1

CHAPTER-I
INTRODUCTION

1.1. Background of the study

Bank is the main financial institution, which plays an important role in the economic
development of the nation. It is the backbone as well as the foundation for the
development of the country. Its principal operations are concerned with the
accumulation on the temporary idle money of the public for advancing others for
expenditures. In other words, Bank is an institution that deals in money and its
substitutes and provides other financial services. Banks accept deposit and make loans
and derive a profit from the difference in the interest rates paid and charged,
respectively. Depositors may be either individual or institutions. These deposits may
be current, saving or fixed and the tenure depends upon the mutual agreements
between the bank may be either an individual or institutions. The tenure of the loan
may vary as per the demand, criteria and the usefulness of the loan. Some banks also
have the power to create money.

The Bank’s capital plays an important role in maintaining the safety and durability of
the banks and the integrity of banking systems in general, capital represents the wall
or barrier that prevents any unexpected loss can be exposed to the bank that effect
depositors’ money, as well known, the banks generally operate in an environment
with high degree of uncertainty which result in exposure to many risks. Banks are
exposed to two main types of losses risks; expected losses which occur frequently to
any bank and the size of these losses are usually small. Unexpected losses that occur
rarely, but the impact on the bank is usually great.

The term capital adequacy expresses the capacity and efficiency of banks that
measures, direct and control the risks it faces, in order to be scaled, control and
making decisions consistent with the strategy and policy and to strengthen its
competitiveness attitude. The capital adequacy is beneficial in pricing banking
services and maximizing returns from banks operations, in addition to policy
development and procedures necessary for the prevention of different types of risks,
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which arise as a result of technological and electronic evolution and increasing

complexities in banking and competition between banks. Thus, commercial banks are
obliged to provide sufficient capital to cover for any possible dangers that may occur,
and develop the right strategy to ensure the survival of the bank with a higher
percentage than the specified percentage and in order to avoid the intervention of
monetary authorities to prevent its decline, which is known Corrective actions.
Capital adequacy ratio for banks is one of the most important indicators of the
financial solvency of the financial sector and it is considered as a safety valve to
protect the depositors to promote stability and efficiency in the banking system and
financial institutions.

Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets

Ratio (CRAR), is the ratio of a bank's capital to its risk. National regulators track a
bank's CAR to ensure that it can absorb a reasonable amount of loss and complies
with statutory Capital requirements. It is a measure of a bank's capital. It is expressed
as a percentage of a bank's risk-weighted credit exposures. The enforcement of
regulated levels of this ratio is intended to protect depositors and promote stability
and efficiency of financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a
bank being required to cease trading, and tier two capital, which can absorb losses in
the event of a winding-up and so provides a lesser degree of protection to depositors.

Capital adequacy ratio is the ratio which determines the bank's capacity to meet the
time liabilities and other risks such as credit risk, operational risk etc. In the most
simple formulation, a bank's capital is the "cushion" for potential losses, and protects
the bank's depositors and other lenders. Banking regulators in most countries define
and monitor CAR to protect depositors, thereby maintaining confidence in the
banking system.

CAR is similar to leverage; in the most basic formulation, it is comparable to

the inverse of debt-to-equity leverage formulations (although CAR uses equity
over assets instead of debt-to-equity; since assets are by definition equal to debt plus
equity, a transformation is required). Unlike traditional leverage, however, CAR
recognizes that assets can have different levels of risk.
 3

Since different types of assets have different risk profiles, CAR primarily adjusts for
assets that are less risky by allowing banks to "discount" lower-risk assets. The
specifics of CAR calculation vary from country to country, but general approaches
tend to be similar for countries that apply the Basel Accords. In the most basic
application, government debt is allowed a 0% "risk weighting" - that is, they are
subtracted from total assets for purposes of calculating the CAR.

The legislation in the central banks of all countries in the world are monitoring this
index of banks operating in their economies in order to maintain the financial
institution's ability to continue to operate and maintain the presence of a strong and
solid money to meet any emergency obligations when there is pressure confronting
the financial institutions or large withdrawals of deposits shortly. In addition, it is an
indicator which leads us to know the degree of skill banking management in
employing financial assets to maximize future shareholder profits, there is an inverse
relationship between high capital adequacy and level of profits when this rate is high
the rate of profit fell, and vice versa. This rate can be measured by two tiers (tier1) a
core capital (equity), which can be the financial institution of the continuity of its
business without interruption. The second tier is extended, which includes core capital
slide (property rights) as well as any technical reserves or allowances loaded on
income and is considered as a non-outflow supports core capital. This rate can be
measured by the following equation:

Capital Adequacy Ratio = Property Rights ÷ Risk Weighted Assets

Banks may not be able to continue its various activities without the necessary funds
required to finance it is assets because the banks business is different from industrial,
service and commercial companies in the degree of dependence on external sources of
funds, and the use of different sources of funds. The finance decision in public
companies, and banks in particular is very important decision that affect the future
cash flows of the company, profitability, and liquidity, and this decision determining
the percentage of financing requirements from short-term sources, and long-term, as
well as the mix capital of debts and equity.
Profitability is a key target for all financial institutions as banks must keep adequate
liquidity amounts so as to maintain the continuity. They are one of the most important
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sources Key to generate capital. Without profits banks will not be able to attract
external capital to strengthen its investments and co-existence with the competition.
The profitability helps to increase bank deposit holders and potential investors as well
as confidence and encourage the shareholders of capital to underwrite in the bank.
They are also used as a measure of performance of the bank's management, which
give strong indications of the regulators that the bank is moving in the right direction.
It also gives an idea about the adequacy of bank management in directing projects, as
well as it is a measure of the effectiveness of investment, operational and financing
policies followed by the management of the bank.

1.1.1. Profile of Himalayan Bank Limited

Himalayan Bank Limited (HBL) is one of the largest private banks of Nepal The
Bank was incorporated in 1992 by a few eminent individuals of Nepal in partnership
with the Employees Provident Fund and Habib Bank Limited of Pakistan. The bank
commenced its operations in January 1993. Himalayan Bank is also the
first commercial bank of Nepal with most of its shares held by the private sector of
Nepal. Besides commercial banking services, the bank also offers industrial
and merchant banking service.With its head and corporate office
at Kamaladi, Kathmandu, the bank has 44 branches. Eighteen of its branches are
located inside the Kathmandu Valley while the rest are spread across the nation
(Kathmandu Valley comprises Kathmandu, Lalitpur and BhaktapurDistricts). Besides,
a branch looking exclusively at electronic cards and related products, is based
in Patan, Lalitpur.
Total Number of Branches 57
No of ATM 113
No of Employees 1029
Lending 97470071077
Profit 2763848475
EPS 27.60
P/E Ratio 29.57

The shareholding pattern of Himalayan Bank Limited is presented below

Ownership Structure Percentage
Institutions 65
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General Public 15
Foreign Ownership 20
Total 100

20%

Institutions
General Public
15% Foreign Ownership

65%

1.2. Statement of Problem

Due to bank’s risk in managing their assets and customers deposit, regulators in Nepal
has set a customers deposit, regulators in Indonesia has set a minimum capital
adequacy ratio. This ratio determines bank’s ability in absorbing unexpected losses
from assets that contain different level of risks. Bank regulator has createregulacy and
monitor bank’s capital adequacy ratio to protect depositors and maintain customer’s
trust. The statement of problem of this study are as under:

1. What is the level of Tier 1 Capital and Tier II Capital of sampled Bank?
2. How far the sampled banks are able to maintain the capital adequacy ratio
required by Bank?
3. What is the current level of capital ratio (CAR) of sampled banks?

1.3. Objectives of the study

Research objectives are the guidelines for conducting the research in a right way. The
main objective of this study is to show the relationship between capital adequacy and
profitability of Himalayan Bank Limited.
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1. To examine total composition of Tier I and Tier II capital of HBL.

2. To examine whether the Banks excess or deficit capital adequacy ratio of
Himalayan Bank Limited.
3. To examine the capital adequacy ratio of sampled banks.

1.4. Significance of the study

Following are the importance of the study

 To the Management of HBL

In addition to the need for banking institutions to manage success and failure
to enable them to take action and precautionary measures to protect them from
financial leverage and operating leverage risk, also officials of institutions
benefit from this study by taking preventive measures to avoid the financial
crises affecting the national economy.

 To the future Researcher

This study will be a source of help for a number of entities, individuals,
researchers and institutions, in order to maintain their investments and achieve
the greatest possible return in exchange for carrying less loss.

 To the Customer of HBL

It is also important for the depositors to check and reassure on the recovery of
their deposits on the one hand and interest imposed on it on the other hand. It
is also important for the deposits to check the core capital, supplementary
capital, risk weighted exposure.
1.5. Literature Review

In terms of a literature review, "the literature" means the works you consulted in order
understand and investigate your research problem. Re-view (or look again) is a process
of systematic, meticulous, and critical summary of the published literature in your
field of research. How others have dealt with topics in your research and the what
knowledge they have acquired? Literature review also indicates that you should
summarize the board contents of the research articles or studies and indicate clearly
any linkages with other studies in the field.
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Review of literature is, thus, an essential part of all research studies. A critical review
of the literature helps to develop a thorough understanding and insight into previous
research works that relates to study. It is also a way to avoid investigating problems
that have already been definitely answered.

1.5.1. Conceptual framework

Capital adequacy is a minimum capital requirement that must be maintained by the

commercial bank in order to protect its depositor. Bank operates in the complex
environment; they invest in the environment by taking the large amount of the risk. If
any uncertainty is happened, bank need to face large crisis. So that bank must
maintain the minimum capital requirement. Capital adequacy directly and indirectly
affects the financial performance of the bank. Higher the risk required high level of
capital adequacy ratio. So there is heart and blood relation between the capital
adequacy and the financial performance of the bank. Capital requirement helps to
increase the strength of the banking sector. According to the directive of Nepal Rastra
Bank, every bank must maintain the minimum 8.5% and it is 13% at present.
According to Basel (II) CAR is calculated using two main items: core capital and
supplementary capital. Both should be added together and divided by risk weighted
assets (RWA) and contingent liabilities.

Core capital [Tier (I)]: Is the core measure of a bank's financial strength and includes
paid in capital (common shares and preferred stock), disclosed capital reserves, net
income for the year and innovative capital instruments.

Supplementary capital [Tier (II)]: Measures banks' financial strength with regard to
the second most reliable forms of financial capital from the regulator's point of view.
It includes assets revaluation reserves, undisclosed reserves, general provisions,
general loan loss reserves, long-term holding of equity securities, hybrid capital
instruments and subordinated long term debts.

Under this study, financial as well as statistical tools will be used to analyze the
gathered data and information.

1.5.2. Review of previous work

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The study is based on previous studies regarding capital adequacy. The previous
studies should not be ignored as it provides foundation to the present study. Various
thesis work related to capital adequacy of different organization are also reviewed for
the purpose of justifying the study. Past empirical studies related to the current study
are summarized as follows:

Valentina, Calvin and Liliana(2009) have found that sub-Saharan Africa’s bank has a
high earnings compared with other regions. The study consisted of 389 banks in 41
countries of sub-Saharan Africa aimed to investigate the determinants of bank
profitability. The study found that regardless of the credit risk, but the return on assets
was high with large banks that have diversification of activity and private property.
The researcher indicated that macroeconomic variables have influenced Bank
earnings, since macroeconomic variables that promote stable growth of output and
low inflation affected and promoted credit expansion. The results also indicated that
continued moderation in profitability. The study supports the imposition that states
“the higher capital requirements in the region can promote financial stability”.

Ben Moussa(2013) has revealed that the relationship between capital and financial
performance in 19 banks located in Tunisia during the period of (2000-2009). Three
measures were used in this study: return on assets (ROA), return on equity (ROE),
and the net interest margin (NIM) to approximate the capital ratio and its financial
performance. The results indicated that a positive relationship was existed between
capital and financial performance.

Ikpefan (2013) has examined the extent of the impact of capital adequacy,
management and performance of the commercial banks in Nigeria (1986-2006). A
capital adequacy ratio is found to have a negative impact on earnings. The researcher
measured the efficiency of the management and operational expenses and found that
there is a negative correlation to the return on capital. The implications of this study,
among other things, pointed out that sufficient shareholders' funds can contribute to
the promotion of Nigerian commercial banks,' increase performance and also increase
customer confidence, especially after the global financial crisis, which has led to huge
losses in the Nigerian financial system.

Siti, Nusaibah, M and Kazuhiro (2016) have aimed to study the impact of capital
adequacy ratio on financial performance and economic resultsin64 Japanese banks
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during the years from 2005 to 2014. The results indicated that there are various signs
of relationships between study’s variables with a slight variation from the previous
empirical work.

Rufo’s and John (2017) have study aimed to investigate the impact of credit risk on
capital adequacy. The sample of this study consisted of 567 banks in Philippines.
Findings related to this current study indicated that capital adequacy has no significant
impact on the banks’ profitability in Philippines.

1.5.3. Research gap

All the previous studies were based on capital adequacy ratio of other countries bank.
No of the studies were based on capital adequacy ratio analysis of commercial banks
of Nepal. So this study is conducted to fill the gap on study on capital adequacy ratio
of Himalayan Bank Limited.

1.6. Research methodology

Research methodology means the analysis of specific topic by using proper method.
In other words research methodology is a process of arriving to the solution of
problem through planned and systematic dealing with collection analysis and
interpretation of the facts and figures. “Research methodology refers to the various
sequential steps to adopt by a researcher in studying a problem with certain objectives
in view (Kothari, 1994).

The study is mainly based on secondary data gathered from respective annual reports
of Himalayan Bank Limited, different circular regarding rules and regulations of
Himalayan Bank Limited, NRB’S directives to the commercial banks, other published
and unpublished material different official websites, etc. It consists of research design,
source of data, population and sample data processing procedure and tools and
technique of analysis of data.

1.6.1. Research Design

Research design means a definite procedure and technique which guides the study and
propounds ways for doing research. For the study of capital adequacy and profitability
of Himalayan Bank Limited, research design followed is an exploratory research
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approach. In this study descriptive and analytical survey is done. The justification for
the choice of these methods is many and various. The descriptive method is preferred
because it includes reliable data and information covering a long time and avoids
numerous complex variables operating into formulation and adoption of credit
investment policies.
1.6.2. Population and Sample
Population is the collection or the aggregate of objects or the set of results of an
operation. On the other hand, sample means the representative parts of population
selected from it with the objectives of investigating its properties. Thus, a sample is
just a portion of the population selected with a view to draw conclusions about the
population under study.

There are all together 27 commercial banks (including government owned, private
and joint ventures) operating in Nepal. Due to time and resource factors it is not
possible to study all of them regarding the study topic. Here 27 commercial banks are
taken as population. Therefore, sampling is done for selecting population. Himalayan
Bank Limited is selected as a sample for the study and analysis from total population.

1.6.3. Nature and sources of data

Data are considered as integral part of research. The study is mainly based on the
secondary data. The required data have been extracted from the annual reports of
Himalayan Bank Limited. Besides these, the directives issued by NRB have also been
taken as secondary source of data. Similarly, various data and information are
collected from the periodicals, economic journals, managerial and economic
magazine and other published and unpublished reports and documents from various
sources.
1.6.4. Methods of data analysis
The data were first collected and tabulated into separate table systematically. The data
were tabulated from simple statistical analysis, such as mean, SD, CV, etc. and these
have been presented and analyzed into descriptive way. Necessarily graphs and chart
have also been presented to interpret the data. Appropriate of financial analysis and
statistical tools have been used.

1.6.5. Data Analysis tools

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Under this study, financial as well as statistical tools will be used to analyze the
gathered data and information.

A. Financial Tools
In this research study various financial tools will be employed for the analysis. There
are various ratios but in the study some important ratios among them are used.
Analysis is the most important tools of the financial analysis, which help to ascertain
the financial conditions of the organizations. Ratio analysis is the process of
examining and comparing financial information by calculating meaningful financial
statement figure percentages instead of comparing lines items for each financial
statement. The financial tools that will be used in this study are as under:

1. Return on Equity
ROE is the measure of the profitability of a business in relation to book value of
shareholder equity, also known as net assets or assets minus liabilities. ROE is a
measure of how well company uses investment to generate earnings growth. This
ratio measures the efficiency of the bank in optimally utilizing the shareholders’
equity in generating profit. Higher the return on equity indicates that the bank has
adopted aggressive working capital policy, and thus the bank is risk taker. ROE is
more than a measure of profit; it’s a measure of efficiency. A rising ROE suggests
that a company is increasing its ability to generate profit without needing much
capital. It also indicates how well a company’s management is deploying the
shareholders’ capital. In other words, the higher ROE the better. Falling ROE is
usually a problem.
Net Profit
×100
Return on Equity = Shareholder's Equity
2. Capital Adequacy Ratio
The capital adequacy ratio, also known as capital to risk-weighted ratio, measures a
bank’s financial strength by using its capital and assets. Generally, a bank with a high
capital adequacy ratio is considered safe and likely to meet its financial obligations.
The capital adequacy ratio is calculated by dividing a bank's capital by its risk-
weighted assets. The capital used to calculate the capital adequacy ratio is divided into
two tiers. Tier one capital, or core capital, comprises equity capital, ordinary share
 12

capital, intangible assets and audited revenue reserves. Tier one capital is used to
absorb losses and does not require a bank to cease operations.
Tier 1 Capital + Tier 2 Capital
Capital Adequacy Ratio = Risk Weighted Assets
3. Return on Assets
Net profit to total assets evaluates the efficiency of a company in utilization and
mobilization of the assets and its survival. The ratio is computed dividing net profit
(loss) by total assets. Net profit indicates the position of income left to the interval
equities after all costs, charges, expenses have been deducted. The high return on total
assets indicates the high profit margin and high turnover of total assets and vice versa.
It can be stated as

4. Core Capital
Core capital refers to the minimum amount of capital that a thrift bank, such as a
savings bank or a savings and loan company, must have on hand in order to comply
with Federal Home Loan Bank (FHLB) regulations. This measure was developed as a
safeguard with which to protect consumers against unexpected losses.

Tier 1 capital refers to the ratio of a bank's core equity capital to the entire amount of
risk-weighted assets (total assets, weighted by credit risk) that a bank owns. The risk-
weighted assets are defined by The Basel Committee on Banking Supervision, a
banking supervisory authority created by the central bank governors from more than a
dozen nations. Banks are deemed less susceptible to failure if they have more core
capital and fewer risk-weighted assets. On the other hand, regulators consider banks
prone to failure, if the opposite is true.

5. Supplementary Capital
The term tier 2 capital refers to one of the components of a bank's required reserves.
Tier 2 is designated as the second or supplementary layer of a bank's capital and is
composed of items such as revaluation reserves, hybrid instruments, and subordinated
term debt. It is considered less secure than Tier 1 capital—the other form of a bank's
capital—because it's more difficult to liquidate. In the United States, the overall
capital requirement is partially based on the weighted risk of a bank's assets.
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Bank capital is divided into two layers—Tier 1 or core capital and Tier 2 or
supplementary capital. A bank's capital ratio is calculated by dividing its capital by its
total risk-based assets. The minimum capital ratio reserve requirement for a bank is
set at 8%—6% of which must be provided by Tier 1 capital. The remaining must be
Tier 2 capital. Along with Tier 1 capital, it provides a bank with a financial cushion in
case it needs to liquidate its assets.

6. Risk weighted assets

The financial crisis of 2007 and 2008 was driven by financial institutions investing
in subprime home mortgage loans that had a far higher risk of default than bank
managers and regulators believed to be possible. When consumers started to default
on their mortgages, many financial institutions lost large amounts of capital, and some
became insolvent. Basel III, a set of international banking regulations, set forth certain
guidelines to avoid this problem moving forward. Regulators now insist that each
bank must group its assets together by risk category so that the amount of required
capital is matched with the risk level of each asset type. Basel III uses credit ratings of
certain assets to establish their risk coefficients. The goal is to prevent banks from
losing large amounts of capital when a particular asset class declines sharply in value.

B. Statistical Tools

1. Mean
Average is the typical values around which other items of distribution congregate.
Arithmetic mean of a given set of observation is their sum divided by the number of
observation(Gupta; 1995:331).
X 1 + X 2 +.. . .. ..+ X n Σx
=
Mean ( X ) = n n
2. Standard Deviation
The standard deviation is an important and widely used measure of dispersion. The
measurement of the scatter ness of the mass of figure in a series about an average is
known as dispersion. The greater the amount of dispersion is greater the standard
deviation. A small standard deviation means a high degree of uniformity of the
observation as well as homogeneity of a series; a large standard deviation means just
the opposites it is denoted by the letter σ .
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Σx2 Σx 2

S.D. ( σ ) = √ n
− ( )
n

1.7. Limitation of the study

This project report is prepared is for the partial fulfillment of the requirements for the
degree of Bachelor in Business Studies. There are various limitations faced during the
research work. Some major limitations faced are listed out as below:
 It mostly focuses on the study of Nepalese banks with special reference to
capital Adequacy ratio.
 The research is based on the secondary data only. The primary sources are not
used. The report presented in merely based on the annual reports of the banks
mentioned.
 Due to the time constraint, they study does not deals the comprehensive study
of the selected commercial banks.
 Moreover, the reliability of tools, lack of research experiences and lack of data
are the other limitation of this study.
1.8. Organization of the study
This research has been organized in three chapters as below:
Chapter-I: Introduction
Chapter one includes background of the study, profile of the organization, statement
of problem, objectives of the study, significance of the study methodology and
limitation of the study.

Chapter-II: Results and Analysis

Second chapter includes result and analysis and major findings of the study.

Chapter-III: Summary & Conclusion

Chapter three is summary of the study and the conclusion based on the findings of the
report.

CHAPTER-II
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RESULT AND ANALYSIS

This chapter deals with the presentation, analysis and interpretation of statistics
evidence to clarify the research works. So, this is the crucial part of this study. Data
for analysis can be obtained from the different sources and they can be presented as
tables or charts like bar diagram, graphs etc. the methods of data presentation and
analysis are used to analyze the given data and to present them in very finest manner
and let the data to present for drawing inferences.

2.1. Data presentation and analysis

Presentation and analysis of the data is the core of each and every research work. This
study requires some financial and statistical tools to accomplish the objective of the study.
The various results obtained with the help of financial, accounting and statistical tools are
tabulated under different headings. As the main objectives of the study is to analyze the
relationship between capital adequacy and profitability of Himalayan Bank Limited. The
necessary financial facts and figures as well as descriptive information are gathered
through the financial statement of Himalayan Bank Limited.

2.1.1. Return on Equity

ROE is the measure of the profitability of a business in relation to book value of
shareholder equity, also known as net assets or assets minus liabilities. ROE is a
measure of how well company uses investment to generate earnings growth. This
ratio measures the efficiency of the bank in optimally utilizing the shareholders’
equity in generating profit. Higher the return on equity indicates that the bank has
adopted aggressive working capital policy, and thus the bank is risk taker. In other
words, the higher ROE the better. Falling ROE is usually a problem.
Net Profit
×100
Return on Equity = Shareholder's Equity

Table 1
Return on Shareholder’s Equity
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Fiscal Year Net profit Shareholder’s Equity Ratio

2073/74 1875610467 12638491555 14.84
2074/75 2763848475 13823651502 19.99
2075/76 2586722710 15092491225 17.12
Mean 17.32
S.D. 2.11
C.V. 12.17
Note: Annual Report of Himalayan Bank Limited from 2073/74 to 2075/76

Return on Shareolder's Equity

25

20

15 Return on Shareolder's Equity

10

0
2073/74 2074/75 2075/76

Figure 1. Return on Shareholder’s Equity

Table and Figure 1 shows the return on shareholders’ equity of Himalayan Bank
Limited from fiscal year 2073/74 to 2075/76. In average return on shareholder’s
equity is 17.32%, standard deviation is 2.11 and coefficient of variation is 12.17%.
Return on shareholder’s equity is not stable during the study period which indicate
that Himalayan a Bank Limited is not able to generate consistent profit for its
shareholder’s.

2.1.2. Capital Adequacy Ratio

The capital adequacy ratio, also known as capital to risk-weighted ratio, measures a
bank’s financial strength by using its capital and assets. Generally, a bank with a high
capital adequacy ratio is considered safe and likely to meet its financial obligations.
 17

The capital adequacy ratio is calculated by dividing a bank's capital by its risk-
weighted assets. The capital used to calculate the capital adequacy ratio is divided into
two tiers. Tier one capital, or core capital, comprises equity capital, ordinary share
capital, intangible assets and audited revenue reserves. Tier one capital is used to
absorb losses and does not require a bank to cease operations.
Tier 1 Capital + Tier 2 Capital
Capital Adequacy Ratio = Risk Weighted Assets
Table 2
Capital Adequacy Ratio
Fiscal Tier 1 Tier 2 Capital 2 Risk weighted Ratio
Year Capital Assets
2073/74 13131659830 1217838627 115140220166 0.12
2074/75 14650186178 1221401023 125984230370 0.13
2075/76 16210310670 4312770217 137875246204 0.15
Mean 0.13
S.D. 0.01
C.V. 8.35
Note: Annual Report of Himalayan Bank Limited from 2073/74 to 2075/76

Capital Adequacy Ratio

0.16
0.14
0.12
0.1 Capital Adequacy Ratio
0.08
0.06
0.04
0.02
0
2073/74 2074/75 2075/76

Figure 2. Capital Adequacy Ratio

Table 2 and Figure 2 shows the capital adequacy ratio of Himalayan Bank Limited
from 2073/74 to 2075/76. It has average capital adequacy ratio of 0.13, standard
deviation 0.01 and coefficient of variation 8.35%. It capital adequacy ratio is
increasing trend during the study period which indicate that it is consistent to
maintain its financial stability during the study period.

2.1.3. Return on Assets

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Net profit to total assets evaluates the efficiency of a company in utilization and
mobilization of the assets and its survival. The ratio is computed dividing net profit
(loss) by total assets. Net profit indicates the position of income left to the interval
equities after all costs, charges, expenses have been deducted. The high return on total
assets indicates the high profit margin and high turnover of total assets and vice versa.
It can be stated as

Table 3
Return on Assets
Fiscal Year Net Profit Total Assets Ratio
2073/74 1875610467 116462301380 1.61
2074/75 2763848475 133151142073 2.08
2075/76 2586722710 155884918983 1.66
Mean 1.78
S.D. 0.21
C.V. 11.72
Note: Annual Report of Himalayan Bank Limited from 2073/74 to 2075/76

Return on Assets
2.5

1.5 Return on Assets

0.5

0
2073/74 2074/75 2075/76

Figure 3. Return on Assets

Table 3 and Figure 3 shows the return on assets of Himalayan Bank Limited from
fiscal year 2071/72 to 2075/76. In average return on assets of Himalayan Bank
Limited is 1.78%, standard deviation is 0.21 and coefficient of variation is 11.72%.
Return on assets is not stable during the study period which indicate thatHimalayan
Bank Limited is not able to utilize its assets efficiently to earn profit consistently.

2.1.4. Core Capital

Core capital consists of shareholders' equity and retained earnings—disclosed on
their financial statements—and is a primary indicator to measure a bank's financial
health. These funds come into play when a bank must absorb losses without ceasing
 19

business operations. Core capital is the primary funding source of the bank. Typically,
it holds nearly all of the bank's accumulated funds. These funds are generated
specifically to support banks when losses are absorbed so that regular business
functions do not have to be shut down.

Under Basel III, the minimum core capital ratio is 10.5%, which is calculated by
dividing the bank's tier 1 capital by its total risk-weighted assets (RWA).

Table 4
Core Capital of Himalayan Bank Limited
Fiscal Year Tier 1 Capital Risk weighted Assets Ratio
2073/74 13131659830 115140220166 11.40
2074/75 14650186178 125984230370 11.63
2075/76 16210310670 137875246204 11.76
Mean 11.60
S.D. 0.15
C.V. 1.26
Note: Annual Report of Himalayan Bank Limited from 2073/74 to 2075/76

Core Capital
11.8

11.7

11.6
Core Capital
11.5

11.4

11.3

11.2
2073/74 2074/75 2075/76

Figure 4. Core Capital of Himalayan Bank Limited

Table 4 and Figure 4 shows the core capita1.l of Himalayan Bank Limited from fiscal
year 2073/74 to 2075/76. In average core capital Himalayan Bank Limited is 11.60,
standard deviation 0.15 and coefficient of variation 1.26% . Himalayan Bank Limited
is not able to maintain 10.5% of minimum core capital under Basel III which indicate
that bank is in not good position when losses are absorbed.
 20

2.1.5. Supplementary Capital

Supplementary capital includes undisclosed funds that do not appear on a bank's
financial statements, revaluation reserves, hybrid capital instruments, subordinated
term debt also known as junior debt securities and general loan-loss, or uncollected,
reserves. Revalued reserves is an accounting method that recalculates the current
value of a holding that is higher than what it was originally recorded as such as with
real estate. Hybrid capital instruments are securities such as convertible bonds that
have both equity and debt qualities.

Tier 2 capital is supplementary capital because it is less reliable than tier 1 capital. It
is more difficult to accurately measure due to its composition of assets that are
difficult to liquidate. Often banks will split these funds into upper and lower level
pools depending on the characteristics of the individual asset.In 2019, under Basel III,
the minimum total capital ratio is 12.9%, which indicates the minimum tier 2 capital
ratio is 2%, as opposed to 10.9% for the tier 1 capital ratio.
Table 5
Supplementary Capital
Fiscal Year Supplementary Capital Risk weighted Assets Ratio
2073/74 1217838627 115140220166 1.06
2074/75 1221401023 125984230370 0.97
2075/76 4312770217 137875246204 3.13
Mean 1.72
S.D. 1.00
C.V. 58.04
 Note: Annual Report of Himalayan Bank Limited from 2073/74 to 2075/76

Supplementary Capital
3.5
3
2.5
2 Supplementary Capital

1.5
1
0.5
0
2073/74 2074/75 2075/76
 21

Figure 3. Supplementary Capital

Table 5 and Figure 5 shows the supplementary capital of Himalyan Bank Limited
from fiscal year 2073/74 to 2075/76. In average supplementary capital is 1.72%,
standard deviation is 1 and coefficient of variation is 58.04%. Himalyan Bank Limited
is not able to maintain its supplementary capital as per Basel III as it supplementary
capital is below 2%.

2.2. Major findings of the Study

The findings of the study are as under:
 In average return on shareholder’s equity is 17.32%, standard deviation is 2.11
and coefficient of variation is 12.17%. Return on shareholder’s equity is not
stable during the study period which indicate that Himalayan a Bank Limited
is not able to generate consistent profit for its shareholder’s.

 It has average capital adequacy ratio of 0.13, standard deviation 0.01 and
coefficient of variation 8.35%. It capital adequacy ratio is increasing trend
during the study period which indicate that it is consistent to maintain its
financial stability during the study period.

 In average return on assets of Himalayan Bank Limited is 1.78%, standard

deviation is 0.21 and coefficient of variation is 11.72%. Return on assets is not
stable during the study period which indicate that Himalayan Bank Limited is
not able to utilize its assets efficiently to earn profit consistently.

 In average core capital Himalayan Bank Limited is 11.60, standard deviation

0.15 and coefficient of variation 1.26% . Himalayan Bank Limited is not able
to maintain 10.5% of minimum core capital under Basel III which indicate that
bank is in not good position when losses are absorbed.

 In average supplementary capital is 1.72%, standard deviation is 1 and

coefficient of variation is 58.04%. Himalyan Bank Limited is not able to
maintain its supplementary capital as per Basel III as it supplementary
 22

CHAPPTER-III
SUMMARY AND CONCLUSIONS

3.1. Summary
Capital adequacy is the amount of capital a bank or other financial institution has to hold
as required by its financial regulator. This is usually expressed as a capital adequacy ratio
of equity that must be held as a percentage of risk-weighted assets. These requirements
are put into place to ensure that the financial institutions do not take on excess leverage
and become insolvent. Capital requirements govern the ratio of equity to debt, recorded
on the assets side of a firm's balance sheet. Capital requirement should not be confused
with reserve requirements, which govern the liabilities side of a bank's balance sheet- in
particular, the proportion of its assets banks must hold in cash or highly-liquid assets.
Liquid assets include cash and bank balances, money at call and short notice having
placement of up to 90 days and investments in government securities.

The present study is an attempt to explore the relationship between the capital adequacy
and profitability of commercial banks. Capital adequacy is an important parameter for
judging the strength and soundness of banking system. Banks with reasonable CRAR can
absorb the unexpected losses easily and their cost of funding is also reduced which
ultimately improve the profitability of banks.
 23

In global market condition, banking has become highly complex and sophisticated.
Several changes create threats and opportunities that have direct impact on the
performances of the banks. Therefore, future is going to be more challenging than what is
today. These days the services oriented banks in the new competitive banking industry
with quality and speedy services will to able to attain objectives including profit
generation along with maintaining social responsibility.

3.2. Conclusions
The conclusions drawn from this study are as under:

 Return on shareholder’s equity is not stable during the study period which
indicate that Himalayan a Bank Limited is not able to generate consistent
profit for its shareholder’s.

 It capital adequacy ratio is not stable during the study period which indicate
that it is inconsistent to maintain its financial stability during the study period.

 Return on assets is not stable during the study period which indicate that
Himalayan Bank Limited is not able to utilize its assets efficiently to earn
profit consistently

 Himalayan Bank Limited is not able to maintain 10.5% of minimum core

capital under Basel III which indicate that bank is in not good position when
losses are absorbed.

 Himalayan Bank Limited is not able to maintain its supplementary capital as

per Basel III as it supplementary capital is below 2%.