ASSETS AND LIABILITY MANAGEMENT AND ITS EFFECT ON

COMMERCIAL BANKS PROFITABILITY

A Thesis

By:
SUBIN MAHARJAN
Public Youth Campus
Campus Roll No.: 331/072
Regd. No.: 7-2-0271-0288-2012
Exam Roll No.: 310078

Submitted to:
Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirement for the degree of

Master of Business Studies (M.B.S.)

Kathmandu, Nepal
February, 2022
 RECOMMENDATION
This is to certify that the thesis

Submitted by:
SUBIN MAHARJAN

Entitled:
ASSETS AND LIABILITY MANAGEMENT AND ITS EFFECT ON
COMMERCIAL BANKS PROFITABILITY

has been prepared as approved by this Department in the prescribed format of the
Faculty of Management. This thesis is forwarded for examination.

……..……..…………...... ……..……..……………...... ……………..………..…..…………

Sagar Ranjit Jeetendra Dangol, PHD Balaram Thapa
(Supervisor) (Research Head) (Campus Chief)

i
 VIVA-VOCE SHEET
We have conducted the viva – voce of the thesis presented

By:

SUBIN MAHARJAN
Entitled:
ASSETS AND LIABILITY MANAGEMENT AND ITS EFFECT ON
COMMERCIAL BANKS PROFITABILITY

And found the thesis to be the original work of the student and written
according to the prescribed format. We recommend the thesis to be
accepted as partial fulfillment of the requirement for the degree of
Master of Business Studies (M.B.S.).

Viva-Voce Committee

Head, Research Department …………………….………

Member (Thesis Supervisor) …………………….………

Member (External Expert) …………………….……….

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 DECLARATION
I hereby declare that this thesis work entitled “Assets and Liability Management and Its Effect
on Commercial Banks Profitability” submitted to Office of the Dean, Faculty Management,
Tribhuvan University, is my original work done in the form in partial fulfillment of the
requirement for the degree of Master of Business Studies which is prepared under the
supervision of respected supervisor Sagar Ranjit, of Public Youth Campus.

…………….………………
SUBIN MAHARJAN
Public Youth Campus
Campus Roll No.: 331/072
Regd. No.: 7-2-0271-0288-2012
Exam Roll No.: 310078

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 ACKNOWLEDGEMENTS
I would like to forward my deepest gratitude to Sagar Ranjit, thesis supervisor, Asso. Prof.
Jeentendra Dangol, Phd, research head at Public Youth Campus and Balaram Thapa Campus
Chief who support me with their invaluable scholarly supervision, constructive comments
and suggestions that allow me to furnish this thesis report in this final format. I am also
thankful to other respected teachers of Public Youth Campus and all the staff of this college
for their help in providing me various kinds of suggestions, information and comments.
Further, my deep regard to known and unknown individual who helped to collect the data at
preliminary stage of this report writing. It is the matter of my immense pleasure to express my
deep sense of gratitude and heartfelt respect to my parents for their affection, inspiration and
incredible support to precede my academic career.

SUBIN MAHARJAN

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 TABLE OF CONTENTS
Recommendation i
Viva Voce Sheet ii
Declaration iii
Acknowledgement iv
Table of Contents v
List of Tables vii
List of Figures viii
Abbreviations ix

CHAPTER I INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problems 3
1.3 Objectives of the Study 5
1.4 Significance of the Study 6
1.5 Limitations of the Study 6
1.6 Organization of the Study 7

CHAPTER II REVIEW OF LITERATURE

2.1 Conceptual Review 8
2.1.1 Concept of Assets Liability Management 9
2.1.2 Assets Liability Management Process 11
2.1.3 Assets Liability Management Organization 11
2.1.4 Need for ALM in Banking 12
2.1.5 The Evolution of ALM 13
2.1.6 Monitoring the ALM in Banking 14
2.1.7 ALM Policy in Financial Institutions 15
2.1.8 Theories Related to ALM and Profitability 15
2.1.8.1 The Portfolio Theory 15
2.1.8.2 The Assets-Liability Management Theory 16
2.1.8.3 Capital Assets Pricing Model 17
2.1.8.4 Efficiency Hypothesis 17
2.1.8.5 Commercial Loan Theory 18

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 2.1.8.6 Liquidity Preference Theory 19
2.2 Empirical Review 19
2.3 Research Gap 24

CHAPTER III RESEARCH METHODOLOGY

3.1 Research Design 25
3.2 Population and Sample 25
3.3 Nature and Source of Data 25
3.4 Tools of Data Analysis 25
3.5 Framework for the Study 26
3.6 Analytical Model 27

CHAPTER IV DATA PRESENTATION AND ANALYSIS

4.1 Financial Analysis 28
4.1.1 Total Deposit HBL, EBL and NABIL 28
4.1.2 Other Liabilities of HBL, EBL and NABIL 30
4.1.3 Loan and Advances of HBL, EBL and NABIL 31
4.1.4 Fixed Assets of HBL, EBL and NABIL 33
4.1.5 Other Assets of HBL, EBL and NABIL 34
4.1.6 Return on Assets of HBL, EBL and NABIL 36
4.2 Statistical Tools 37
4.2.1 Descriptive Statistics 37
4.2.2 Coefficient of Correlation 39
4.2.3 Regression Analysis 40
4.2 Major Findings of the Study 42

CHAPTER V SUMMARY, CONCLUSION AND

RECOMMENDATIONS
5.1 Summary 46
5.2 Conclusion 47
5.3 Recommendations 49
REFERENCES
APPENDIX
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 LIST OF TABLES

S.N. Lists Page No.

4.1 Total Deposits of HBL, EBL and NABIL 29
4.2 Other Liabilities of HBL, EBL and NABIL 30
4.3 Loan and Advances of HBL, EBL and NABIL 32
4.4 Fixed Assets of HBL, EBL and NABIL 33
4.5 Other Assets of HBL, EBL and NABIL 35
4.6 Return on Assets of HBL, EBL and NABIL 36
4.7 Descriptive Statistics 38
4.8 Correlation Analysis 39
4.9 Model Summary 40
4.10 Anova 41
4.11 Coefficients 41

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 LIST OF FIGURES
S.N. Lists Page No.
3.1 Framework for the Study 26
4.1 Total Deposits of HBL, EBL and NABIL 29
4.2 Other Liabilities of HBL, EBL and NABIL 31
4.3 Loan and Advances of HBL, EBL and NABIL 32
4.4 Fixed Assets of HBL, EBL and NABIL 34
4.5 Other Assets of HBL, EBL and NABIL 35
4.6 Return on Assets of HBL, EBL and NABIL 37

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 ABBREVIATIONS
AGM : Annual General Meeting
ALM : Assets and Liability Management
BFI : Bank and Financial Institution
B.S : Bikram Sambat
EBL : Everest Bank Limited
FA : Fixed Assets
Fig. : Figure
i.e. : That is
HBL : Himalayan Bank Limited
LA : Loan and Advance
Ltd. : Limited
MBS : Master of Business Studies
NABIL : Nabil Bank Limited
NII : Net Interest Income
NRB : Nepal Rastra Bank
OA : Other Assets
OL : Other Liabilities
SPSS : Statistical Package for Social Sciences
TD : Total Deposits

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 CHAPTER I
INTRODUCTION
1.1 Background of the Study
Managing risks associated with mismatches between assets and liabilities (also known
as asset and liability management or ALM) is a process that is often abbreviated as
ALM. The process is at a crossroads between risk management and strategic planning,
and it is undergoing revision (Crockford, 1986). In addition to providing solutions to
minimize or hedge the risks originating from the interplay of assets and liabilities, it is
concerned with the long-term outlook: success in the process of maximizing assets to
fulfil complicated obligations may result in increased profitability. Traditional ALM
programmes have a strong emphasis on interest rate risk and liquidity risk since they
are the most significant risks impacting an organization's financial position (as they
require coordination between assets and liabilities).

Zawalinska, (1999) states asset and liability management (ALM) refers to the dynamic
process of planning, organizing, coordinating, and regulating assets and liabilities, as
well as their mixes, volumes, maturities, yields, and costs, in order to reach a defined
net interest income (NII). In other words, it is concerned with the best allocation of
assets in order to satisfy present objectives while also anticipating future obligations.
It has to do with the management of risks connected with liquidity mismatches, interest
rates, and fluctuations in foreign currency. Consequently, ALM is concerned with
trying to match assets and liabilities in terms of maturity and interest rate sensitivity in
order to reduce interest rate and liquidity risks. Fabozzi & Kanishi, (1991), state that
institutions (banks, finance companies, leasing companies, insurance companies, and
others) focus on asset-liability management when they face financial risks of different
types. Asset liability management includes not only a formalization of this
understanding, but also a way to quantify and manage these risks. Further, even in the
absence of a formal asset liability management program, the understanding of these
concepts is of value to an institution as it provides a truer picture of the risk/reward
trade-off in which the institution is engaged.

Asset-liability management, in its most basic definition, refers to the process by which
an organization maintains its balance sheet in order to accommodate different interest

1
rate and liquidity situations. Financial institutions such as banks and other financial
institutions offer services that expose them to a variety of hazards including credit risk,
interest rate risk, and liquidity risk. Asset-Liability Management (ALM) is the process
of controlling the risks inherent in a corporation as a result of mismatches between
assets and liabilities. Asset-liability management (ALM) is a strategy that provides
institutions with the protection they need to make such risks acceptable to them. The
asset-liability management approach is thus suited for institutions such as banks,
financing companies, leasing firms, insurance firms, and others when they are
confronted with financial risks of various forms, as is the case for most businesses.
Asset-liability management encompasses not only a formalization of this concept, but
also a method of quantifying and managing risks, which ultimately leads to improved
returns and profits for the organization. Furthermore, even in the absence of a formal
asset-liability management program, an institution's comprehension of these ideas is
beneficial because it offers a realistic picture of the risk/reward trade-off in which the
institution is involved.

The objective of ALM is to maintain a match in the terms of rate sensitive assets (those
assets that will move in search of the most competitive interest rates) with their funding
sources (savings, deposits, equity, and external credit) in order to reduce interest rate
risk while maximizing profitability. Interest rate risk is defined as the risk that changes
in the current market interest rates will adversely impact the institution’s financial
performance. For example, due to changes in the market a bank is forced to adjust the
interest rate on deposits upward to remain competitive, but its earning assets are
concentrated in long term, fixed-rate loans, and investments. Financial performance
will be impaired because the institution cannot adjust its income earned on loans
upward as fast as the cost of funds is increasing. Interest rate risk to some degree is
unavoidable, but it is manageable. ALM allows for the quantifiable assessment and
effective management of various risk categories. Even in the absence of a formal ALM
program, the understanding of these concepts provides a picture of the risk/reward
trade-off in which the financial institutions are engaged. The second step or
requirement for the implementation of ALM is the development of an information
system. The set of data alone is likely to provide valuable information about the degree
of financial risk affecting the institution. The third step involves a design and

2
implementation of the ALM decision making process. The Asset Liability Committee
(ALCO) usually carries out this process.

A healthy, progressive, and dynamic financial system is a necessary but not sufficient
condition for economic growth. Economic growth and prosperity are supported by the
tertiary sector of an economy, which includes commercial banks, which operate as a
catalyst in the process of development. Commercial banks are a critical component of
the financial sector. The money that have been raised are put to use for constructive
objectives in agriculture, industry, and commerce (Vossen, 2010). Since the Great
inflation of the 1930s and the 1940s, financial performance monitoring of commercial
banks has piqued the attention of academic researchers.

Asset liability management helps the organization balance its assets and liabilities. This
reduces financial risks and increases profitability. The firm's asset liability management
drives investment decisions. Because the company can allocate adequate money for
investment due to optimal liquidity management methods (Uyemura & Van Deventer,
2003). According to Uyemura (2003), companies that maintain a correct balance sheet
structure are more profitable than those that do not. Since no risk can be removed, it is
the job of risk managers to determine their risk levels and know which level can be
managed or accepted. Good asset liability management techniques help financial
organizations to better allocate assets and identify financial opportunities and risks.
Asset liability management is important for any organization that invests to satisfy
future cash flow and capital demands.

The basic purpose of asset-liability management is to provide a high quality, steady,

sizable, and rising source of net interest income. These four aims are attained by reach
ing the highest mix and degree of assets, obligations and financial risk. Asset Liability
Management demands for the awareness of the interplay between the different forms
of risks to guarantee that they are not assessed in isolation. The basic purpose of asset-
liability management is to provide a high quality, steady, sizable, and rising source of
net interest income. This aim is attained by reaching the highest mix and degree of ass
ets, obligations and financial risk. Asset Liability Management demands for the aware
ness of the interplay between the different forms of risks to guarantee that they are not
assessed in isolation.
3
1.2 Statement of Problems
The issue of jointly managing assets and liabilities arises in a number of industries, such
as banking, insurance, and pension funds, as well as at the level of individual
households. The definitions of assets, liabilities, and risks are specific to each
institution, but, very generally, assets may be viewed as expected cash inflows, and
liabilities as expected cash outflows. Although short-term risks arising from the
possibility that an institution's assets will not cover its short-term obligations are
important to assess and quantify, ALM is usually conducted from a long-term
perspective. It therefore suffices to say that, ALM is considered a strategic discipline
that influences the financial performance as opposed to a tactical one to take market
position (Choudhry, 2007).

In so far as the importance of the above discourse is concerned, ALM is an integral as

it is a significant component/determinant of financial performance of any financial
institution especially the commercial banks. ALM has its pros and cons that cannot go
unmentioned if a balanced and scholarly approach is to be achieved in this research. He
says that some of the challenges of ALM include but are not limited to; Firstly, each
client has their particular objectives, risk tolerances, and constraints, and it would be
difficult to devise an optimization algorithm that would realistically account for these
specific characteristics when evaluating portfolio allocation decisions. Secondly, long
term strategic decisions depend on factors whose forecasts may not be readily available
to the bank. Thirdly, risk preferences and their changes over time must be translated
into mathematical language, which is far from trivial (Romanyuk, 2010).

Deloof (2003) investigated the relationship between asset liability management and the
profitability of Belgian services organizations in this research. A significant
relationship was discovered between asset liability management and profitability,
according to the findings of the study. Chakraborty (2008) looked at the link between
asset liability and profitability in Indian pharmaceutical enterprises. The data showed
that there was a statistically significant positive association between the asset liability
and the profitability of the pharmaceutical companies involved. Belete (2013)
investigated the link between asset liability management and the profitability of
commercial banks in Ethiopia. As a consequence of the findings, commercial banks'

4
assets were shown to have a positive relationship with their profitability. In a similar
vein, it was discovered that liabilities had a statistically significant negative association
with the profitability of the bank.

Finally, a reasonable ALM model must put all of its different components (assets,
liabilities, goals, institutional and policy constraints, etc.) together in a meaningful
manner, which is difficult. Conversely, ALM has benefits whose real value far
outweighs any of the aforementioned challenges. Firstly, an understanding of the
company's overall position in terms of its obligations; comprehensive strategic
management and investment in view of liabilities; the ability to quantify risks and risk
preferences in the ALM process; better preparation for future uncertainties; and, ideally,
gains in efficiency and performance from the integration of asset and liability
management. If an ALM framework is well done and implemented, banks would make
great and sustainable profitability and growth trends going by the value of the
aforementioned benefits. It suffices to authoritatively say that proper formulation and
implementation of ALM concept would spur profitability. The present study attempts
to evaluate the changing perspectives of the Nepalese commercial banks in identifying
and facing the risk and maintaining asset quality so as to ensure profitability with the
help of the Asset Liability Management techniques. This study also tries to assess the
effectiveness of Asset Liability Management as a strategy vital to the progress and
development of Nepalese commercial banks. Mainly the following questions were
raised:
 What is the present situations of deposits, other liabilities, loan and advance,
fixed assets, other assets and ROA of sample commercial banks?
 What is the relationship between deposits, other liabilities, loan and advance,
fixed assets, other assets and ROA of sample commercial banks?
 What is the effect of deposits, other liabilities, loan and advance, fixed assets,
other assets and ROA of sample commercial banks?

1.3 Objective of the study

The main objective of the present study is to examine the effect of assets and liability
management on profitability of sample commercial Banks. The other specific
objectives of the study were as follows.

5
  To access the present position of a deposits, other liabilities, loan and advance,
fixed assets, other assets and ROA of sample commercial banks.
 To examine the relationship between deposits, other liabilities, loan and
advance, fixed assets, other assets and ROA of sample commercial banks.
 To analyze the effect of deposits, other liabilities, loan and advance, fixed
assets, other assets on ROA of sample commercial banks.

1.4 Significance of the study

A better knowledge of the best practices in risk management in the banking sector and
economic climate is gained via this research. This research will also benefit other
financial institutions by providing them with insights on how to manage risks by
maintaining a correct balance between assets and liabilities. The findings of this
research are likely to assist banks in better understanding the idea of asset liability
management and in determining the degree to which it has been used as a risk
management tool. Because of the liberalization of the interest rate regime, asset liability
management has become more crucial for the banking sector in the current
environment. It aids in the assessment of hazards and the management of risks via the
implementation of suitable measures. As a result, this subject has been chosen in order
to better understand the Asset Liability Management process and the numerous tactics
that may be used by banks to control their liquidity risk. So, it would be useful to expand
my understanding of the Asset Liability Management method, functions, and impact on
the liquidity risk in commercial banks, which would be beneficial.

1.5 Limitations of the study

This study confines only the effect of assets and liability management on profitability
of Himalayan Bank Limited, Everest Bank Limited and Nabil Bank Limited. So, the
limitations of the study are as:
 The study focused on the effect of assets and liability management of HBL, EBL
and NABIL Bank.
 The study covered the related data of the banks of ten accounting period only from
the FY 2011/12 to 2020/21.
 The study was based on secondary sources of data.
 Only few financial and statistical tools were used in the analysis.

6
1.6 Organization of the study
This study has been divided into five chapters, which are as follows.
Chapter I: Introduction it includes general introduction, statement of the problem,
objective of the study, scope of the study, limitation and organization of the study itself.

Chapter II: Review of literature: It includes review of books, articles, research papers,
previous research works and research gap.

Chapter III: It covers on research design, population and sample, source of data,
methods of analysis.

Chapter IV: This chapter attempts to analyze and evaluate data with the help of
analytical tools procedure and interprets the result obtained. This chapter will highlight
the major finding of the study work.

Chapter V: It sums up the results obtained through analysis summary, conclusion and
recommendations. At last bibliography and appendix are also included.

7
 CHAPTER II
REVIEW OF LITERATURE
A review of the literature serves as the foundation for research by assisting in the
selection of the most appropriate research methodology for the research topic.
Researchers, as well as you, the reader, and we, as authors, must first establish a
concrete frame of reference before proceeding on their search journey. Through the
identification of essential topics in asset and liability management as well as relevant
ideas in asset and liability management, the literature evaluation aids in the
development of a framework for the research. As a result, this part includes numerous
sections, including a definition and idea of asset and liability management, a theoretical
examination of asset and liability management, and empirical research on the impact of
asset and liability management on profitability.

2.1 Conceptual Review

When it comes to the United States, the origins of asset and liability management may
be traced back to the high interest rate years of 1975-76, as well as the late 1970s and
early 1980s in Europe (Van & Mesler, 2004). With the rise in interest rate volatility,
inflation, and a severe recession that affected several economies in the mid-1970s,
banks began to place greater emphasis on the management of both sides of the balance
sheet, which has continued to this day. ALM is defined as the process by which a
financial institution maintains its balance sheet in order to accommodate different
interest rate and liquidity situations. A bank's risk management practice is concerned
with the management of risks that arise as a result of mismatches between the bank's
assets and liabilities. Managing assets and liabilities is a strategy that equips
organizations with the tools they need to manage risk in a reasonable manner. While
the short-term goal of asset liability management in a commercial bank is to ensure
liquidity while protecting earnings, the long-term goal is to maximize the economic
value of a commercial bank, which is defined as the present value of the commercial
bank's expected net cash flows, which is defined as the expected cash flows on assets
minus the expected cash flows on liabilities plus the expected net cash flows on off
balance sheet (OBS) positions (Basel Committee on Banking Supervision, 2006). In
addition to maximizing profitability, ensuring structural liquidity, minimizing capital
requirements, and ensuring robustness in market risk management.

8
2.1.1 Concept of Assets Liability Management
The management of assets and liabilities may be described as the strategic management
of the balance sheet for the risk optimization of obligations and assets while taking into
consideration all market risks, according to Angelopoulos et al. (2001). Asset liability
management (ALM) is a comprehensive and dynamic framework that is used to assess,
monitor, and manage the market risk of a financial institution (such as a bank or credit
union). A balance sheet structure that is managed in such a way that the net profits from
interest are maximized within the overall risk-preference of the company is known as
interest rate risk management. The management of assets and liabilities aims to
optimize profits after adjusting for risk, in order to maximize returns for long-term
investors. The asset-liability management function, according to Uyemura (2003), is a
cost profit function that takes into consideration the bank's expected risk, level of
profits, and liquidity. In addition to serving as a risk management approach, asset and
liability management is also significant because it allows for the achievement of a
sufficient return while preserving a comfortable excess of assets over and above the
obligations. It is sometimes referred to as excess management since it takes into account
factors such as interest rates, earning capacity, and the degree to which a person is ready
to take on debt.

Because banks mainly function as a channel for bridging the gap between surplus and
deficit units in an economy, they are very important entities that aid in the achievement
of socioeconomic activities conducted by people, businesses, and even sovereign
nations (Kamoyo et al., 2012). The relevance of bank financial performance may be
assessed at both the micro and macroeconomic levels of the economy, depending on
the circumstances. Profit is the most important precondition for a competitive financial
organization and the most cost-effective source of money at the microeconomic level.
An economically viable and profitable banking sector is better equipped to resist
negative shocks and contribute to the stability of the financial system at the
macroeconomic level (Aburime,2008). One of the most essential variables impacting a
country's constant economic growth is the effectiveness and dependability of its
banking system (Miletic,2009).

9
According to Oguzsoy and Guven (1997), risk management is concerned with
supporting banks in achieving a balance between risks and profitability; this is
accomplished by a correct match between assets and liabilities. The company is in a
position to satisfy its short-term commitments on time and to engage in successful
enterprises as well. The purpose of ALM is not just to defend the organization from
risk. The increased security provided by ALM also opens the door to new chances for
increasing net worth. Interest rate risk (IRR) is a significant source of concern for a
bank's net interest revenue and, therefore, its profitability. If there is a considerable
mismatch between the asset and liability interest rate reset dates, changes in interest
rates may have a major impact on a bank's net interest income (NII), which can be
significant. Changes in interest rates have an impact on the market value of a bank's
equity as well as its debt. Asset liability management will be assessed using credit risk,
which is calculated by dividing loan loss reserve by the total amount of assets and
liabilities at risk (Moore, 2006). The management of assets and liabilities can be defined
as the strategic management of the balance sheet for risk optimization of liabilities and
assets taking into account all market risks. Asset liability management is
comprehensive and dynamic framework used to measure, monitor and manage the
market risk of a bank. It is the management of structure of balance sheet in such a
manner that the net earnings from interest is maximized within the overall risk-
preference of the firm (Angelopoulos, et.al., 2001).

The management of assets and liabilities seeks to maximize earnings, adjusted for risk,
given the long-term shareholders. Asset-liability management is a cost profit function
which takes into account the assumed risk, level of earnings and liquidity of the bank
(Uyemura, 2003). The management of asset and liabilities is important because it acts
as a risk management technique designed to earn an adequate return while maintaining
a comfortable surplus of assets beyond liabilities. It takes into consideration interest
rates, earning power, and degree of willingness to take on debt and hence is also known
as surplus management. The management of risk aims at assisting the banks to achieve
a balance between risks and profitability; this is realized through a proper match of
assets and liabilities. The firm is able to meet its short-term obligations when due and
also invest in profitable ventures.

10
The short-term objective of ALM in a commercial bank is to ensure liquidity while
protecting the earnings and the long-term goal is to maximize the economic value of
the bank i.e., “the present value of commercial bank’s expected net cash flows, defined
as the expected cash flows on assets minus the expected cash flows on liabilities plus
the expected net cash flows on off balance sheet (OBS) positions. (Basel Committee on
Banking Supervision, 2006). Other objectives of ALM are maximizing profitability,
ensuring structural liquidity, minimizing of capital and ensuring robustness in market
risk management. ALM is based on 3 basic pillars. ALM is defined as managing both
assets and liabilities simultaneously for the purpose of minimizing the adverse impact
of interest rate movement, providing liquidity and enhancing the market value of equity.
It is also defined as “planning procedure which accounts for all assets and liabilities of
a bank by rate, amount and maturity. Generally, asset liability management is managing
the asset liability mix to minimize the risk. (Singh, 2013).

2.1.2 Assets Liability Management Process

When it comes to financial asset and liability management (ALM), it is the process of
determining the quantities of assets and liabilities as well as their maturities, rates, and
yields in order to reduce interest rate risk and maintain a reasonable level of
profitability. ALM is, to put it another way, another kind of planning. Management may
be proactive and anticipate change rather than being reactive to unforeseen change as a
result of using this tool. Given the critical role that market and credit risk play in a
financial institution's main business, the success of the institution depends on its ability
to detect, analyze, monitor, and manage these risks in a sound and competent manner"
(Rowe, et.al., 2004). ALM is a systematic method that seeks to give some level of
protection against the risk emerging from a mismatch between an organization's assets
and liabilities.

2.1.3 Assets Liability Management Organization

In any company, the Board of Directors would be in charge of overall responsibility for
ALM and would be responsible for establishing the business's philosophy in this regard.
The Asset Liability Committee (ALCO) is in charge of deciding on business strategies
that are compatible with the rules in place and putting such plans into action. ALCO is
typically comprised of the company's senior management, which includes the Chief
Executive Officer (Satishchandra & Pralhad, 2006). The Asset-Liability Committee
11
(ALCO), which should be comprised of the bank's senior management, including the
CEO, should be responsible for adhering to the limits established by the board of
directors as well as for determining the bank's business strategy in accordance with the
bank's budget and previously established risk management goals. It is the ALCO's
decision-making unit that is responsible for balance sheet planning from a risk-return
perspective, which includes interest and liquidity risk management on a strategic level.
For example, consider the process of approving a loan. When a borrower approaches a
bank, the credit department evaluates the borrower based on a variety of factors,
including industry prospects, operational efficiency, financial efficiency, management
evaluation, and other factors that have an impact on the client company's operations
and performance. The borrower is charged a set rate of interest in order to cover the
credit risk based on the results of this assessment. It goes without saying that there will
be a particular credit assessment cut-off point beyond which the bank would not lend.
The ALCO meetings are where the parameters for the loan sanctioning system are
defined, as well as the aims and goals that have been established.

2.1.4 Need for ALM in Banking

The Changes in the financial markets as a result of international players gaining access
to the local market, as well as the risks connected with the activities of banks, have
grown more complicated. Now, in order to run banks effectively, management must
use strategic management techniques. As a result of increasing competition after the
entrance of foreign banks, which has resulted in more variable interest rates and
currency rates, banks are under pressure to structure their asset liability portfolios in
such a manner that the risk in the portfolio is reduced. Banks' management must
maintain a healthy balance between the gap, profitability, and stability of the institution.
The management of market liquidity risk and interest rate risk are the most critical tasks
for bank executives. As a result, banks need a framework that allows them to battle
these risks while also assisting them in optimizing the performance of their institutions.
In this situation, ALM is a highly useful and beneficial instrument for analyzing the
performance of financial institutions (Kumar & Dhar, 2014).

The Basel Committee on Banking Supervision is a group of banking regulators in

Switzerland (2001) which proposed and created a wide supervisory framework, as well
as specified necessary requirements for incorporating best practices into the banking
12
system's oversight mechanism. With this initiative, the goal was to promote global
convergence toward uniform methods and standards for the financial system. This
group also recommended the establishment of stringent risk and capital management
rules in order to provide an appropriate capital reserve for the numerous risks that may
be exposed throughout the course of lending and borrowing activities. It implies that
banks must hold a higher level of capital to compensate for their increased risk
exposure. This will secure the solvency and stability of the system. The Basel II rules
(2004) established a worldwide standard for the amount of capital that banks should
hold as a precaution against the different risks that they may encounter when doing
business in the banking industry. According to Basel II, strict risk and capital
management rules should be established in order to guarantee that a bank maintains
capital reserves that are proportional to the level of risk that the bank exposes itself to
via its lending and investing operations. Thus, the bigger the amount of risk to which a
financial institution is subjected, the greater the quantity of capital the financial
institution must maintain to secure its solvency and long-term stability (Singh, 2013).

2.1.5 The Evolution of ALM

The origins of asset and liability management may be traced back to the high interest
rate years of 1975-76, as well as the late 1970s and early 1980s in Europe (Van
Deventer, et.al., 2004). With the rise in interest rate volatility, inflation, and a severe
recession that affected various countries in the mid-1970s, banks began to place more
emphasis on the management of both sides of the balance sheet, which has continued
to this day. It was during the 1980s that a coordinated method to managing the complete
balance sheet of commercial banks, rather than a piecemeal one, was created. Product
growth, globalization of the money and capital markets, and changes in legislation
made the management of assets and obligations even more difficult in the 1990s, as
shown by the following: ALM began as a simple method of gap management to close
the gap between interest-sensitive assets and liabilities, as well as the gap between
market value of assets and liabilities. Over time, it evolved into a duration model that
took into account the emergence of derivatives activities and asset securitization within
its framework. After starting with the simple concept of matching assets and liabilities
based on their maturities over different time horizons, asset liability management has
evolved to include more sophisticated concepts such as duration matching and variable
rate pricing, as well as the use of both static and dynamic simulation.
13
ALM was first used by financial institutions in the United States, but it has now
extended to other parts of the world. During the 1940s and 1950s, commercial banks
had an oversupply of cash in the form of demand and savings accounts, which helped
the economy to grow. Because of the cheap cost of deposits, commercial banks were
forced to devise procedures that would allow them to make more effective use of these
money. As a result, the emphasis was mostly on asset management at the time. During
the 1960s and early 1970s, the demand for loans had grown significantly, and the supply
of low-cost capital had begun to dwindle. As a result, the emphasis of bank management
operations shifted to liability management. To put it simply, liability management refers
to the activity of purchasing money in order to finance successful lending possibilities
(Gardner & Mills, 1994).

2.1.6 Monitoring the ALM in Banking

Managers of financial institutions must have effective liquidity management plans in
place in order to successfully monitor the ALM position of their organizations.
Identifying the core or stable deposit base of the institution and matching it with longer-
term assets is critical for managers who want to decrease interest rate risk in their
institutions. Investment securities such as stocks and bonds, certificates of deposit with
early withdrawal penalties, retirement savings, savings for a specific purpose, and
regular savings accounts with small balances are all examples of stable deposits.
Managers must establish the amount or percentage of money in each form of savings
account that may be used to support longer-term loans within each type of savings
account. In order to cover financial expenditures, operational expenses, and
contributions to capital, managers must be able to determine the bare minimum net
margin (gross revenue less cost of funds). Everything mentioned above will be possible
only if the institution has the following: (1) an effective management information
system either manual or computerized that provides the necessary data; (2) formal,
written liquidity and asset liability management policies; (3) tools in place to monitor
liquidity, the institution's gap position, core deposits, and net margin; and (4) a
commitment by both officials and managers to change both deposit and loan interest
rates as demanded by the local market (Belty, 1994).

14
2.1.7 ALM Policy in Financial Institutions
Like other operational areas, ALM must be led by a clear policy, which must have been
established and written by officials with the aid of senior management. Officials should
evaluate the policy at least once a year and make any necessary revisions. ALM and
liquidity policies may be implemented as two independent policies or as a single
integrated policy. However, since choices on lending, investments, liabilities, and
equity are all intertwined, it is impossible to write the ALM and liquidity rules in
isolation. The ALM policy should address issues such as who is accountable for
monitoring the institution's ALM posture and how the policy should be communicated.
What tools will be used to monitor ALM will be discussed. What technologies will be
used to keep track of ALM? (Belty, 1994). Liquidity management, which involves
ensuring that the institution has enough cash and liquid assets on hand to satisfy
withdrawal and disbursement requests as well as pay expenditures, is critical in the
savings mobilization process. Another important component of savings mobilization is
asset and liability management (ALM), which is the process of planning, organizing,
and controlling asset and liability volumes, maturities, rates, and yields in order to
minimize interest rate risk and maintain an acceptable profitability level. This is an
extremely tight relationship between the two. An efficient liquidity and asset-liability
management system is required by a savings institution in order to guarantee that low-
cost funds are always accessible for depositors when they demand repayment of the
cash they have placed.

2.1.8 Theories Related to ALM and Profitability

This section reviews the theories that support the relationship between asset-liability
management and the profitability of firms.

2.1.8.1 The Portfolio Theory

It is possible that this theory will play a role in investing in a portfolio model of asset
diversification to alleviate financial loss, because a clear portfolio will prevent the firm
from financial loss because the risk is minimized by portfolio assets. However, this
theory may have an impact on the liquidity position of a financial institution. A well-
defined portfolio, on the other hand, avoids the business from suffering a complete loss
since the risks are limited by the portfolio of assets in which the firm has invested.
According to Black and colleagues (1972), the portfolio diversification and intended

15
portfolio composition of commercial banks are the outcome of choices made by the
bank's management. To maximize profits, the bank's management must first determine
a feasible set of assets and liabilities. Then it must determine how much it will have to
spend on unit costs to produce each component of assets. This means that the bank can
improve performance by limiting the volatility of its portfolio by spreading the risks
among different types of securities that do not always behave in the same way.

In the opinion of Canner et al. (1997), the importance of this theory is that the company
should maintain a suitable balance of assets and liabilities in order to satisfy its short-
term and long-term financial obligations, respectively. It is necessary for the company
to diversify its portfolios in order to reduce risks that might result in financial losses
and have a negative influence on the liquidity position of a financial institution in order
to preserve this balance. Important because each asset class has a distinct pattern of
performance over time as a result of the specific balance of risk and reward associated
with it. Historically, equities have provided a higher rate of return while simultaneously
posing a greater risk. Bonds and cash are both generally considered to be lower-risk
investments, and as a result, they offer more modest returns.

Modigliani and Miller (1958) argued that frequent rebalancing of a portfolio has been
shown to greatly reduce the risk of the portfolio. A company that wants to reduce its
risks should work toward putting up a portfolio of strategies to deal with the different
threats. In order to avoid confusion, it is necessary to understand that investments in a
portfolio may experience value changes as a result of changes in the external
environment. This might have a detrimental impact on the overall balance of the asset
portfolio allocation mix. Rebalancing should be done on a regular basis by the company
in order to keep a suitable balance of your portfolio that can withstand fluctuations in
the market. This implies that the company should consider selling the percentage of its
assets that have amassed significant value in the meantime. Those funds may then be
sued in order to acquire an underperforming portfolio of assets while keeping the
original asset allocation mix in place.

2.1.8.2 The Assets-Liability Management Theory

Liability-management theory (LMT) has been in existence since the early 1960s, and it
has had considerable impact on the loan portfolios of commercial banks. LMT is an
16
abbreviation for liability-management theory. This is one of the most prominent asset
liability management ideas, and it asserts that it is no longer necessary to adhere to
traditional ALM practices such as keeping liquid assets, liquid investments, and so on.
Banks have been concentrating their efforts recently on the liabilities side of the balance
sheet. Theoretically, banks may meet their ALM requirements by borrowing money
and capital from the money and capital markets. It was this theory's key contribution to
banking that it began to take into account both sides of a bank's balance sheet
(Emmanuel, 1997). Banks now employ both assets and liabilities to satisfy their ALM
requirements. The Asset and liability management committee of a bank analyzes the
sources of ALM that are available and compares them to the bank's anticipated
requirements (ALCO). Maintaining excellent asset quality and a robust capital base are
important factors because they both lower the need for asset liability management and
increase a bank's ability to obtain funds at a low cost. Between ALM and profitability,
there is a short-term trade-off to be made. If management is effective in controlling
ALM over the long term, long-term profitability will outperform those of rival banks,
as would the capital (Koch & McDonald, 2003).

2.1.8.3 Capital Assets Pricing Model

The CAPM demonstrates that investors require high levels of expected returns to
compensate for high levels of expected risk. However, it is now commonly
acknowledged that, in the context of informational asymmetries and contract
enforcement issues, the financial system will not always allocate resources to projects
or enterprises with the best returns. Based on empirical data from mean-variance
portfolio selection, simulation analysis, and out-of-sample portfolio performance,
correcting for estimating error, especially in the means, may significantly enhance
investment performance (Jobson et al, 1979). The model recommends that investors
diversify their portfolios and anticipates that investors would hold a portion of the
market portfolio. Furthermore, one key conclusion of the CAPM, often known as the
efficient market’s hypothesis, is that individuals without specialized financial expertise
would be wise to purchase and keep diverse portfolios (Black, 1971).

2.1.8.4 Efficiency Hypothesis

The efficiency-structure (ES) hypothesis, which arose in response to criticism of the
CPM hypothesis, is an alternative theory. According to the efficiency hypothesis, the
17
link between market structure and company performance is described by the firm's
efficiency. Companies with better management or manufacturing technology have
lower expenses and hence bigger profits. Within the ES, there are two separate
approaches: the X-efficiency hypothesis and the Scale efficiency hypothesis. More
efficient organizations are more profitable, according to the X-efficiency method, since
they have lower expenses. Such enterprises tend to obtain bigger market shares, which
may result in higher levels of market concentration, but there is no direct link between
concentration and profitability. The scale approach stresses scale savings above
differences in management or manufacturing technologies. Through economies of
scale, larger enterprises may achieve lower unit costs and bigger profits. This allows
huge enterprises to obtain market shares, which may result in greater concentration and,
ultimately, profitability (Athanasoglou et al, 2006).

2.1.8.5 Commercial Loan Theory

According to the commercial loan or real bills doctrine hypothesis, which developed in
England during the 18th century, a commercial bank should only provide short-term
self-liquidating productive loans to businesses. This is because, because they acquire
liquidity, they can automatically liquidate themselves, and because they mature in the
short run and are for productive ambitions, there is no risk of them running to bad debts,
and such loans are high on productivity and earn income for banks. Self-liquidating
loans are those used to fund the production and development of commodities through
the many stages of manufacturing, storage, transportation, and distribution (Emmanuel,
1997). Certain flaws exist in the commercial loan theory. First, if a bank refuses to offer
a loan until the previous debt is returned, the dejected borrower will be forced to reduce
output, which will have a negative impact on economic activity. If all banks follow the
same rule, the money supply and costs in the community may be reduced. As a
consequence, current debtors are unable to return their debts on time. This theory, on
the other hand, holds that loans are self-liquidating under normal economic conditions.
However, if there is a depression, production and trade suffer, and the debtor is unable
to repay the debt at maturity. Furthermore, this approach ignores the reality that a bank's
liquidity is dependent on the salability of its liquid assets rather than on actual trade
bills. It guarantees security, liquidity, and profitability. In times of distress, the bank
does not need to rely on maturities. Finally, one of the theory's major flaws is that no

18
loan is self-liquidating. If the things bought are not sold to customers and remain with
the shop, the loan is not self-liquidating. (Guthua,2013).

2.1.8.6 Liquidity Preference Theory

Keynes initially developed liquidity preference theory, often known as liquidity
preference hypothesis (1989). According to this theory, investors require higher interest
rates on securities with long maturities because they would rather hold cash, which is
less risky. When an investment is more liquid, it is easier to sell or convert to cash with
minimal risk; additionally, the demand for money rises and falls in response to changes
in interest rates; when interest rates fall, people demand more money to hold until
interest rates rise, and vice versa. The implication of this theory is that firms should
maintain a high level of liquidity in order to not miss out on opportunities that promise
higher returns in the future, and firms should strive for balance through proper asset
and liability management in order to meet capital requirements and future higher return
investments. This idea is relevant because enterprises should maintain an optimum
amount of liquidity. This is due to the firm's ability to seize chances that offer bigger
profits. Pasinetti (1997) underlines that the business should strive for balance via good
financial management in order to fulfill future cash flow and capital requirements. As
a result, it is critical for the company to invest in monitoring and coordinating its assets
and obligations. This will allow the company to establish stability and hence absorb
risks and shocks more readily. Asset liability management is a critical component in
attaining bank efficiency and development.

2.2 Empirical Review

Obari (2015), did a descriptive study on the effects of asset and liability management
on profitability of commercial banks in Kenya for the year 2010 to 2014 by using
secondary data from published financial statement of 44 commercial banks in Kenya.
Author measures dependent variable which is profitability by ROA and uses as
independent variables namely bank size, capital structure and asset and liability
management position having these variable he reached a conclusion that there is a
statistically significant positive relationship between bank size and profitability and a
statistically significant negative relationship between capital structure and profitability.

19
But the main finding of obari that differ from others is asset and liability position has
an inverse relationship with profitability of commercial banks.

Shrestha, (2015) examined the effect of ALM on commercial banks’ profitability in

Nepal. ALM deals with the optimal investment of assets in view of meeting current
goals and future liabilities. The pooled OLS regression analysis result showed that all
assets, including fixed assets, mainly loans and advances as well as other assets affect
profitability positively, while all liabilities, mainly deposits, and other liabilities have
negative effect on commercial banks profitability. With regard to macroeconomic
variables, GDP and Inflation rate has negative effect on commercial banks profitability.
As a result, the study recommended that commercial banks should focus on increasing
public awareness to mobilize more saving and fixed deposits and this will enhance their
performance in provision of loans and advance to customers.

Ajibola, (2016) identified the best possible strategy to manage the composition of
financial institutions’, assets and liability management by controlling the various types
of business strategies to maximize profitability and increase performance. Annual
statistical bulletin and audited financial statement of selected Nigerian Deposit Money
Banks were used for the analysis which consist of time-series and cross-sectional data
were analyzed using descriptive statistics and a panel data regression analysis were used
to explore the relationship between AML and Financial performance, R2, and t-statistics
were computed. Findings showed that loans and advances are positively related to
return on equity especially when profitability is measured as proxy of financial
performance, while the liability variables are negatively related to the measure of bank
performance adopted in this study. It was concluded that asset management has
significant effect on financial performance of Nigerian deposit money banks.

Evans (2017) examined the asset liability management and the profitability of Listed
Banks in Ghana. For the purpose of determining the impact of asset liability
management on profitability, a random effect model was used. It was decided to utilize
the return on asset as the dependent variable, while valuing everything else as an
independent variable, including the value of all assets and liabilities, as well as
macroeconomic variables such as GDP and interest rate. Finally, the findings show that
total assets have a positive impact on bank profitability, whereas total liabilities,
20
primarily savings and fixed time deposits, have a negative impact on profitability.
However, the macroeconomic variable, interest rate, has no significant impact on bank
profitability.

Tee, (2017) assessed the impact of asset and liability management on the profitability
of listed banks in Ghana. Multiple linear regression has been applied by taking ROA as
the dependent variable, and TAS (the total asset) and TLT (the total liability)
representing the asset and liability mix of the banks as the independent variables
together with gross domestic product and interest rates also representing the economic
factors. The model used in this study hypothesized that the rate of return on earning
assets is positive, and the rate of cost on liabilities is negative. The robust panel
regression analysis with random effect result showed that total assets affect profitability
positively, while total liabilities mainly saving and fixed deposits and other liabilities
and credit balances have significant and negative effect on commercial banks
profitability. With regard to the macroeconomic variables, interest rate had no
significant effect on commercial banks profitability. As a result, the study recommends
that commercial banks should focus on increasing public awareness to mobilize more
savings and fixed deposits and this will enhance their performance in their provision of
loans and advances to customers.

Kumari & Rasika, (2018) explored the impact of the Assets and Liability Management
on Financial Performance of Licensed Commercial Banks in Sri Lanka. Return on
Assets, Return on Equity and Net Profit Ratio were used to measure the financial
performance. Under AML that effect financial performance was based on the CAMEL
approach which includes Capital Adequacy, Asset Quality, Management Efficiency,
Liquidity and Operational Efficiency. The findings reveal that Capital Adequacy,
Liquid Asset Ratio and Earnings have a significant positive impact on the financial
performance whereas Assets Quality and Management Efficiency have a negative
significant impact on the financial performance. It can be concluded that Assets and
Liability Management has a statistically significant effect on the financial performance
of the commercial banks. It is recommended to follow the policies that would encourage
revenue diversification, reduce operational costs, minimize credit risk and encourage
banks to minimize their liquidity holdings.

21
Darshan & Yogashree, (2019) examined the effect of ALM on financial performance
of AXIS Bank. The key objective of this study is to know the risk management
strategies and effect of asset-liability mix on financial performance of the bank. The
data is collected from secondary source and analytical research methodology is used
for this study. The correlation and regression analysis tools were taken on to set up the
relationship and outcome of the ALM on the financial performance of AXIS Bank. The
study found that the bank is exposed to changing interest rates, facing liquidity problem
for short term. It also found that the quality of assets affects the financial performance
of banks.

Owusu & Alhassan, (2020) looked at the link between profit and the Asset-Liability
Management (ALM) structure of 27 Ghanaian banks over the period 2007–2015.
According to the results, the primary premise of the SCA model is supported, and proof
that profitability is connected to balance sheet items in Ghana has been provided. The
report also provides evidence that local banks have generated a greater rate of return on
assets than foreign banks during the course of the study's duration. In addition, high
profit banks were shown to have a greater rate of return on assets as well as a higher
rate of cost on liabilities than low profit banks, according to the findings. When it comes
to bank management, these results are particularly valuable since they enable them to
identify the assets items that give the best return on bank profitability.

Rahman & Kolawole, (2020) examined the impact of Asset Liability Management
(ALM) on the financial performance of Nigerian deposit money banks using time series
annual data from 2005 to 2018. Asset liability management data were proxied by loan
and advance, non-performing loan, demand deposit, and borrowing, while performance
was proxied by return on asset and return on investment. The research discovered that
asset liability management has an impact on both the return on asset and the return on
investment of Nigeria's listed deposit money banks. It was also shown that loan and
advance, as well as bank size, have a favorable influence on return on asset, but
nonperforming loans have a negative effect on return on asset of Nigerian deposit
money institutions. The research also discovered that demand deposit, borrowing, and
bank size all have a favorable influence on deposit money bank return on investment in
Nigeria, however increasing bank size has a negative effect on deposit money bank
return on investment. The research finds that deposit money banks in Nigeria must pay
22
close attention to loan and advance, non-performing loan, demand deposit, and
borrowings in order to facilitate and ensure better asset liability management.

Al-Ahmadi & Shaheen, (2021) investigated the difficulties to guarantee that

commercial banks in Saudi Arabia provide the finest services possible The ALM
procedures and liquidity risk of a Saudi commercial bank were investigated. For the
five-year period from 2013 to 2017, eight banks listed on the Saudi Arabia Stock
Exchange were utilized as examples. This study was completed using a quantitative
manner. Return on asset (ROA), total assets, total debt, inflation, and interest rate were
the factors studied. Based on observations of eight banks listed on the Saudi Arabia
Stock Exchange from 2014 to 2017, findings revealed that liabilities had a negative
impact on bank profitability. Furthermore, the observation of eight banks listed on the
Saudi Arabia Stock Exchange from 2014 to 2017 revealed that liabilities had a negative
impact on bank profitability. Thus, the examination of the banks revealed that the
institutions' results were adequate, and the ALM process is handled with solid strategy.
Traditional perception on such financial intermediaries shows a simple logic that a bank
accept deposits with short term maturities from a large number of individuals and grants
loans with long term maturities to a small number of borrowers. These transformation
activities expose a bank to credit, interest rate, and liquidity risks.

Rahmi & Sumirat, (2021) analyzed the bank’s financial performance during Covid-19
pandemic and to examine the relationship between ALMA and profitability of
Commercial Banks in Indonesia as the short-term impact of COVID-19 in 2020. The
study focuses on commercial Bank based on Group of Business Activities (BUKU).
The methodology of this research is a quantitative and qualitative approach. The result
of the study indicates a statistically significant relationship for most asset and liability
management primary variables, such as Capital Adequacy Ratio (CAR), Cost to Income
Ratio (BOPO) and Loan to Deposit Ratio (LDR). Net Interest Margin (NIM) does not
have a significant relationship toward Return on Asset (ROA). This study will
contribute as an empirical analysis to highlight the relationship of capital adequacy,
operational efficiency, and liquidity management with profitability of commercial Bank
Indonesia.

23
2.3 Research Gap
The above-mentioned studies offer limited findings, more extensive testing, and
adjustment of necessary variables are needed in ordered to be more conclusive about
the assets-liability management and its effect on financial performance of commercial
banks in Nepal. Previous studies were directed to find the effect of the financial
performance analysis of different commercial banks. Presently, this study aims to
attempt to study about assets and liability management and its effect on profitability of
Nepalese commercial banks. The previous relevant literature related to banking
business has just reviewed to support the study. This study tries to fulfill the weakness
from previous studies related to this topic.

24
 CHAPTER III
RESEARCH METHODOLOGY
3.1 Research Design
A research design refers to plan that guide a researcher on how to organize the research
activities. A research design presents a framework or arrangement of action for a study.
A descriptive research design was adopted which provides a comprehensive picture of
a circumstance or a situation. The first purpose of research design is to enable the
researcher to answer research questions as validity, objectively, accurately and
economically as possible. Similarly, the second purpose of research design is to control
variance among sets up the instructions to the test of the relationship among variables.
It is a set of instructions to the researcher to collect and analyze the data in a systematic
manner. It suggests the researcher for what observations to make, how to make and how
to analyze the quantitative information that is gathered. So, to meet the objectives of
the study descriptive and explanatory research design was carried out.

3.2 Population and sample

The population refers to the industries of the same nature and its services and product
in general. A sample design refers to a plan to be used in obtaining a sample from a
population. It is a technique or procedure which a researcher adopts when selecting
sample items. Under the study constitutes the 27 commercial banks among them three
commercial banks i.e. HBL, EBL and NABIL, are selected using convinence sampling
method for the study as per the highest percentage of foreign investment to lowest
percentage.

3.3 Nature and sources of data

The study used the secondary data. Most of data required for the study were gathered
through the banks. The main sources of data for this study were the published financial
statement of banks last ten years data were collected. The study was mainly based on
the secondary data. Due to lack of personal access, the study was mainly depended upon
financial statement & balance sheet of sample commercial banks. The study employs
secondary data. The annual reports of relevant banks are collected from the respective

25
website, along with published Banking & financial statistics of Nepal Rastra Bank. Data
are collected for the period from 2011/12 to 2020/21.

3.4 Tools of Data Analysis

For analyzing the data, different kinds of tools were used. The analysis is done
according to the nature and quality of the available data. Some simple financial tools
were used and this study was based on the analysis of secondary data with the help of
different statistical tools like Statistical Package for the Social Science (SPSS).
Therefore, the data were collected accordingly and managed, analyzed and presented
in suitable tables, formats, diagrams, graphs and charts.

3.5 Framework for the Study

In order to meet the objective of the study, the proxies of independent variables are total
deposits, other liabilities, loan and advance, fixed assets, other assets and inflation.
Similarly, the dependent variable will return on assets (ROA) as profitability indicators.
The framework for the study was more clearly from the figure 3.1 below:
Figure 3.1
Framework for the Study

Independent Variables Dependent Variables

Total Deposits

Other Liabilities Profitability

Loan and Advance (ROA)

Fixed Assets

Other Assets

26
3.6 Analytical Model
The following model was used to study the effect of assets and liability management
on profitability of commercial banks. According to this model, effect of assets and
liability management on profitability is a function of total deposits, other liabilities,
loan and advances, fixed assts and other assets. Hence, the modes take the following
form:
ROA = 𝛽o + 𝛽1 TD+𝛽2 OL+𝛽3LA+𝛽4FA+𝛽4OA + e
Where,
ROA= Performance by the bank expressed as return on Assets
TD= Total Deposits
OL= Other Liabilities
LA= Loan and Advance
FA= Fixed Assets
OA= Other Assets
e = error terms

27
 CHAPTER IV
DATA PRESENTATION AND ANALYSIS
Presentation and analysis of data is very important stage of research study. Presentation
is the process of organizing the data in tabular form and placing the available data in
reasonable form. Analysis is done to portrait the financial figures in tabular or in
graphical form so that recommendation can be given for the remedial measure. Present
chapter will discuss the various aspects of assets and liability management and its effect
on profitability and their actual output so that recommendation can be given for
remedial purposes. For analysis balance sheet and income statement of financial year
2011/12 to 2020/21 has presented.

4.1 Financial Analysis

Financial analysis involves the methods of calculating and interpreting financial
position in terms of assets and liability management. The basic input to assets and
liabilities is the firm's income and expenditure statement and balance sheet for the
periods to be examined. The study consists of the following headings to analyze the
assets and liability management of the Himalayan Bank Limited, Everest Bank
Limited and Nabil Bank Limited.

4.1.1 Total Deposit HBL, EBL and NABIL

Bank deposits are sums of money that have been put in financial institutions for
protection. These deposits are placed into deposit accounts, such as savings accounts,
checking accounts, and money market accounts, among other types of accounts.
According to the terms and circumstances regulating the account agreement, the
account holder has the right to withdraw any monies that have been placed into the
account. It is important to note that the deposit itself is considered a responsibility
owing to the depositor by the bank. Bank deposits are defined as a liability rather than
as the real monies that have been put in a bank account. When someone establishes a
bank account and makes a cash deposit, he relinquishes his legal ownership of the
money, which becomes an asset of the bank in exchange for the money. As a result,
the account is considered a liability by the bank. Table 4.1 shows the total deposit for
HBL, EBL, and NABIL during the 10 years of the study period.

28
Table: 4.1
Total Deposits of HBL, EBL and NABIL
Rs in Million
Fiscal Year HBL EBL NABIL
2011/12 47,731 50,006 55,024
2012/13 53,072 57,720 63,610
2013/14 64,675 62,108 75,389
2014/15 73,538 83,094 104,238
2015/16 87,336 93,735 110,267
2016/17 92,891 95,094 118,684
2017/18 98,989 115,512 135,979
2018/19 109,387 129,568 162,954
2019/20 125,264 143,545 190,806
2020/21 141,021 160,220 223,474
Mean 89,390 99,060 124,043
S. D 28944.41 35637.91 52339.35
C.V 32.38% 35.98% 42.19%
(Source: Appendix i, ii, iii and Annual Reports of Respective Banks)
Table 4.1 is also presented in Figure 4.1 to show the total deposit during the ten years
of the study period.
250,000

200,000
Rs in Million

150,000

100,000

50,000

0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Fiscal Year

HBL EBL NABIL

Figure: 4.1 Total Deposits of HBL, EBL and NABIL

Table 4.1 and Figure 4.1 represents the total deposits of sample banks for ten years of
study period. Total deposit of all three sample banks is in increasing trend during the
ten years of the study period. The average deposit for sample banks is 89,390 million,
99,060 million and 124,043 million respectively for HBL, EBL and NABIL. On the
basis of average, NABIL hold the first position with highest average while HBL hold
the last position with lowest average. CV shows the consistency deposit growth of

29
sample commercial banks. HBL deposit growth is more consistent with lower CV i.e.,
32.38% than EBL i.e., 35.98% and NABIL i.e., 42.19%.

4.1.2 Other Liabilities of HBL, EBL and NABIL

Liabilities are obligations that a firm must meet but that are too little to be recorded
individually in the balance sheet. Other liabilities, on the other hand, are all of the
various commitments that a firm group together on its financial accounts. Other
obligations are tiny and negligible in comparison to the total amount of assets. In order
to simplify financial reporting, businesses often group modest obligations together into
a single category rather than stating each responsibility individually. Table 4.2 presents
the other liabilities of sample commercial banks during the ten years of the study period.
Table: 4.2
Other Liabilities of HBL, EBL and NABIL
Rs. In Million
Fiscal Year HBL EBL NABIL
2011/12 1,160 897 1,072
2012/13 1,259 1,084 1,071
2013/14 1,403 1,119 2,357
2014/15 1,372 7,609 1,468
2015/16 1,528 9,092 2,233
2016/17 1,861 8,206 2,552
2017/18 1,814 11,076 3,256
2018/19 2,777 18,460 4,302
2019/20 3,541 20,428 4,497
2020/21 3,091 27,048 6,703
Mean 1,981 10,502 2,951
S. D 802.94 8488.70 1693.45
C.V 40.54% 80.83% 57.38%
(Source: Appendix i, ii, iii and Annual Reports of Respective Banks)
Table 4.2 is also presented in Figure 4.2 to show the other liabilities of sample
commercial banks during the ten years of the study period.

30
 30,000

25,000

20,000
Rs in Million

15,000

10,000

5,000

0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Fiscal Year

HBL EBL NABIL

Figure: 4.2 Other Liabilities of HBL, EBL and NABIL

Table 4.2 and Figure 4.2 depict that, the highest and lowest other liabilities of HBL is
1,160 million and 3,541 million for fiscal year 2011/12 and 2019/20. The highest and
lowest other liabilities for EBL is of 897 million and 27,048 million for fiscal year
2011/12 and 2020/21 respectively. The highest and lowest other liabilities for NABIL
is 1,071 million and 6,703 million for fiscal year 2012/13 and 2020/21 respectively. The
average other liabilities for HBL, EBL and NABIL, is 1,981 million, 10,502 million and
2,951 respectively during ten years of the study period. The result indicates all banks
other liabilities is in fluctuating trend during the study period. Similarly, CV shows the
consistency of other liabilities of sample commercial banks. HBL is more consistent in
other liabilities with lower CV i.e., 40.54% than EBL i.e., 80.83% and NABIL i.e.,
57.38%. In order to simplify financial reporting, businesses often group modest
obligations together into a single category rather than stating each responsibility
individually. So, EBL has more tiny liabilities which is grouped in other liabilities
during the ten years of the study period.

4.1.3 Loan and Advances of HBL, EBL and NABIL

Loans and advances are generic descriptions of debt obligations that businesses owe
and that must be shown on their balance sheet as a component of total liabilities in
order to be considered debt obligations. In most cases, formal negotiated loans are
documented as "notes due" on a balance sheet, while advances or purchases made on
credit are reported as "accounts payable." Table 4.3 presents the loan and advance of
sample commercial banks during ten years of the study period.

31
Table: 4.3
Loan and Advances of HBL, EBL and NABIL
Rs. In Million
Fiscal Year HBL EBL NABIL
2011/12 35,968 36,617 41,606
2012/13 41,057 44,198 46,370
2013/14 45,320 47,572 54,692
2014/15 53,476 54,482 65,502
2015/16 67,746 67,955 76,106
2016/17 76,394 77,288 89,877
2017/18 86,160 94,182 115,415
2018/19 99,530 112,007 133,558
2019/20 109,092 119,068 153,890
2020/21 132,094 135,173 206,622
Mean 74,684 78,854 98,364
S. D 30367.13 32866.19 50805.25
C.V 40.66% 41.68% 51.65%
(Source: Appendix i, ii, iii and Annual Reports of Respective Banks)
Table 4.3 is also presented in Figure 4.3 to show the loan and advance during the ten
years of the study period.
250,000

200,000
Rs in Million

150,000

100,000

50,000

0
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Fiscal Year

HBL EBL NABIL

Figure: 4.3 Loan and Advances of HBL, EBL and NABIL

Table 4.3 and Figure 4.3 show the total loan and advance of selected commercial banks
over the ten-year study period. All three sample commercial banks loan and advance is
in increasing trend during the ten years of the study period. HBL has loan and advance
amount of 35,968 million in fiscal year 2011/12 and reach 132,094 million in fiscal
year 2020/21. EBL has loan and advance amount of 36,617 million in fiscal year
2011/12 and reach 135,173 million in fiscal year 2020/21. NABIL has loan and advance
amount of 41,606 million in fiscal year 2011/12 and reach 206,622 million in fiscal

32
year 2020/21. This result show that after increasing the total deposit of the bank loan
and advance of the bank is also increased which can balance the total assets and
liabilities of the bank. The average loan and advance of the HBL is 74,684 million
during the ten years of the study period while EBL has 78,854 million and NABIL has
98,364 million. CV shows the consistency of loan and advance growth of the bank.
Here HBL has consistent growth of loan and advance with lower CV i.e., 40.66% than
EBL with CV of 41.68% and NABIL with CV of 51.65%.

4.1.4 Fixed Assets of HBL, EBL and NABIL

In finance, a fixed asset is a long-term physical piece of property or equipment that a
company owns and employs in its operations in order to create money. The
conventional assumption concerning fixed assets is that they are anticipated to endure
for at least one year before being consumed or turned into cash, unless otherwise
stated. Consequently, businesses are allowed to depreciate the value of these assets to
account for normal wear and use. Property, plant, and equipment are the most frequent
types of fixed assets that show on a balance sheet (PP&E). Table 4.4 shows the fixed
assets of a sample of commercial banks during the course of the study's ten-year period
of investigation.
Table: 4.4
Fixed Assets of HBL, EBL and NABIL
Fiscal Year HBL EBL NABIL
2011/12 1,305 548 888
2012/13 1,309 631 872
2013/14 1,323 606 843
2014/15 1,321 630 812
2015/16 1,923 679 770
2016/17 2,176 728 791
2017/18 2,223 1,862 986
2018/19 2,392 2,116 1,052
2019/20 2,412 2,151 1,318
2020/21 2,519 2,768 1,693
Mean 1,890 1,272 1,003
S. D 493.86 806.81 277.44
C.V 26.13% 63.43% 27.67%
(Source: Appendix i, ii, iii and Annual Reports of Respective Banks)
Table 4.4 is also presented in Figure 4.4 to show the fixed assets of sample commercial
banks during the ten years of the study period.

33
 3,000

2,500

Rs in Million 2,000

1,500

1,000

500

0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Fiscal Year

HBL EBL NABIL

Figure: 4.4 Fixed Assets of HBL, EBL and NABIL

Table 4.4 and Figure 4.4 shows the fixed assets of sample commercial banks over the
ten-year study period. Fixed assets of HBL is in increasing trend for each fiscal year
during the study period while EBL is fixed assets is in increasing trend except fiscal
year 2013/14. For NABIL fixed assets is in increasing trend except fiscal year 2013/14
2014/15 and 2015/16. HBL has fixed assets of 1,305 million in fiscal year 2011/12 and
reach 2,519 million in fiscal year 2020/21. EBL has fixed assets of 548 million in fiscal
year 2011/12 and reach 2,768 million in fiscal year 2020/21. Similarly, NABIL has a
fixed assets of 888 million in fiscal year 2011/12 and reach 1,693 million in fiscal year
2020/21. Average fixed assets during the ten years of the study period for HBL is 1,890
million while average fixed assets for EBL is 1,272 million during the ten years of the
study period. Similarly, NABIL average fixed assets during the ten years of the study
period is 1,003 million. Results shows that all sample commercial banks purchase fixed
assets in each fiscal year. CV indicate consistency growth of fixed assets during the
study period. HBL fixed assets growth is more consistent with lower CV i.e., 26.13%
than EBL i.e., 63.43% and NABIL i.e., 27.67%.

4.1.5 Other Assets of HBL, EBL and NABIL

Other assets are a collection of accounts that are displayed as a distinct line item in
the assets area of the balance sheet, in addition to the accounts stated in the current
assets section. Listed under this category are small assets that do not readily fall
into any of the major asset categories, such as current assets or fixed assets, but are

34
still important. Table 4.5 shows the other assets of sample commercial banks during
the course of the study's ten-year period of investigation.
Table: 4.5
Other Assets of HBL, EBL and NABIL
Fiscal Year HBL EBL NABIL
2011/12 1,435 1,127 1,549
2012/13 1,418 1,237 2,150
2013/14 1,366 2,590 2,732
2014/15 1,439 3,821 2,372
2015/16 1,531 3,935 3,243
2016/17 1,841 5,146 3,979
2017/18 1,063 893 2,071
2018/19 1,075 973 2,591
2019/20 1,129 1,557 2,428
2020/21 1,718 1,154 3,535
Mean 1,402 2,243 2,665
S. D 246.90 1457.74 695.20
C.V 17.62% 64.98% 26.09%
(Source: Appendix i, ii, iii and Annual Reports of Respective Banks)
Table 4.5 is also presented in Figure 4.5 to show the other assets of sample commercial
banks during the ten years of the study period.
6,000

5,000

4,000
Rs in Million

3,000

2,000

1,000

0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Fiscal Year

HBL EBL NABIL

Figure: 4.5 Other Assets of HBL, EBL and NABIL

Table 4.5 and Figure 4.5 presents the other assets of HBL, EBL and NABIL during the
last ten fiscal years. Other assets of all three commercial banks is in fluctuating trend
during the study period. The average other assets of HBL is 1,402 million during the
study period while EBL has 2,243 million other assets during the study period. NABIL

35
has 2,665 million other assets during the study period. The other assets is consistent for
HBL with lower CV i.e., 17.62% than EBL i.e., 64.98% and NABIL i.e., 26.09%.

4.1.6 Return on Assets of HBL, EBL and NABIL

Profitability ratio is one of the main indicators to analyzing the financial
performance of a firm. It calculates to measure the earning performance and
operational efficiency of the bank. A bank should be able to produce adequate
profit on each rupee of investment, if investments do not generate sufficient profits,
it would be very difficult for the bank to cover operating expenses and interest
charges. The profitability of the bank should also be evaluated in term of its
investment in assets and in term of capital contributed by creditors. If the bank
is unable to earn satisfactory return of investment, its survival is threatened. This
ratio is related to net profit after tax (NPAT) and total assets. How efficiently are
the assets of a firm able to generate more profit are measured by this ratio is
calculated by dividing NPAT by Total Assets. This ratio provides the foundation
necessary for a company to deliver a good return on equity. Return on total assets
ratio of sample commercial banks for the period of 2010/11 to 2019/20 is
presented in the Table 4.6.
Table: 4.6
Return on Assets of HBL, EBL and NABIL
Fiscal Year HBL EBL NABIL
2011/12 1.73 1.95 2.69
2012/13 1.51 2.24 3.03
2013/14 1.30 2.20 2.66
2014/15 1.34 1.59 1.81
2015/16 1.94 1.52 2.21
2016/17 2.03 1.72 2.59
2017/18 1.61 1.78 2.47
2018/19 2.04 1.80 2.11
2019/20 1.63 1.36 1.46
2020/21 1.68 0.84 1.56
Mean 1.68 1.70 2.26
S. D 0.25 0.39 0.49
C.V 14.79% 22.94% 21.90%
(Source: Appendix i, ii, iii and Annual Reports of Respective Banks)
Table 4.6 is also presented in Figure 4.6 to show the trend of return on assets of three
sample commercial banks during the ten years of the study period.

36
 3.5

2.5
Ratio in %
2

1.5

0.5

0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Fiscal Year

HBL EBL NABIL

Figure: 4.6 Return on Assets of HBL, EBL and NABIL

Table 4.6 and Figure 4.6 shows the result of financial surplus to assets ratio or return
on assets of the sample banks during the ten years of the study period. The average ratio
for return on assets is 1.68%, 1.70% and 2.26% for HBL, EBL and NABIL respectively.
This indicates that the return on assets for the bank is satisfactory. Likewise, Standard
deviation for the HBL, EBL and NABIL are 0.25%, 0.39% and 0.49% respectively.
Coefficient of variation indicates the fluctuating trend or measuring the uniformity of
the banks which is 14.79%, 22.94% and 21.90% for HBL, EBL and NABIL
respectively. From the ten years’ analysis i.e., fiscal year 2011/12 to 2020/21 return on
assets is greater for NABIL which is 2.26% than of HBL which is 1.68% and EBL
which is 1.70% among the three sample banks. In same way, financial surplus to assets
ratio for sample banks are fluctuating trend. EBL is riskier that is higher CV 22.94%
than HBL which is 14.79% and NABIL which is 21.90%.

4.2 Statistical Tools

4.2.1 Descriptive Statistics
Table 4.7 presents a summary of the descriptive statistics of the dependent and
independent variables for three commercial banks during a ten-year period from
2011/12 to 2020/21, with a total of 30 observations. The data is based on a total of 30
observations. There are mean, standard deviation, number of observations, minimum
and maximum values for the independent and dependent variables in the model, as well
as other information. Total deposit, other liabilities, loan and advance, fixed assets and

37
other assets are the measure of banks’ assets and liabilities management are
independent variables under this study while return on assets was a dependent variable.
The statistics are from pooled data of 30 valid observations. N is the number of
observations. There are average indicators of variables calculated from the financial
accounts, which are shown below.
Table: 4.7
Descriptive Statistics
Variables N Minimum Maximum Mean SD
Total Deposit 30 47731.00 223474.00 104164.36 43496.76713
Other Liabilities 30 897.00 27048.00 5144.5333 6408.33049
Loan and Advance 30 35968.00 206622.00 83967.233 41118.46243
Fixed Assets 30 548.00 2768.00 1388.2333 691.37672
Other Assets 30 893.00 5146.00 2103.2667 1098.10432
Return on Assets 30 .84 3.03 1.8800 .48223
(Source: SPSS Output)
The mean of total deposit was 104,164.36 million and standard deviation 43,496.77
million. This means, sample commercial banks in Nepal, under the period of study, the
average deposit is 104,164.36 million with minimum 47,731 million and maximum of
223,474 million. Regarding the standard deviation, it means the value of deposit can
deviate from its mean to both sides by 43,496.77 million. The average other liabilities
were 5,144.53 million. The maximum value of other liabilities for the study year was
27,048 million whereas the minimum value was 897 million. Also, the standard
deviation was 6,408.33 million which indicate there was average variation from the
mean. Likewise, the loan and advance have a minimum value of 35,968 million and a
maximum of 206,622 million with a mean of 83,967.23 million. The average value of
the fixed assets variable as proxied was 1,388.23 million. The maximum value of other
assets for the study period was 5,146 million and a minimum value of 893 million. The
standard deviation was 1,098.10 million. The average profitability was 1.89%. This
means, on the average, for each one-rupee investment in the asset of commercial banks
there was 0.019 return. The maximum value of ROA for the year was 3.03 whereas the
minimum value was 0.84. Also, the standard deviation was 0.48 which indicate there
was low variation from the mean.

38
4.2.2 Coefficient of Correlation
Correlation is the statically tool, which measure the relationship between two or more
variables of a population or a sample. In other words, it describes the degree to which
one variable is linearly related to another. The coefficient of correlation measures the
degree of relationship between two sets of figures. Among the various methods of
finding out coefficient of correlation, Karl Pearson’s method is applied in the study.
The result of coefficient of correlation is always between +1 and -1 when r is +1, it
means there is perfect relationship between two variables and vice versa. When r is 0 it
means there is no relationship between two of them.
Table: 4.8
Correlation Analysis (N=30)
ROA TD OL LA FA OA
ROA Pearson Correlation 1
Sig. (2-tailed)
TD Pearson Correlation -.312 1
Sig. (2-tailed) .093
OL Pearson Correlation -.507** .469** 1
Sig. (2-tailed) .004 .009
LA Pearson Correlation -.311 .984** .457* 1
Sig. (2-tailed) .094 .000 .011
** *
FA Pearson Correlation -.477 .436 .449* .516** 1
Sig. (2-tailed) .008 .016 .013 .003
OA Pearson Correlation .156 .174 -.050 .102 -.549** 1
Sig. (2-tailed) .409 .359 .791 .593 .002
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
Table 4.8 shows the correlation relationship between profitability with total deposit,
other liabilities, loan and advance, fixed assets and other assets. The correlation
between profitability and total deposit was negatively correlated (-0.312) in opposite
direction which is negative degree of correlation. Negative correlation coefficients
indicate a reverse relationship, indicating that as increasing in total deposit result to
decreased in profitability of the bank. Similarly, the correlation between profitability
and other liabilities is negatively correlate i.e. (-0.507) which indicates that the increase
in other liabilities will decrease the profitability of sample commercial banks.
Correlation between profitability and loan and advance was negatively correlate i.e.
(-0.311) which the result can consider loan and advance and profitability are in opposite
direction, which means the increase in loan and advance, the profitability of the bank

39
was decreased. Profitability and fixed assets have a negative correlation (-0.477). It
means it should consider about profitability and fixed assets of the bank are
simultaneously decreased. Correlation between profitability and other assets was
positively correlate i.e. (0.156) which the result can consider other assets and
profitability are in same direction, which means the increase in other assets, the
profitability of the bank was increased. The Sig. (2-Tailed) value in Table 4.8 for total
deposit, loan and advance and other assets are more than .05. Because of this, it can
conclude that there is a statistically insignificant correlation between profitability of the
bank and total deposit, loan and advance and other assets. But in case of other liabilities
and fixed assets, it can be concluded that the p value for other liabilities and fixed assets
is lower than 0.05. So, it is statistically significant relationship with profitability.

4.2.3 Regression Analysis

When we take two or more independent variables and predict the value of dependent
variable through the appropriate regression time then the analysis is known as multiple
regression analysis. An attempt has been done to examine the relationship of
profitability with other key variables i.e., total deposit, other liabilities, loan and
advance, fixed assets and other assets.
Table 4.9
Model Summary
Std. Error of the
Model R R Square Adjusted R Square Estimate
a
1 .599 .359 .226 .42432
a. Predictors: (Constant), OA, OL, LA, FA, TD
Table 4.9 shows that the R square is 0.359 i.e., 35.9%. The regression result from R
square indicates that 35.9 percent of the variation in profitability is determined by these
independent variables i.e., total deposit, other liabilities, loan and advance, fixed assets
and other assets. This shows that dependent variable (Profitability) on commercial
banks, 35.9 percent explained by the independent variables used in this study and rests
64.1 percent are explained by other variables which were not included in this study.

40
Table 4.10
ANOVAa
Sum of
Model Squares df Mean Square F Sig.
1 Regression 2.423 5 .485 2.691 .046b
Residual 4.321 24 .180
Total 6.744 29
a. Dependent Variable: ROA
b. Predictors: (Constant), OA, OL, LA, FA, TD
Table 4.10 depict those 30 observations are used in the model and dependent variable
is profitability of commercial banks and independent variables are total deposit, other
liabilities, loan and advance, fixed assets and other assets. The f-static i.e., 2.691 is
significant at the level of 5 percent because p value is lower than 0.05 i.e., 0.046<0.05
which means that the independent variables were able to explain the dependent variable
Table 4.11
Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 2.628 .426 6.174 .000
TD -1.075E-5 .000 -.970 -.867 .395
OL -2.356E-5 .000 -.313 -1.550 .134
LA 1.227E-5 .000 1.047 .909 .372
FA .000 .000 -.491 -1.629 .116
OA -2.940E-5 .000 -.067 -.285 .778
a. Dependent Variable: ROA
Table 4.11 shows that total deposit has negative effect on dependent variable
profitability (ROA) and indicates statistically insignificant because p value for this
variable is higher than 0.05 i.e., 0.395>0.05. In the same way other liabilities has the
negative effect on profitability and also it is statistically insignificant because its
significance value is higher than 0.134>0.05. In the same way loan and advance has the
positive effect on profitability and it is statistically insignificant because its significance
value is higher than 0.05 i.e., 0.372>0.05. Fixed assets have no effect profitability
because its beta value is 0 and it is statistically insignificant because p value for this
variable is higher than 0.05. Finally, other assets have negative effect on profitability
of sample commercial banks and also it is insignificant at 5% level of significance
because its p value is higher than 0.05 i.e., 0.778>0.05.

41
4.3 Major Findings of the Study
 The average deposit for sample banks is 89,390 million, 99,060 million and
124,043 million respectively for HBL, EBL and NABIL. On the basis of
average, NABIL hold the first position with highest average while HBL hold
the last position with lowest average. CV shows the consistency deposit growth
of sample commercial banks. HBL deposit growth is more consistent with
lower CV i.e., 32.38% than EBL i.e., 35.98% and NABIL i.e., 42.19%.
 The average other liabilities for HBL, EBL and NABIL, is 1,981 million,
10,502 million and 2,951 respectively during ten years of the study period. The
result indicates all banks other liabilities is in fluctuating trend during the study
period. Similarly, CV shows the consistency of other liabilities of sample
commercial banks. HBL is more consistent in other liabilities with lower CV
i.e., 40.54% than EBL i.e., 80.83% and NABIL i.e., 57.38%.
 The average loan and advance of the HBL is 74,684 million during the ten years
of the study period while EBL has 78,854 million and NABIL has 98,364
million. CV shows the consistency of loan and advance growth of the bank.
Here HBL has consistent growth of loan and advance with lower CV i.e.,
40.66% than EBL with CV of 41.68% and NABIL with CV of 51.65%.
 Average fixed assets during the ten years of the study period for HBL is 1,890
million while average fixed assets for EBL is 1,272 million during the ten years
of the study period. Similarly, NABIL average fixed assets during the ten years
of the study period is 1,003 million. Results shows that all sample commercial
banks purchase fixed assets in each fiscal year. CV indicate consistency growth
of fixed assets during the study period. HBL fixed assets growth is more
consistent with lower CV i.e., 26.13% than EBL i.e., 63.43% and NABIL i.e.,
27.67%.
 The average other assets of HBL is 1,402 million during the study period while
EBL has 2,243 million other assets during the study period. NABIL has 2,665
million other assets during the study period. The other assets is consistent for
HBL with lower CV i.e., 17.62% than EBL i.e., 64.98% and NABIL i.e.,
26.09%.

42
 The average ratio for return on assets is 1.68%, 1.70% and 2.26% for HBL, EBL
and NABIL respectively. This indicates that the return on assets for the bank is
satisfactory. Likewise, Standard deviation for the HBL, EBL and NABIL are
0.25%, 0.39% and 0.49% respectively. Coefficient of variation indicates the
fluctuating trend or measuring the uniformity of the banks which is 14.79%,
22.94% and 21.90% for HBL, EBL and NABIL respectively.
 The mean of total deposit was 104,164.36 million and standard deviation
43,496.77 million. This means, sample commercial banks in Nepal, under the
period of study, the average deposit is 104,164.36 million with minimum 47,731
million and maximum of 223,474 million.
 The average other liabilities were 5,144.53 million. The maximum value of
other liabilities for the study year was 27,048 million whereas the minimum
value was 897 million. Also, the standard deviation was 6,408.33 million which
indicate there was average variation from the mean.
 The loan and advance have a minimum value of 35,968 million and a maximum
of 206,622 million with a mean of 83,967.23 million. The average value of the
fixed assets variable as proxied was 1,388.23 million.
 The maximum value of other assets for the study period was 5,146 million and
a minimum value of 893 million. The standard deviation was 1,098.10 million.
 The average profitability was 1.89%. This means, on the average, for each one-
rupee investment in the asset of commercial banks there was 0.019 return. The
maximum value of ROA for the year was 3.03 whereas the minimum value was
0.84. Also, the standard deviation was 0.48 which indicate there was low
variation from the mean.
 The correlation between profitability and total deposit was negatively correlated
(-0.312) in opposite direction which is negative degree of correlation. Negative
correlation coefficients indicate a reverse relationship, indicating that as
increasing in total deposit result to decreased in profitability of the bank.
 The correlation between profitability and other liabilities is negatively correlate
i.e. (-0.507) which indicates that the increase in other liabilities will decrease
the profitability of sample commercial banks.
 Correlation between profitability and loan and advance was negatively correlate
i.e. (-0.311) which the result can consider loan and advance and profitability are

43
 in opposite direction, which means the increase in loan and advance, the
profitability of the bank was decreased.
 Profitability and fixed assets have a negative correlation (-0.477). It means it
should consider about profitability and fixed assets of the bank are
simultaneously decreased.
 Correlation between profitability and other assets was positively correlate i.e.
(0.156) which the result can consider other assets and profitability are in same
direction, which means the increase in other assets, the profitability of the bank
was increased.
 The Sig. (2-Tailed) value in Table 4.8 for total deposit, loan and advance and
other assets are more than .05. Because of this, it can conclude that there is a
statistically insignificant correlation between profitability of the bank and total
deposit, loan and advance and other assets. But in case of other liabilities and
fixed assets, it can be concluded that the p value for other liabilities and fixed
assets is lower than 0.05. So, it is statistically significant relationship with
profitability.
 The regression result from R square indicates that dependent variable
(Profitability) on commercial banks, 35.9 percent explained by the independent
variables used in this study and rests 64.1 percent are explained by other
variables which were not included in this study.
 The f-static i.e., 2.691 is significant at the level of 5 percent because p value is
lower than 0.05 i.e., 0.046<0.05 which means that the independent variables
were able to explain the dependent variable
 Total deposit has negative effect on dependent variable profitability (ROA) and
indicates statistically insignificant because p value for this variable is higher
than 0.05 i.e., 0.395>0.05. This indicates that when the total deposit of sample
commercial banks was increased then the profitability will be decreased.
 Other liabilities have the negative effect on profitability and also it is
statistically insignificant because its significance value is higher than
0.134>0.05.
 Loan and advance have the positive effect on profitability and it is statistically
insignificant because its significance value is higher than 0.05 i.e., 0.372>0.05.

44
 Fixed assets have no effect profitability because its beta value is 0 and it is
statistically insignificant because p value for this variable is higher than 0.05.
 Other assets have negative effect on profitability of sample commercial banks
and also it is insignificant at 5% level of significance because its p value is
higher than 0.05 i.e., 0.778>0.05.

45
 CHAPTER V
SUMMARY, CONCLUSION & RECOMMENDATION

5.1 Summary
When it comes to the formation and operation of any business or not-for-profit
organization, the source of financing is the most important factor to consider. Profit-
oriented entities often get these sources via ownership capital, public capital through
the issuance of shares, and through financial institutions such as banks, which provide
loans, overdrafts, and other associated services in exchange for their capital
contributions. Banks are important entities in the financial industry. Customers' needs
are taken into consideration as the bank participates in the process of gathering
dispersed money and assisting in its mobilization in various areas. Individuals’ saving
habits are encouraged by the bank, which in turn encourages other people to invest in
their businesses. A banking loan may be used to fund investments in the industrial
sector, the commercial sector, the manufacturing sector, and trade and commerce. The
bank also contributes to the development of international commerce by acting as a
middleman in the export and import of goods. Banks contribute to the strengthening of
the national economy in this manner.

In the last two decades, the financial scenario of Nepal has dramatically changed. The
vast development industrial sector or due to the presence of different kinds of risk in
the economy brings so many banking institutions from private as well as public
sector in Nepal. The present study is a conclusion-oriented study of effect of assets
and liability management on profitability HBL, EBL and NABIL. The study had
been undertaken to examine and evaluate the effect of assets and liability
management on profitability of HBL, EBL and NABIL. The researcher had used
the financial tools to make this study more effective and informative. This study
has covered ten years' data from 2011/12 to 2020/21 of HBL, EBL and NABIL.
Return on asset was taken as dependent variable to measure profitability and five
independent variables are used these are total deposit, other liabilities, loan and
advance, fixed assets and other assets. Random effect model was used to show the
variables which are affect profitability of private commercial banks in Nepal weather
positively or negatively. In this section, the researcher has tried to summarize the

46
effect of assets and liability management on profitability of sample commercial
banks.

Assets and liability management analysis is the key tools for financial decision and
starting for making plan before using sophisticated forecasting and budgeting. The
study has used different financial indicators namely total deposit, other liabilities,
loan and advance, fixed assets and other assets and statistical tools namely,
correlation of coefficient, determination, t –test for the study of the sample banks.

With regard to the relationship between the selected variable to profitability measures
of Return on Asset (ROA) total deposit, other liabilities, loan and advance and fixed
assets had negative relation with the return on asset of banks and positive relation with
other assets. These indicate that total deposit, other liabilities, loan and advance and
fixed assets had inverse relation with the ROA. But other assets had direct relation with
ROA. Fixed assets and other assets was significant at 5%. As to the explanatory power
of the regression output 35.9% of the change in the return on asset can be explained by
the selected variable. Generally, the study finds that all factors related to ALM
significantly affect Nepalese private banks profitability for the last 10 years

5.2 Conclusion
On the basis of entire research study some conclusions have been deduced. This study
particularly deals about the assets and liability management and its effect on
profitability of commercial banks in Nepal. Certain conclusion has been derived after
the financial as well as statistical tools have been measured on behalf of different aspect
of the s and liability management and its effect on profitability of the concerned bank
under study. After conducting the s and liability management and its effect on
profitability of HBL, EBL and NABIL, covering the study period of 2011/12 to
2020/21, the conclusions have been drawn from the study.

Based on the findings, following conclusions have drawn as the concluding framework
of the study on s and liability management and its effect on profitability analysis.
Profitability and total deposit were inversely associated in the opposite direction,
indicating a negative degree of association. Negative correlation coefficients imply a

47
reversal of the connection, suggesting that as total deposits increase, the bank's
profitability decreases. Similarly, the connection between profitability and other
liabilities is inverse, implying that a rise in other liabilities would reduce the
profitability of the sample commercial banks. The correlation between profitability and
loan and advance was negative, indicating that loan and advance and profitability are
inversely related, implying that as loan and advance increased, the bank's profitability
declined. Profitability and fixed assets have an inverse relationship. It indicates that the
bank's profitability and fixed assets should be considered at the same time. The
correlation between profitability and other assets was positive, indicating that other
assets and profitability are moving in the same direction, implying that as other assets
grow, so does the bank's profitability. The total deposit, loan, and advance, as well as
other assets, exceeds.05. As a result, it is possible to conclude that there is a statistically
insignificant correlation between the bank's profitability and total deposit, loan and
advance, and other assets. However, in the case of other obligations and fixed assets, it
is possible to infer that the p value is less than 0.05. As a result, there is a statistically
significant association between profitability and this factor.

According to the regression results, the dependent variable (Profitability) on

commercial banks is explained in 35.9 percent by the independent factors utilized in
this research, and the remaining 64.1 percent is explained by other variables not
included in this study. Total deposit has a negative influence on the dependent variable
profitability (ROA), although this effect is statistically negligible. This suggests that
increasing the total deposit of the sample commercial banks reduces profitability.
Similarly, other liabilities have a negative impact on profitability and are statistically
negligible. Similarly, loan and advance have a beneficial influence on profitability that
is statistically negligible. Fixed assets have no influence on profitability since their beta
value is zero, and they are statistically insignificant because their p value is greater than
0.05. Finally, other assets have a negative impact on the profitability of the sample
commercial banks, although the impact is minor.

48
5.3 Recommendations
Based on the major finding and conclusion of the study of assets and liability
management and its effect on profitability of concerned sample bank some suggestions
made. To following points are highlighted to put forward for the further improvement
of all commercial banks.
 Total deposit of sample commercial banks is in increasing trend during the study
period. So, it is recommended that all sample banks should maintain the increasing
trend to maintain the liquidity which is directly related to profitability of commercial
banks.
 Other liabilities of EBL is too high as compare to HBL and NABIL. So, it is
recommended to EBL to maintain the tiny liabilities properly which comes into the
group of other liabilities.
 Loan and advance of all sample commercial banks is in increasing trend. So, all
banks are recommended to maintain the trend to increase the profitability of
commercial banks.
 The earning quality ratios of banks like ROA are in increasing trend. So, all banks
recommended that to increase more profit of the bank should minimized its
operating cost by increasing the operating efficiency of its employees.
 Finally, this study is the impact of asset liability management on profitability (RoA)
of private commercial banks in Nepal Therefore; the researcher would like to
recommend future researchers to include the impact of macroeconomic factors
variables such as GDP, inflation related, government regulation and policy in order
to obtain reliable results.

49
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 APPENDIX - I
For HBL
Fiscal Total Deposit Other Liabilities Loan and Advance
Year
X (X -X̄)2 X (X -X̄)2 X (X -X̄)2
2011/12 47,731 1735472281 1,160 674041 35,968 1498928656
2012/13 53,072 1318997124 1,259 521284 41,057 1130775129
2013/14 64,675 610831225 1,403 334084 45,320 862244496
`2014/15 73,538 251285904 1,372 370881 53,476 449779264
2015/16 87,336 4218916 1,528 205209 67,746 48135844
2016/17 92,891 12257001 1,861 14400 76,394 2924100
2017/18 98,989 92140801 1,814 27889 86,160 131698576
2018/19 109,387 399880009 2,777 633616 99,530 617323716
2019/20 125,264 1286943876 3,541 2433600 109,092 1183910464
2020/21 141,021 2665760161 3,091 1232100 132,094 3295908100
Total 893,904 8377787298 19,806 6447104 746,837 9221628345
Mean 89,390 1,981 74,684
S.D. 28944.41 802.94 30367.13
C.V. 32.38% 40.54% 40.66%

Fiscal Fixed Assets Other Assets Return on Assets

Year
X (X -X̄)2 X (X -X̄)2 X (X -X̄)2
2011/12 1,305 342225 1,435 1089 1.73 0.0025
2012/13 1,309 337561 1,418 256 1.51 0.0289
2013/14 1,323 321489 1,366 1296 1.3 0.1444
2014/15 1,321 323761 1,439 1369 1.34 0.1156
2015/16 1,923 1089 1,531 16641 1.94 0.0676
2016/17 2,176 81796 1,841 192721 2.03 0.1225
2017/18 2,223 110889 1,063 114921 1.61 0.0049
2018/19 2,392 252004 1,075 106929 2.04 0.1296
2019/20 2,412 272484 1,129 74529 1.63 0.0025
2020/21 2,519 395641 1,718 99856 1.68 0
Total 18,903 2438939 14,015 609607 16.81 0.6185
Mean 1,890 1,402 1.68
S.D. 493.86 246.90 0.25
C.V. 26.13% 17.62% 14.79%
 APPENDIX - II
For EBL
Fiscal Total Deposit Other Liabilities Loan and Advance
Year
X (X -X̄)2 X (X -X̄)2 X (X -X̄)2
2011/12 50,006 2406294916 897 92256025 36,617 1783964169
2012/13 57,720 1708995600 1,084 88698724 44,198 1201038336
2013/14 62,108 1365450304 1,119 88040689 47,572 978563524
2014/15 83,094 254913156 7,609 8369449 54,482 593994384
2015/16 93,735 28355625 9,092 1988100 67,955 118788201
2016/17 95,094 15729156 8,206 5271616 77,288 2452356
2017/18 115,512 270668304 11,076 329476 94,182 234947584
2018/19 129,568 930738064 18,460 63329764 112,007 1099121409
2019/20 143,545 1978915225 20,428 98525476 119,068 1617165796
2020/21 160,220 3740545600 27,048 273770116 135,173 3171829761
Total 990,602 12700605950 105019 720579435 788,542 10801865520
Mean 99,060 10,502 78,854
S.D. 35637.91 8488.70 32866.19
C.V. 35.98% 80.83% 41.68%

Fiscal Fixed Assets Other Assets Return on Assets

Year
X (X -X̄)2 X (X -X̄)2 X (X -X̄)2
2011/12 548 524176 1,127 1245456 1.95 0.0625
2012/13 631 410881 1,237 1012036 2.24 0.2916
2013/14 606 443556 2,590 120409 2.2 0.25
2014/15 630 412164 3,821 2490084 1.59 0.0121
2015/16 679 351649 3,935 2862864 1.52 0.0324
2016/17 728 295936 5,146 8427409 1.72 0.0004
2017/18 1,862 348100 893 1822500 1.78 0.0064
2018/19 2,116 712336 973 1612900 1.8 0.01
2019/20 2,151 772641 1,557 470596 1.36 0.1156
2020/21 2,768 2238016 1,154 1185921 0.84 0.7396
Total 12719 6509455 22,433 21250175 17 1.5206
Mean 1,272 2,243 1.70
S.D. 806.81 1457.74 0.39
C.V. 63.43% 64.98% 22.94%
 APPENDIX - III
For NABIL
Fiscal Total Deposit Other Liabilities Loan and Advance
Year
X (X -X̄)2 X (X -X̄)2 X (X -X̄)2
2011/12 55,024 4763622361 1,072 3530641 41,606 3221470564
2012/13 63,610 3652147489 1,071 3534400 46,370 2703376036
2013/14 75,389 2367211716 2,357 352836 54,692 1907243584
2014/15 104,238 392238025 1,468 2199289 65,502 1079911044
2015/16 110,267 189778176 2,233 515524 76,106 495418564
2016/17 118,684 28718881 2,552 159201 89,877 72029169
2017/18 135,979 142468096 3,256 93025 115,415 290736601
2018/19 162,954 1514065921 4,302 1825201 133,558 1238617636
2019/20 190,806 4457298169 4,497 2390116 153,890 3083136676
2020/21 223,474 9886523761 6,703 14077504 206,622 11719794564
Total 1,240,425 27394072595 29,511 28677737 983,638 25811734438
Mean 124,043 2,951 98,364
S.D. 52339.35 1693.45 50805.25
C.V. 42.19% 57.38% 51.65%

Fiscal Fixed Assets Other Assets Return on Assets

Year
X (X -X̄)2 X (X -X̄)2 X (X -X̄)2
2011/12 888 13225 1,549 1245456 2.69 0.1849
2012/13 872 17161 2,150 265225 3.03 0.5929
2013/14 843 25600 2,732 4489 2.66 0.16
2014/15 812 36481 2,372 85849 1.81 0.2025
2015/16 770 54289 3,243 334084 2.21 0.0025
2016/17 791 44944 3,979 1726596 2.59 0.1089
2017/18 986 289 2,071 352836 2.47 0.0441
2018/19 1,052 2401 2,591 5476 2.11 0.0225
2019/20 1,318 99225 2,428 56169 1.46 0.64
2020/21 1,693 476100 3,535 756900 1.56 0.49
Total 10025 769715 26,650 4833080 22.59 2.4483
Mean 1,003 2,665 2.26
S.D. 277.44 695.20 0.49
C.V. 27.67% 26.09% 21.90%