Internal and External Factors Affecting Earnings of Nepalese Commercial Banks

Abstract

This study examines the impact of external and internal factors on the earnings in the context of Nepalese commercial banks. Return on assets and return on equity are the selected dependent variables. The selected independent variables are bank size, capital adequacy ratio, non-performing loans, inflation rate, GDP growth rate, and interest rate. The study is based on secondary data for a sample of 14 commercial banks, which include 3 public sector banks, 3 joint venture banks, and 8 private sector banks for the period of 8 years from 2015/16 to 2022/23, leading to total 112 observations. The data were collected from Bank Supervision Report published by Nepal Rastra Bank (NRB) and annual reports of the selected commercial banks. The correlation coefficients and regression models are estimated to test the significance and importance of internal and external factors on earnings of Nepalese commercial banks. The study shows that the bank interest rate has a positive impact on return on assets and return on equity. It indicates that higher the bank interest rate, higher would be the return on assets and return on equity. However, non performing loans have a negative impact on return on assets and return on equity. It indicates that higher the non performing loan, lower would be the return on assets and return on equity. Moreover, capital adequacy ratio, GDP growth rate, and inflation rate have a positive impact on return on assets. It indicates that the higher the capital adequacy ratio, GDP growth rate, and inflation rate, higher would be the return on assets. Contrarily, capital adequacy ratio, GDP growth rate, and inflation rate have a negative impact on return on equity. It indicates that higher the capital adequacy ratio, GDP growth rate, and inflation rate, lower would be the return on equity.