Impact of credit, liquidity and market risks on the profitability of Nepalese commercial banks

Abstract

This study examines the impact of credit, liquidity, and market risks on the profitability of Nepalese commercial banks. Return on assets and return on equity are the selected dependent variables representing profitability. The selected independent variables are non-performing loan, loan loss provision rate, loan to deposit ratio, liquidity ratio, net interest margin, and market risk. The study is based on secondary data of 12 commercial banks with 120 observations for the study period from 2014/15 to 2023/24. 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 impact of credit, liquidity, and market risks on the profitability of Nepalese commercial banks. The study revealed that non-performing loan has a negative effect on return on assets and return on equity. It indicates that increase in non-performing loan leads to decrease in return on assets and return on equity. Similarly, loan loss provision rate has a negative effect on return on assets and return on equity. It indicates that increase in loan loss provision rate leads to decrease in return on assets and return on equity. Likewise, liquidity ratio has a negative effect on return on assets and return on equity. It indicates that increase in liquidity ratio leads to decrease in return on assets and return on equity. In addition, net interest margin has a positive effect on return on assets and return on equity. It indicates that increase in net interest margin leads to increase in return on assets and return on equity. Furthermore, market risk has a positive effect on return on assets and return on equity. It indicates that increase in market risk leads to increase in return on assets and return on equity.