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NIC Asia Profitability analysis

Financing Options - New or Growing Bus (San José State University)

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CHAPTER-I

INTRODUCTION

Background
Profitability is a measure of firm’s efficiency. It is also a control measure of the earning
power of a firm as well as operating efficiency. Weston and Copland (1998) described
profitability as net result of a large number of policies and decisions. Ratios are used to
measure profitability and give final answers to how effectively the firm is being managed in
terms of its financial performance. Therefore, management, creditors and owners are also
interested in the profitability ratio of the firm.

In order to perform a profitability analysis, all costs of an organization have to be allocated to

output units by using intermediate allocation steps and drivers. This process is called costing.
When the costs have been allocated, they can be deducted from the revenues per output unit.
The remainder shows the unit margin of a product, client, location, channel or transaction.
After calculating the profit per unit, managers or decision makers can use the outcome to
substantiate management decisions. Managers can decide to stop selling loss making
products, to reduce costs for loss making customers or to increase sales in profitable
locations.

A commercial bank is an institution that provides services such as accepting deposits,

providing business loans and offering basic investment products. Commercial bank can also
refer to a bank, or a division of a large bank, which more specifically deals with deposit and
loan services provided to corporations or large/middle-sized business – as opposed to
individual members of the public/small business.Commercial banks are 3 type public sector
bank, private sector bank and foreign bank. The general role of commercial banks is to
provide financial services to general public, business and companies, ensuring economic and
social stability and sustainable growth of the economy.
Commercial banks accept various types of deposits from public especially from its clients,
including saving account deposits, recurring account deposits, and fixed deposits.
Commercial banks provide loans and advances of various forms, including an overdraft
facility, cash credit, bill discounting, money at call etc.

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Profile of NIC ASIA Bank Limited

NIC ASIA Bank has its antecedents in NIC Bank which was founded on 21 July 1998. The
bank was rechristened as NIC ASIA Bank on 30 June 2013 after it merged with Bank of Asia
Nepal. This was a historic merger in the annals of Nepalese financials landscapes as the first
of its kind merger between two successful commercial banks in the country. Today, NIC
ASIA has established itself as one of the most successful commercial bank in Nepal.
Post-merger because of reticular planning, NIC ASIA managed the transition very smoothly
receiving accolades from the regulators as well as the stakeholders, paving the way for other
mergers and consolidation in the Nepalese financial sector. After the merger, NIC ASIA was
recognized as “Bank of the year 2013-Nepal” by The Banker, Financial Times, UK. This is
the second time that the bank was recognized with this prestigious award, the previous
occasion being in 2007.

NIC ASIA Bank is now, one of the largest private sector commercial banks in the country in
terms of capital base, balance –sheet size, number of branches, ATM network and customer
base. It has 105 branches with plans to continue to expand. , The Bank has 184 branches and
across Nepal with plans to continue to expand with a network covering all major financial
centers of the country. The Bank strongly believes in meritocracy, transparency,
professionalism, team spirit and service excellence. These core values are internalized by all
functions within the Bank and are reflected in all actions the Bank takes during the course of
its business.

The vision of this bank is to become one of the most respectable banks in Nepal based on
honorable conduct and long-term financial performance and the mission of this bank is to
become a leading bank in Nepal by providing complete financial solutions to our customers,
superior value to our shareholders and promising growth opportunities to our employees.

Through the honest implementation of strategy 2020, strategy set by the bank for its 5 years
of period from 2015-2020; the bank aims to be one of the most aggressive top banks in the
country.

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Objectives

The objectives of the report are as follows: -

 To calculate profitability ratioof NICASIA bank.

 To evaluate the profitability position of NICASIA bank.

Rationale

The purpose of this study is to know the profitability position of NIC Asia Bank Ltd. using
different financial tools. Its importance is to all the stakeholder’s of the bank. The
stakeholder’s may be the management, the shareholder’s and the outsiders. It helps
management to identify their loose areas & other weakness, suggests the ways through which
management can solve it and avoid it in future. It may benefit the shareholder’s to know
whether their funds are being used properly or not. It may help outsiders like debtors,
competitors and investors etc. to take decision on various matters such as whether to deposit
or not, finance or not etc.

Review

Profitability ratio is the indicators of degree of managerial success in achieving the objective
of profit maximization. It shows the overall efficiency and earning capacity of the business
concern.Profitability is the ability of a business to earn a profit. A profit is what is left of the
revenue a business generates after it pays all expenses directly related to the generation of the
revenue, such as producing a product, and other expenses related to the conduct of the
business activities. There are many different ways to analyze profitability ratios such as
Return on Assets, Return on equity, Net Interest Margin, Profit Margin et

Subbaroo (2007), in his study entitled “Changing Paradigm in Indian Banking” has
concluded that the Indian banking system has undergone transformation itself from domestic
banking to international banking. However, the system requires a combination of new
technologies, well regulated risk and credit appraisal, treasury management, product
diversification, internal control, external regulations and professional as well as skilled

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human resource to achieve the heights of the international excellence to play its role
criticallyin meeting the global challenge.

Regmi (2015), in a study entitled “Performance of Public Sector Banks” analyzed the
profitability of NIC Asia bank by analyzing the relationship between EPS, DPS and MPS of
the bank. The study, however, did not deal with the profitability forecasting through capital
budgeting techniques

Shah (2016),in a study entitled “commercial banks of Nepal” stated that banks’ financial
performance not only benefits its shareholders but also plays a crucial role in handling the
economy of the country.

Methods

This study is based on the basic or fundamental research as it tries to fetch the depth
knowledge about the profitability position of the bank. The study is also based on secondary
data. For this data annual report, journals, publications, library previous studies etc. are used.
In this study, various financial, accounting and statistical tools have been used to achieve the
objectives of the study. The study includes the data only the period of 5 years from FY
2069/70 to FY2073/74.

There are two types of data: -

Primary data:

Primary data means original data that has been collected specially for the pre-purposed. It
means when an authorized organization investigator or an enumerator collects the data for the
first time from the original sources.

Secondary data:

Secondary data which has already been collected and is usually available in published or
electronic form. Secondary data has often been collected analyzed and organized with a
specific purpose in mind so it may have limited applications to specific market research.
Secondary data can be found through company reports, government agencies newspaper
articles, extension publications, etc. Secondary data are collected by some other than the user

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The present study was mainly based on secondary data. Collections of data are presented by
using Graphs and Charts, so that they can be easily analyzed. Profitability ratios used trend
analysis for presentation of data.

Limitations of the study

The limitations of the report are as follows: -

 The study is based on the published annual report of NICASIA.

 The study report cannot be precise because almost all the data aresecondary.
 This study is concerned only for the period of 5 years.
 The time frame of preparing report was one month.
 Simple statistical tools such as trend line were used for analysis.

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CHAPTER-II

RESULTS AND ANALYSIS

Data Presentation

In order to evaluate the profitability performance of NICA five years financial statement i.e.
Balance Sheet (B/S) and profit and loss a/c are presented in tabulation form. The study cannot
be fulfilled without the analytical scheme that follows to result oriented under chapter. The
important Profitability ratios which are to be calculated to present the data for the purpose of
the study are mentioned as below: -

a. Profit Margin

b. Net Interest Margin

c. Return on Assets

d. Return on Shareholder’s equity

e. Earnings per Share

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a. Profit Margin :-

Table 1: Profit Margin

Year Net Income Operating Income Profit margin

2069/70 642,136 978,025 66%
2070/71 831,589 1,215,973 68%
2071/72 680,317 868,234 78%
2072/73 1,066,839 1,369,473 78%
2073/74 1,475,848 1,702,228 87%
Source: Annual report of NICASIA

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2069/70 2070/71 2071/72 2072/73 2073/74
Profit margin

Figure 1: Trend Analysis of Profit Margin

b. Net Interest Margin (NIM):-

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Table 2: Net Interest Margin

Year Net Income Interest earning NIM
2069/70 642,136 1,243,323 52%
2070/71 831,589 1,798,223 46%
2071/72 680,317 1,577,472 43%
2072/73 1,066,839 1,957,842 54%
2073/74 1,475,848 2,551,700 58%
Source: Annual report of NICASIA

70%

60%

50%

40%

30%

20%

10%

0%
2069/70 2070/71 2071/72 2072/73 2073/74
NIM

Figure 2: Trend Analysis of Net Interest margin

c. Return on assets:

It shows the overall efficiency of the bank in generating profit with its available assets.

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Table 3:Return on assets

Year Net Profit Total Assets ROA
2069/70 642,136 45,822,344 1.40%
2070/71 831,589 51,500,486 1.61%
2071/72 680,317 60,519,399 1.12%
2072/73 1,066,839 80,456,520 1.33%
2073/74 1,475,848 99,265,724 1.49%
Source: Annual report of NICASIA

1.80%

1.60%

1.40%

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%
2069/70 2070/71 2071/72 2072/73 2073/74
ROA

Figure 3: Trend Analysis of Return on assets

d. Return on shareholder's equity:

It is calculated by dividing NPAT by shareholder equity.

Table 4: Return on Shareholder’s equity

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Year Net Profit Shareholder's equity ROSE

2069/70 642,136 4,388,176 14.63%
2070/71 831,589 4,873,032 17.07%
2071/72 680,317 5,498,784 12.37%
2072/73 1,066,839 7,382,845 14.45%
2073/74 1,475,848 10,118,493 14.59%
Source: Annual report of NICASIA

18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2069/70 2070/71 2071/72 2072/73 2073/74
ROSE

Figure 4: Analysis of Return on shareholder's equity

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e. Earnings per Share

Table 5

Earnings per Share

Year Net Profit No. of Equity Share EPS

2069/70 642,136 23,115 27
2070/71 831,589 26,583 31
2071/72 680,317 36,950 18
2072/73 1,066,839 57,763 18
2073/74 1,475,848 80,311 18
Source: annual report of NIC ASIA

35

30

25

20
EPS
15

10

0
2069/70 2070/71 2071/72 2072/73 2073/74

Figure 5, Trend Analysis of Earnings per Share

Analysis of Results

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a. Profit Margin

Higher profit margin is better for any firm. The above table shows the profit margin of NICA
for 2069/70 to 2073/74 which is 66%, 68%, 78%, 78% & 87% respectively. The profit
margin seems to be increasing each year in increasing trend.

b. Net Interest Margin (NIM):

Higher NIM is better for any bank. The above table shows the net interest margin for year
2069/70 to 2073/74 which is 52%, 46%, 43%, 54% & 58% respectively. NIM seems to be
decreasing from year 2069/70 to 2071/72 but from FY 2072/73, NIM seems to be in
increasing trend.

c. Return on assets

Return on Assets for year 2069/70 to 2073/74 which is 1.40%, 1.61%, 1.12%, 1.33% and
1.49% respectively. The ROA of the firm’s seems to be lowest on 2071/72 but the firm seems
to increasing its ROA since then.

d. Returnon shareholder's equity

Higher ROSE is desirable for the company; which indicates that the company is able to pay
dividend to its shareholders. Here the table shows increasing ROSE in each f/y. The return on
equity 14.59 percent means that the firm’s total shareholders’ investment offers 14.59 percent
return after recovering from all operating expenses, interest and tax payments.

e. Earnings per Share

In Earning per Share, The EPS has increased in year 2070/71 which is good sign but the EPS
in year 2071/72, 2072/73, 2073/74 is being constant which is huge decrease in EPS. This
indicates the lowest return to shareholders’. Highest the EPS higher will be return to the
shareholders’ of the firm.

Findings

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Thefindings of this report are as follows: -

 The Profit Margin ratio is totally in increasing trend form the fiscal year 2069/70 to
2073/74 the current Profit Margin ratio is 87%. A higher profit margin indicates a more
profitable company that has better control over its costs, compared with its competitors.
 Net Interest margin ratio is in decreasing trend form the fiscal year 2069/70 to 2071/72
and it is in increasing trend form the fiscal year 2071/72to 2073/74. This shows the firm’s
profitability position is good and helps to earn more profit.
 The ROA of the bank is in increasing trend from the year 2069/70 to 2070/71 and after
year 2071/72 to 2073/74, it is in increasing trend, and finally in the year 2073/74 the ROA
of bank increases to 1.49%. It shows that NIC ASIA Bank Limited is successful in
deriving benefits from the assets it has used.

 The ROE of the bank is in increasing trend from the year 2069/70 to 2070/71 and after
fiscal year 2071/72 to 2073/74, it is in increasing trend, and finally in the year 2073/74
the ROE of bank increases to14.59%. It shows that NIC ASIA Bank Limited is able to
satisfy its shareholders to the fullest because of decreasing Net profit in year 2071/72.

 Earnings per share ratio slightly increases from the fiscal year 2069/70 to 2070/71 after
that the Earnings per share shows equal share in year 2071/72 to 2073/74 i.e. Rs 18 per
share. Since, it measures the return per share receivable by equity or ordinary share
holders, the more per share return the more excellent.

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CHAPTER-III

SUMMARY AND CONCLUSION

Summary

In this chapter, the evaluation of NIC ASIA is done with the help of the answers derived from
available data. Some major issues have been taken into consideration for discussion and some
conclusions for the same have also been discussed. The data of past five fiscal year has been
taken for purpose.

This study has been undertaken to evaluate the financial performance of assessment of
profitability analysis of NICA. The financial statement of 5 years has been taken into
consideration for the performance of analysis of the bank. This project work report has been
divided into three main chapter in which first chapter discuss about the background,
introduction to NICA, Objectives, rationale, review, methods and limitations. In second
chapter tabulation of Balance Sheet and Profit and Loss a/c analysis of data and study result
has been presented. The third chapter discuss about summary and conclusion of the study. A
higher profit margin indicates a more profitable company that has better control over its costs,
compared with its competitors. The firm’s profitability position is good and helps to earn
more profit. NIC ASIA Bank Limited is successful in deriving benefits from the assets it has
used. NIC ASIA Bank Limited is able to satisfy its shareholders to the fullest because of
decreasing Net profit in year 2071/72. The return per share receivable by equity or ordinary
share holders, the more per share return the more excellent.
Firms profitability ratio seems to be satisfactory as the return to the shareholder’s wealth
seem to be positive and continuously growing.The data that are essential for the preparation
of the report and the data that are useful for techniques analysis of the bank’s performance are
given. And the various ratios essential for the financial analysis of NIC ASIA Bank Limited
are prepared in this report and the ratios are also calculated. Details calculations are presented
in this chapter are shown as appendix which is the source of NIC ASIA Bank Limited.

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Conclusions

Although our findings are based on the historical data through the secondary means, the
findings are of suggestive in nature. Though we have no right to suggest to the management
of NIC ASIA, however, we have tried to recommend on those topics with a view that this
recommendation might be of some useful to them. Although the ROA of the firm seems
positive, the firm doesn’t seem to utilize its assets to the optimum. NICA must focus on
increasing its ROA.NIC ASIA management must focus on action to be carried out towards
skillful planning, control and execution of financial activities. The EPS is in constant trend
even though the banks sound profitability performance. This might be due to the capital
policy of NIC ASIA and the policy undertaken by the bank to reach it. Nevertheless, the bank
in our country is very important. The bank must focus on providing high quality services.

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BIBLIOGRAPHY

Adhikari, Dev Raj (2015), Research Methodology, Asmita books publishers & Distributors
(P) Ltd.

Hamal, Sadaya (2014). Business Finance. Varanasi (India): Ganga Kaveri Publishing House

Pant, Prem Raj (2015). Social Science Research and Thesis Writing. BuddhaAcademic
Enterprises Pvt. Ltd.

Pandey, I. M (2016). Financial Management. Vikas Publishing House Pvt. Ltd.,

EightEditions

Paudel, Rajan (2015) Managerial finance. Asmita books publishers & Distributors (P) Ltd.

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APPENDICES

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