Cash balance + Balance at NRB + Balance at other banks + Money
at call. A higher LD ratio indicates that a bank/FI is relatively more liquid than a
bank/FI which has lower LD ratio. Depositors trust to a FI is enhanced when a FI
maintains higher LD Ratio. More LD ratio usually indicates better liquidity position.)
vii. Credit Deposit Ratio (CD Ratio) = Loan / Deposit
(A higher CD Ratio indicates that a bank takes more financial stress by making
excessive loans. Therefore, lower CD ratio is usually preferable. More CD ratio
usually indicates less liquidity.)
3. RESULTS AND DISCUSSION

3.1 Chhimek Laghubitta Bikash Bank Limited (CBBL)

The table below is the overview of the financial ratios over the 6 years period for CBBL:

Liquid Assets to CD
YEAR ROA ROE EPS NWPS Size Deposit Ratio
2064/65 2.18% 29.68% 39.34 132.54 20.64 96.80% 211.46%
65/66 1.98% 29.85% 42.21 141.40 21.02 77.01% 212.07%
66/67 2.28% 29.99% 71.00 236.71 21.40 65.16% 200.65%
67/68 2.86% 35.63% 58.66 164.64 21.67 64.07% 172.42%
68/69 2.17% 28.99% 60.24 207.77 21.98 57.42% 146.82%
69/70 2.38% 31.22% 68.64 219.81 22.24 43.45% 131.72%

The Return on assets (an overall measure of profitability) seems to be growing slowly from
2064/65 to 2067/68 from 2.18% to 2.86% respectively but fluctuation came back at 2.38% at the
year-end 2069/70. Likewise, the ROE followed the same pattern as of ROA but the percentage of
return is more than the ROA. And EPS has increased on year-end of 2066/67 i.e. 71.00 per share
but it has declined to 68.64% in year-end 2069/70. Net worth Per Share however increased
growing from 132.54 to 219.81 in 6 years period. The size of the company gradually has come at
22.24 in 2069/70 from 20.64 in 2064/65. Liquid assets to deposit ratio decreased gradually in the
years of observation from 96.80% in 2064/65 to 43.45% in 2069/70. Credit to deposit ratio (CD
Ratio) also has decreased gradually from 211.46% in 2064/65 to 131.72% in 2069/2070.
3.1.1 DESCRIPTIVE STATISTICS

The following table shows the descriptive statistics of the collected variables of CBBL:

Liquid Assets to CD
ROA ROE EPS NWPS Size Deposit Ratio

Mean 2.31% 30.90% 56.68 183.81 21.49 67.32% 179.19%

Median 2.23% 29.92% 59.45 186.20 21.53 64.61% 186.54%
Standard
Deviation 0.30% 2.43% 13.22 43.51 0.60 18.14% 34.44%
Range 0.88% 6.64% 31.66 104.18 1.60 53.35% 80.35%
Minimum 1.98% 28.99% 39.34 132.54 20.64 43.45% 131.72%
Maximum 2.86% 35.63% 71.00 236.71 22.24 96.80% 212.07%
Count 6 6 6 6 6 6 6

The mean ROA is 2.31%, mean ROE IS 30.90%, mean EPS is 56.68, mean NWPS is 183.81,
mean Size is 21.49, mean LD ratio is 67.32% and mean CD ratio is 179.19%. The mean CD ratio
of CBBL doesn’t meet the NRB standard of 80%. So, it can be said that CBBL gives excessive
loans and takes more financial stress. The maximum CD ratio is 212.07% which shows that bank
has given more loans and taken excessive risk in that year than in other years (2065/66).
Likewise, the minimum LD ratio is 43.45% which shows that bank had hold fewer liquid assets
in a year (2069/70).

The standard deviation of ROA is 0.30% which is least among all the variables used for this
study. This shows that ROA of CBBL is quite stable. The CD ratio has standard deviation of
34.44% which again shows that CBBL is not maintaining its CD ratio as per the NRB standard.
The standard deviation of ROE is 2.43%, EPS is 13.22, NWPS is 43.5 and LD ratio is 18.14%.
The standard deviation of size is 0.60 which shows that assets size of CBBL has neither
increased nor decreased by a significant amount.
3.1.2 CORRELATION

The table below shows the Pearson correlation coefficient calculated between the different ratios
used for this study.

Liquid Assets to CD
ROA ROE EPS NWPS Size Deposit Ratio
ROA 1
ROE 0.9365 1
EPS 0.3996 0.1847 1
NWPS 0.1137 -0.1249 0.9517 1
Size 0.3860 0.2463 0.7915 0.7215 1
Liquid Assets to
Deposit -0.3249 -0.2190 -0.8413 -0.7781 -0.9725 1
CD Ratio -0.3426 -0.1882 -0.6253 -0.5698 -0.9477 0.8639 1

There is high positive correlation between ROA and ROE (0.9365) as they are both the
profitability ratios. Similarly, NWPS and EPS have high positive correlation (0.9517). Other
highly correlated ratios are Size and EPS (0.7915), Size and NWPS (0.7215), LD ratio and EPS
(-0.8413), LD ratio and NWPS (-0.7781), LD ratio and Size (-0.9725), CD ratio and EPS (-
0.6253), CD ratio and Size (-0.9477) and CD ratio and LD ratio (0.8639). Size has high positive
correlation with EPS and NWPS as EPS and NWPS will increase if the size of assets increases
and vice versa.

More importantly, LD ratio has negative correlation with the profitability ratios ROA (r= -
0.3249), ROE (r= -0.2190) and EPS (r= -0.8413). This indicates that the profit of CBBL
increases if it keeps fewer liquid assets for repaying the deposits of customers. This is contrary to
previous findings which suggest that profit and liquidity are directly related. Similarly, CD ratio
also has negative correlation with the profitability ratios, ROA (r= -0.3426), ROE (r= -0.1882)
and EPS (r= -0.6253). CD ratio increases if amount of loan increases. So, this negative
correlation indicates that profit of CBBL increases if it gives fewer loans and maintains more
liquidity. So, we can say that CBBL is not maintaining its liquidity position.
3.1.3 REGRESSION

SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.5854
R Square 0.3427
Adjusted R Square -0.6432
Standard Error 0.0039
Observations 6

ANOVA
Significance
df SS MS F F
5.20E-
Regression 3 1.56E-05 06 0.3476 0.7994
1.50E-
Residual 2 2.99E-05 05
Total 5 4.55E-05

Standard Lower Upper

Coefficients Error t Stat P-value 95% 95%
Intercept -0.5896 0.7517 -0.7844 0.5150 -3.8238 2.6446
Size 0.0256 0.0311 0.8219 0.4975 -0.1083 0.1595
Liquid Assets to
Deposit 0.0492 0.0649 0.7571 0.5280 -0.2303 0.3286
CD Ratio 0.0167 0.0250 0.6680 0.5729 -0.0908 0.1242
From the above table, we can see that R2= 0.3427 which indicates that 34.27% of change in main
dependent variable ROA is due to the change in main independent variables Size, LD ratio and
CD ratio. For independent variable Size, p-value is 0.4975 which is less than 0.05 which
indicates that size is not significantly associated with ROA. Likewise, LD ratio and CD ratio are
also not significantly associated with ROA as their p-values are 0.5280 and 0.5729 respectively
which is less than 0.05. Similarly, this overall model is not significant as Significance F-value is
0.7994 which is less than α-value 0.05. This can be due to very a smaller number of observations
(only 6).

3.2 Everest Bank Limited (EBL)

The table below is the overview of the financial ratios over the 8 years period for EBL:

Liquid Assets to CD
YEAR ROA ROE EPS NWPS Size Deposit Ratio
2061/62 1.43% 20.20% 32.47 160.74 23.19 16.04% 75.45%
62/63 1.49% 24.65% 45.81 185.87 23.49 11.74% 71.01%
63/64 1.38% 24.67% 57.22 231.95 23.79 13.15% 75.13%
64/65 1.66% 23.49% 54.27 231.08 24.02 12.57% 76.49%
65/66 1.73% 28.99% 76.15 262.71 24.33 18.50% 71.68%
66/67 2.01% 30.15% 65.00 215.62 24.45 21.17% 74.61%
67/68 2.01% 29.91% 66.92 223.74 24.56 14.89% 75.51%
68/69 1.95% 26.11% 61.92 237.19 24.75 20.72% 71.81%

In the above table, the ROA was the lowest in the year 2063/64 and highest in the year 2066/67
and 2067/68. The ROE increased to 30.15% in the year 2066/67, after which it has been
decreasing in the later years. The CD Ratio of EBL was 76.49% in the year 2064/65 which was
the highest compared to other years.
3.2.1 DESCRIPTIVE STATISTICS

The following table shows the descriptive statistics of the collected variables of EBL:

Liquid Assets to
ROA ROE EPS NWPS Size Deposit CD Ratio

Mean 1.71% 26.02% 57.47 218.61 24.07 16.10% 73.96%

Median 1.70% 25.39% 59.57 227.41 24.18 15.47% 74.87%
Standard
Deviation 0.26% 3.48% 13.55 31.80 0.55 3.67% 2.12%
Range 0.63% 9.94% 43.67 101.97 1.56 9.43% 5.48%
Minimum 1.38% 20.20% 32.47 160.74 23.19 11.74% 71.01%
Maximum 2.01% 30.15% 76.15 262.71 24.75 21.17% 76.49%
Count 8 8 8 8 8 8 8

The mean ROA is 1.71%, mean ROE IS 26.02%, mean EPS is 57.47, mean NWPS is 218.61,
mean Size is 24.07, mean LD ratio is 16.10% and mean CD ratio is 73.96%. Unlike CBBL, the
mean CD ratio of EBL meets the NRB standard of 80%. So, it can be said that CBBL doesn’t
give excessive loans and take more financial stress. Even the maximum CD ratio of 76.49%
meets the NRB standard. But the mean of LD ratio of EBL is only 16.10% which indicates that
EBL holds fewer liquid assets for repaying the deposits. This might be due to its timely recovery
of most loans due to which it doesn’t need to hold a lot of liquid assets.

The standard deviation of ROA is 0.26% which is least among all the variables used for this
study. This shows that ROA of EBL is very stable. The CD ratio has standard deviation of only
2.12% which again shows that CBBL is maintaining its CD ratio as per the NRB standard. The
standard deviation of ROE is 3.48%, EPS is 13.55, NWPS is 31.80 and LD ratio is 3.67%. The
standard deviation of size is 0.55 which shows that assets size of EBL has neither increased nor
decreased by a significant amount. The financial ratios have less standard deviation in case of
EBL which shows that EBL is well managed.
3.2.2 CORRELATION

Liquid Assets to CD
ROA ROE EPS NWPS Size Deposit Ratio
ROA 1
ROE 0.7816 1
EPS 0.6593 0.8881 1
NWPS 0.4199 0.6087 0.9007 1
Size 0.8970 0.8024 0.8542 0.7482 1
Liquid Assets to
Deposit 0.6625 0.4796 0.4487 0.2849 0.6123 1
CD Ratio -0.0413 -0.2097 -0.2183 -0.1635 -0.1365 -0.2495 1

There is high positive correlation between ROA and ROE (0.7816), ROA and EPS (0.6593),
ROE and EPS (0.8881) as they are all the profitability ratios. Similarly, NWPS and EPS have
high positive correlation (0.9007). Other highly correlated ratios are Size and ROA (0.8970),
Size and ROE (0.8024), Size and EPS (0.8542)), Size and NWPS (0.7482). Size has high
positive correlation with EPS and NWPS as EPS and NWPS will increase if the size of assets
increases and vice versa. Similarly, ROA, ROE and EPS have positive correlation with size as
profit increases if size of assets increase and vice versa.

From the above table, we can see that ROA is slightly negatively correlated with CD ratio (r = -
0.413). CD ratio increases when the amount of loan increases. So, the negative correlation
between ROA and CD ratio shows that EBL gets more return if it gives fewer loans than before.
Similarly, there is negative correlation of CD ratio with other profitability ratios ROE (r = -
0.2097) and EPS (r = -0.2183) which again shows that EBL can get more return if it gives less
loans and maintains its liquidity position. Unlike CD ratio, LD ratio is positively correlated with
ROA (r=0.6625), ROE (r=0.4796) and EPS (r=0.4487) which shows that profitability of EBL
increases if it keeps more liquid assets for repaying its loan, i.e. deposits.
3.2.3 REGRESSION

SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.9156
R Square 0.8383
Adjusted R Square 0.7170
Standard Error 0.0014
Observations 8

ANOVA
Significance
df SS MS F F
1.3E-
Regression 3 4.01E-05 05 6.9115 0.0463
1.9E-
Residual 4 7.73E-06 06
Total 7 4.78E-05

Standard P- Upper
Coefficients Error t Stat value Lower 95% 95%
-
Intercept -0.0861 0.0334 2.5752 0.0616 -0.1789 0.0067
Size 0.0037 0.0012 3.0778 0.0370 0.0004 0.0071
Liquid Assets to
Deposit 0.0151 0.0185 0.8173 0.4596 -0.0362 0.0665
CD Ratio 0.0146 0.0256 0.5714 0.5983 -0.0565 0.0858

From the above table, we can see that R2= 0.8383 which indicates that 83.83% of change in main
dependent variable ROA is due to the change in main independent variables Size, LD ratio and
CD ratio. For independent variable Size, p-value is 0.037 which is less than 0.05 which indicates
that size is significantly associated with ROA. But LD ratio and CD ratio are not significantly
associated with ROA as their p-values are 0.4596 and 0.5983 respectively which is less than
0.05. The overall model is significant as Significance F-value is 0.0463 which is less than α-
value 0.05. This indicates that profitability depends on size and liquidity (LD ratio and CD ratio)
in case of EBL.

3.3 JANAKI FINANCE

The table below is the overview of the financial ratios over the 7 years period for Janaki Finance.

Liquid Assets to CD
YEAR ROA ROE EPS NWPS Size Deposit Ratio
2063/64 1.12% 9.57% 14.81 154.78 20.09 13.65% 104.75%
64/65 2.14% 17.81% 33.24 186.71 20.25 16.73% 106.31%
65/66 3.03% 22.46% 28.54 127.07 20.37 22.51% 107.95%
66/67 5.60% 29.86% 48.09 161.07 20.55 37.34% 91.68%
67/68 4.51% 26.54% 45.55 171.62 20.71 48.62% 83.04%
68/69 5.80% 29.34% 46.78 159.44 20.89 52.18% 80.20%
69/70 3.30% 15.33% 31.08 202.78 21.04 60.93% 70.83%

The Return on assets (earnings generated from the use of assets) seem to be growing steadily
from 2063/64 to 66/67 from 1.12% to 5.60% respectively but fluctuated to come back at 3.30%
at the year-end 69/70. Likewise, the ROE followed the same pattern as of ROA but the
percentage of return is more than the ROA. And EPS too followed the same pattern as the ROA
and ROE as it was highest in 2066/67 at 48.09 but came down to 31.08 in 2069/70. Net worth
Per Share (NWPS) however increased gradually from 154.78 in 2063/64 to 202.78 in 2069/70.
The size of the company too grew gradually to come at 21.04 in 2069/70 from 20.09 in 2063/64.
Liquid assets to deposit ratio too grew gradually in the years of observation from 13.65% in
2063/64 to 60.93% in 2069/70. Cash to deposit ratio (CD Ratio) however decreased gradually
from 104.75% to 70.83% from 2063/64 to 2069/70.
3.3.1 DESCRIPTIVE STATISTICS

Liquid Assets to CD
ROA ROE EPS NWPS Size Deposit Ratio

Mean 3.64% 21.56% 35.44 166.21 20.56 35.99% 92.11%

Median 3.30% 22.46% 33.24 161.07 20.55 37.34% 91.68%
Standard
Deviation 1.75% 7.66% 12.16 24.23 0.35 18.69% 14.66%
Range 4.68% 20.29% 33.28 75.71 0.96 47.27% 37.11%
Minimum 1.12% 9.57% 14.81 127.07 20.09 13.65% 70.83%
Maximum 5.80% 29.86% 48.09 202.78 21.04 60.93% 107.95%
Count 7 7 7 7 7 7 7
The above table shows the descriptive statistics of the collected variables of Janaki Finance. The
mean ROA is 3.64%, mean ROE is 21.56%, mean EPS is 35.44, mean NWPS is 166.21, mean
Size is 20.56, mean LD Ratio is 35.99% and mean CD Ratio is 92.11%. Like CBBL, the mean
CD Ratio of Janaki Finance doesn’t meet the NRB standard of 80% but unlike CBBL, Janaki
Finance was able to bring its CD Ratio down to 70.83% in year 2069/70. Likewise, Janaki
Finance is also increasing its LD ratio every year and had a maximum LD ratio of 60.93%
(2069/70). So, this decreasing CD Ratio and increasing LD Ratio indicate that Janaki Finance is
slowly improving its liquidity position.

The standard deviation of ROA is 1.75% which shows that ROA of Janaki Finance is quite
stable. The CD ratio has standard deviation of 14.66%. The standard deviation of ROE is 7.66%,
EPS is 12.16, NWPS is 24.23 and LD ratio is 18.69%. The size has least standard deviation of
0.60 which shows that assets size of CBBL has neither increased nor decreased by a significant
amount.

3.3.2 CORRELATION

The table below shows the Pearson correlation coefficient calculated between the different ratios
used for this study.
 Liquid Assets to CD
ROA ROE EPS NWPS Size Deposit Ratio
ROA 1
ROE 0.9314 1
EPS 0.9328 0.9307 1
NWPS -0.0414 -0.2440 0.1211 1
Size 0.6669 0.4307 0.5802 0.4474 1
Liquid Assets to
Deposit 0.6807 0.4339 0.5978 0.4606 0.9864 1
CD Ratio -0.5851 -0.2960 -0.5052 -0.5714 -0.9485 -0.9779 1

There is high positive correlation between ROA and ROE (0.9314), ROA and EPS (0.9328),
ROE and EPS (0.9307) as they are all the profitability ratios. Other highly correlated ratios are
Size and ROA (0.6669), LD Ratio and ROA (0.6807), LD Ratio and Size (0.9864), CD Ratio and
Size (-0.9485) and CD Ratio and LD Ratio (-0.9779). Size has high positive correlation with CD
Ratio and LD ratio as the liquid assets and the amount of loan will increase if the size of assets
increases which results in increase in CD Ratio and LD Ratio and vice versa. Similarly, CD
Ratio has high negative correlation with LD Ratio (-0.9485) as when liquid assets increase, LD
ratio increases but usually CD Ratio decreases as the amount of loan decreases.

From the above table, we can see that ROA is negatively correlated with CD ratio (r = -0.5851).
CD ratio increases when the amount of loan increases. So, the negative correlation between ROA
and CD ratio shows that Janaki Finance gets more return (profit) if it gives fewer loans than
before and improves its liquidity position. Similarly, there is negative correlation of CD ratio
with other profitability ratios ROE (r = -0.2960) and EPS (r = -0.5052) which again shows that
Janaki Finance can get more return if it gives less loans and maintains its liquidity position.
Unlike CD ratio, LD ratio is positively correlated with ROA (r=0.6807), ROE (r=0.4339) and
EPS (r=0.5978) which shows that profitability of Janaki Finance increases if it keeps more liquid
assets for repaying its loan, i.e. deposits.
3.3.3 Regression

SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.8166
R Square 0.6668
Adjusted R Square 0.3336
Standard Error 0.0143
Observations 7

ANOVA
Significanc
df SS MS F eF
Regression 3 0.0012 0.00041 2.0012 0.2916
Residual 3 0.0006 0.00020
Total 6 0.0018

Coefficient Standard Upper

s Error t Stat P-value Lower 95% 95%
Intercept 1.2970 2.1980 0.5901 0.5966 -5.6980 8.2919
Size -0.0820 0.1159 -0.7071 0.5305 -0.4509 0.2870
Liquid Assets to
Deposit 0.4362 0.3254 1.3407 0.2725 -0.5993 1.4717
CD Ratio 0.2904 0.2150 1.3510 0.2695 -0.3937 0.9746

From the above table, we can see that R2= 0.6668 which indicates that 66.68% of change in main
dependent variable ROA is due to the change in main independent variables Size, LD ratio and
CD ratio. For independent variable Size, p-value is 0.5305 which is less than 0.05 which
indicates that size is not significantly associated with ROA. Likewise, LD ratio and CD ratio are
also not significantly associated with ROA as their p-values are 0.2725 and 0.2695 respectively
which is less than 0.05. Similarly, this overall model is not significant as Significance F-value is
0.2916 which is less than α-value 0.05. This can be due to a smaller number of observations
(only 7).

4. Conclusion

As mentioned before, the negative correlation between profitability ratios and CD ratio shows
that there is relation between profitability and liquidity as CD ratio increases when loan increases
and the negative correlation suggests that profitability increase if amount of loan decreases
(which increases liquidity) and vice versa. On the other hand, the positive correlation between
profitability ratios and LD ratio shows that there is relation between profitability and liquidity as
LD ratio increases when liquid assets increase and the positive correlation suggests that
profitability increase if amount of liquid assets increase and vice versa.

In case of CBBL, the correlation analysis showed negative correlation between the profitability
ratios and LD ratio which indicates that profit of CBBL increases if it holds fewer liquid assets
which is contrary to other findings which suggest that profitability and liquidity are related.
Likewise, the profitability ratios showed negative correlation with CD Ratio which indicates that
profit of CBBL increases if it gives fewer loans and maintains more liquidity. But the regression
analysis showed that ROA is not significantly affected by Size, LD ratio and CD ratio which
indicates that profitability and liquidity are not related in case of CBBL. The major reason
behind this can be due to a smaller number of observations.

In case of EBL, the correlation analysis showed positive correlation between the profitability
ratios and LD ratio which indicates that profit of EBL increases if it holds more liquid assets. But
the profitability ratios showed negative correlation with CD Ratio which indicates that profit of
EBL increases if it gives fewer loans and maintains more liquidity. The regression analysis also
showed that ROA is significantly affected by Size, LD ratio and CD ratio which indicates that
profitability and liquidity are related in case of CBBL.

In case of Janaki Finance, just like in EBL, the correlation analysis showed positive correlation
between the profitability ratios and LD ratio which indicates that profit of Janaki Finance
increases if it holds more liquid assets. Likewise, the profitability ratios showed negative
correlation with CD Ratio which indicates that profit of Janaki Finance increases if it gives fewer
loans and maintains more liquidity. But the regression analysis showed that ROA is not
significantly affected by Size, LD ratio and CD ratio which indicates that profitability and
liquidity are not related in case of Janaki Finance. The major reason behind this can be due to a
smaller number of observations.

As a whole, it can be said that profitability and liquidity are related because using correlation
analysis, the profit of all three financial institutions showed negative correlation with CD ratio
(which indicated that profit of FIs increases if they give few loans and maintain more liquidity).
Also, the profit of both EBL and Janaki finance showed positive correlation with LD ratio
(which indicated that profit of FIs increases if they hold more liquid assets and maintain more
liquidity). Regression analysis didn’t show significant relation between liquidity and profitability
(except EBL) in these three selected financial institutions but the major reason behind this is
smaller number of observations due to time constraint.

4.1 Which bank is better?

It is found that CBBL doesn’t maintain its CD Ratio as per the NRB requirement which indicates
that it gives excessive loans and takes more risk. Although the CD Ratio of CBBL is decreasing
in every year of observation, it still doesn’t meet the NRB standard. Due to having higher CD
ratio, CBBL needs higher LD ratio as it needs to hold more liquid assets. CBBL has meaner LD
ratio than EBL and Janaki Finance but even though CD ratio of CBBL is decreasing every year,
its LD ratio is also decreasing in every year of observation which is not a good sign. So, it can be
concluded that CBBL is not focusing on its liquidity position as it is giving excessive loans and
decreasing its liquid assets. There is high chance for CBBL not to repay the customer deposits on
time.

In case of EBL, it is found that EBL maintains its CD Ratio as per the NRB requirement which
indicates that it doesn’t give excessive loans and takes less risk. EBL has less mean LD ratio than
CBBL and Janaki Finance but it doesn’t need to hold a lot of liquid assets as CBBL as it is not
giving excessive loans. The CD ratio of EBL is in decreasing trend and its LD Ratio is in
increasing trend which is a good sign. So, it can be concluded that EBL is focusing on its
liquidity position as it is not giving excessive loans and also increasing its liquid assets.
Finally, in case of Janaki Finance, it is found that Janaki Finance, like CBBL, has not maintained
its CD Ratio as per the NRB requirement in most years of observation but unlike CBBL, it has
been able to bring its CD ratio down to 80% (in 2069/70) which indicates that Janaki Finance is
trying to reduce excessive loans and take less risk. The LD Ratio of Janaki Finance is also in
increasing trend which further indicates that Janaki Finance is trying to improve its liquidity
position.

So, it can be concluded that EBL has the best liquidity position and CBBL has the worst liquidity
position among these three FIs. EBL is the best among these three FIs because it has the best
liquidity position and its ROA, ROE, LD Ratio and CD Ratio have the least standard deviation
which indicates that EBL is the best managed FI among these three.