Background Finance is the backbone of any organization. No organization can sustain and develop without finance. The organizations with the sound financial structure can compete and lead the market. Economic growth of the nation depends on the availability, mobilization and utilization of the financial resources. Financial institutions play the major role for economic development of any country. Financial sector primarily indicates the banking sector. So, there is a very much dependence on the banking sector for the overall economic development of any nation.
Number of banks are increasing rapidly in recent years in Nepal. This is a good symptom for the development of economy in Nepal. This is a positive impact of the financial reform of the country. Generally, a word bank indicates a commercial bank. Authors have defined in various aspects about bank. A modern bank performs number of functions; it has become very difficult to give a precise definition of a bank. Some of the important and commonly used definitions of a bank are given below. Ordinary banking business consists of changing cash for bank deposits and bank deposits for cash; transferring bank deposits from one person to corporation (one depositor) to another; giving bank deposits in exchange for bills of exchange, government bonds, secured or unsecured promises of businessmen to repay. ”[1] “A commercial bank is one which exchange money, deposits money, accepts deposits, grants loans and performs commercial banking functions and which is not a bank meant for cooperative, agriculture industry or for specific purpose. [2] “A commercial banker is a dealer in money and in substitutes for money, such as checks or bill of exchange. He also provides a variety of financial service. ”[3] “A commercial bank is essentially a dealer in money. It is a banking institution that accepts the demand and time deposits from business institutions and individuals and engages in both business and consumer lending. ”[4] “Finance is the branch, which looks after the money matter of the entire organization.
Every organization needs a sound financial system to carry out its activities efficiently because each and every managerial decision -making is based on financial analysis. It involves acquisition, utilization, control and administration of funds needed for the business. Managerial finance is an interesting, exciting and dynamic area of study. Finance is concerned with the institution, markets and instrument involved in the efficient transfer of money between individual business organization and governments.
The finance is concerned with the conversion of capital funds to meet the finance need of business organization. Financial management leads to the decision making most skillfully. Finance has become an important branch of economy for e. g. share market. Even in the least developed country like Nepal, stock market has become one of the important parts the national economy. Stock market is the important part of the finance that encourages the development of the country’s financial sector.
It is assumed that in he capitalistic economy expansion of stock market represents the development of the country’s financial sector and it speeds up the nation’s growth. Capital market refers to the market for long-term debt and equity shares. It can be further divided into primary market and secondary market. Primary market is the market where the shares are offered to general public for the first time and in the secondary market the securities that have already been purchased by the public in primary market are traded again and again.
Lord Keynes was the first person to express stock market as ‘a game of professional investment’. The main purpose is to win or to make lots of money. Success comes to those; treat it as a game to be played not for profit but also for enjoyment and sports. Stock market provides opportunities and threatens. Opportunity for the well informed people having better knowledge of market realities and danger for the unknown people. The Nepalese capital market has been passing through the transactional phase over the past few decades. There are various inconsistencies and hindrances on the way of smooth functioning of the market.
Not only institutional bottlenecks are hampering the growth of capital market, but also at times the existing imperfect national characteristics phenomenon deeply noted in socio- economic system has under mined proper trading in security market. The arbitrarily quoting of the stock price without fundamental and technical justification made securities market not to look after the protection of investors. ”[5] Reward for the investment is called return. Profit is also regarded as return. Investors only invest their money in those sectors where they can get higher return.
Investors are interested in investing in high yielding stocks. Future is uncertain. Risk refers to the chance of occurrences of unfavorable conditions on the investment. The expectation of the investor may not be fulfilled which can be said as risk. The modern banking system was introduced in Nepal with the establishment of Nepal Bank Ltd in 1937. The financial scenario has changed with the introduction of joint venture banks in 1984 when the first joint venture bank i. e. Nabil Bank was established. Seventeen commercial banks are operating on the end of Shawn, 2061 in Nepal.
Among them, five are the joint venture banks. In Nepalese context, financial institutions involved in capital market are Nepal Rastra Bank, Commercial Bank, Agriculture Development Bank, Nepal Industrial Development Trust, Co-operative Agencies, Rural Development Banks, Securities Board, NEPSE, Rastriya Beema Sansthan, Insurance Companies, Financial Institutions, etc. 1. 1. 1 Standard Chartered Bank Nepal Limited Standard Chartered Bank Nepal Limited has been in operation in Nepal since 1987 when it was initially registered as a joint-venture operation.
Today the Bank is an integral part of Standard Chartered Group who has 75% ownership in the company with 25% shares owned by the Nepalese public. The Bank enjoys the status the largest international bank currently operating in Nepal. Standard Chartered Group employs 30,000 people in over 500 locations in more than 50 countries in the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. It is one of the world’s most international banks, with a management team comprising 79 nationalities.
The Bank is trusted across its network for its standard of governance and its commitment to making a difference in the communities in which it operates. An integral part of the only international banking Group currently operating in Nepal, the Bank enjoys an impeccable reputation of a leading financial institution in the country. With 11 points of representation (7 Branches) and 9 ATMs across the Kingdom and with over 300 local staff, Standard Chartered Bank Nepal Ltd. is in a position to service its customers through a large domestic network.
In addition to which the global network of Standard Chartered Group gives the Bank the unique opportunity to provide truly international banking in Nepal. Standard Chartered Bank Nepal Limited, offers a full range of banking products and services in Wholesale and Consumer banking, catering to a wide range of customers from individuals, to mid-market local corporates to multinationals and large public sector companies, as well as embassies, aid agencies, airlines, hotels and government corporations. The Bank has been the pioneer in introducing ‘customer focused’ roducts and services in the country and aspires to continue to be a leader in introducing new products and highest level of service delivery. It is the first Bank in Nepal that has implemented the Anti-Money Laundering policy and applied the ‘Know Your Customer’ procedure on all the customer accounts. 1. 1. 2 Nepal Investment Bank Limited Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd. , was established in 1986 as a joint venture between Nepalese and French partners. The French partner (holding 50% of the capital of NIBL) was Credit Agricole Indosuez, a subsidiary of one the largest banking group in the world.
With the decision of Credit Agricole Indosuez to divest, a group of companies comprising of bankers, professionals, industrialists and businessmen, has acquired on April 2002 the 50% shareholding of Credit Agricole Indosuez in Nepal Indosuez Bank Ltd. The name of the bank has been changed to Nepal Investment Bank Ltd. upon approval of banks Annual General Meeting, Nepal Rastra Bank and Company Registrars office with the following shareholding structure. •A group of companies holding 50% of the capital •Rashtriya Banijya Bank holding 15% of the Capital. Rashtriya Beema Sansthan holding the same percentage. •The remaining 20% being held by the General Public (which means that NIBL is a Company listed on the Nepal Stock Exchange). 1. 1. 3 Nepal Stock Exchange Limited The market where outstanding securities are traded is referred to use the secondary market of more popularly the stock market. There is only one stock exchange is call Nepal Stock Exchange Limited, where govt. and corporate sectors securities are traded. The history of security market began with the floatation of shares by Biratnagar Jute Mills Ltd. nd Nepal Bank Ltd. in 1937. Introduction of the Company Act in 1964, the first issuance of government bond in 1964 and the establishment of securities exchange centre Ltd. in 1976 were other significant development resulting to capital markets. Securities Exchange Centre was established with an objective of facilitating and promoting the growth of capital markets. Before conversion into stock exchange it was only the capital market institution undertaking the job of brokering, underwriting, managing public issue, market making for government bonds and other financial services.
His Majesty’s Government, under program initiated to reform capital market, converted Securities Exchange Centre into Nepal Stock Exchange in 1993. Nepal Stock Exchange, in short NEPSE is a non-profit making organization, operating under Securities Exchange Act, 1983. The basic objective of NEPSE is to impart free marketability and liquidity to the government and corporate securities by facilitating transactions in its trading floor through market intermediaries such as broker, market makers, etc. His Majesty’s Government, Nepal Rastra Bank, Nepal Industrial Development Corporation and licensed Members are the shareholders of the NEPSE.
NEPSE opened its trading floor on January 13th, 1994 through licensed members. The Securities Exchange Act 1983 has provisioned the Board of Director of NEPSE consists nine directors. Six directors are to be nominated by HMG/N and different institutional investors where as two are appointed from the licensed members and the general manager of the NEPSE in the Ex-officio Director of the board. The authorized capital of the exchange is 50 million. The issued capital is Rs. 30 million of this Rs. 26. 39 million is subscribed by HMG/N Nepal Rastra Bank, Nepal Industrial Development Corporation and licensed members. . 2Statement of the Problems The statement of the problems of this study is mentioned as follows: 1. What are the risks and returns of SCBNL and NIBL? 2. What is the risk and return of NEPSE? 3. What is the co-variance between SCBNL’s return and NIBL’s return? 4. What is the correlation co-efficient between SCBNL’s return and NIBL’s return? 1. 3Objectives of the Study The major objectives of the study are presented as follows: 1. To find out the risks and returns of SCBNL and NIBL. 2. To find out the risks and returns of NEPSE. 3. To find out the co-variance between SCBNL return and NIBL return. . To find out the correlation co-efficient between SCBNL return and NIBL return. 1. 4Importance of the Study Importance of the study is as follows: 1. Knowledge about the financial status of SCBNL and NIBL. 2. Research will benefit the related banks. 3. Helps to the new researcher. 4. Library asset for common use. 1. 5Limitation of the Study The limitations of the study are as follows: 1. Data are collected from secondary sources. Therefore analysis and interpretation are dependent on secondary sources. 2. This study covers 5 years period. 3. Return has been calculated on annual basis. . Limited time and resources. 5. Only two banks SCBNL and NIBL are taken for the study. Chapter II Project Work Methodology 2. 1Introduction Two commercial banks SCBNL and NIBL are taken for the study, which covers five years period. Various data analysis tools are used for measuring risk and return of the related banks. 2. 2 Sources of Data The data are collected from secondary sources that are annual report of related banks, NEPSE trading report, annual report of SEBO/N and websites of related banks, NEPSE and SEBO/N are the sources of collecting data. 2. 3 Data Processing Procedure
Collected data are arranged and presented in a systematic way to yield meaningful information. It is further verified and simplified for analysis. Moreover, data and information, so gathered are to be checked, edited and tabulated in such ways that provide convenience for computation and interpretation. Relevant data are presented in tables. Only the data that are relevant to the study have been presented in tabular and chart forms in the simple way and unnecessary data are excluded. 2. 4 Data Analysis Tools Following tools are used for analyzing data. Return Analysis: 2. 4. 1Rate of Return
Common way to measure security return is the holding period return (HPR). The HPR measures the total return from an investment over a specific period of time. The formula for finding the HPR on investment j during the period t, HPRj,t is defined as: Symbolically, [pic] Where, [pic] = the price of the investment at the end of the period on stock j. [pic] = the price of the investment at the beginning of the period on stock j. [pic] = cash received during the period on stock j. 2. 4. 2 Mean Rate of Return Mean rate of return is obtained by computing the arithmetic mean of the return:
Symbolically, [pic] Where, [pic] = mean rate of return of stock j. n = number of years that the return is taken. [pic]= sum of rate of return of stock j. Risk Analysis: 2. 4. 3 Standard Deviation Standard deviation is a statistical tool, which is widely used to measure the total risk of the asset. The standard deviation “[pic]” can be given as: Symbolically, [pic] Where, [pic] = the standard deviation of returns on stock j during the time period n. n = no. of the years. [pic] = return of jth stock. [pic] = mean rate of return of stock j. 4. Co-efficient of Variation
If absolute risk is measured by the standard deviation then risk per unit of expected return can be measured by the co-efficient of variation (CV. ). It is given as: Symbolically, [pic] Where, [pic] = standard deviation of stock j. [pic] = mean return of stock j. [pic] = co-efficient of variation of stock j. 5. Beta Co-efficient Beta measures market sensitivity of stock. Higher beta indicates high sensitivity with the market movement and situation. Beta is a systematic risk, which can’t be eliminated through the means of diversification. Symbolically, [pic] Where, [pic] = beta co-efficient of stock j. pic] = the covariance of return of j asset with the market. [pic] = variance of market return 6. Co-variance Co-variance is a measure that combines the volatility of a stock’s returns with the tendency of those returns to move up or down at the same time other stocks returns move up or down. Co-variance can be measured as follows: Symbolically, [pic] Where, [pic] = co-variance of stock j and stock m [pic] = rate of return of stock Rj [pic] = average rate of return of stock j [pic] = market return [pic] = average market return 7. Correlation Co-efficient Correlation Co-efficient calculates the relationship between two shares.
The range of correlation co-efficient is from -1 to +1. Correlation co-efficient can be given as follows: Symbolically, [pic] Where, [pic] = correlation co-efficiently between stock j and market return [pic]= market risk [pic] = risk of stock j [pic] = co-variance of return of j asset with the market Chapter III Data Presentation and Analysis This chapter contains presentation, interpretation and analysis of the collected data. Detail data of closing MPS and dividends of two banks; NEPSE indices are presented, interpreted and analyzed with reference to various books. Closing MPS and dividends are adjusted where necessary.
Risks and returns of two commercial banks SCBNL and NIBL have been studied in this chapter. Different tables and diagrams are prepared to interpret and analyze the collected data. Table 3. 1 Calculation of Returns of SCBNL | | Reported | Adjusted | | | | | |Year | | | |Closing MPS |Cash dividend (%) |Stock dividend |Closing MPS (Rs)|Cash dividend (Rs)|Return of SCBNL[pic] | | |(Rs) | |(%) | | | | |1999/2000 |1985 |100 |- |1985 |100 |- | |2000/2001 |2144 |100 |- |2144 |100 |0. 305 | |2001/2002 |1575 |100 |- |1575 |100 |-0. 2188 | |2002/2003 |1640 |110 |20 |1366. 67 |91. 67 |-0. 0741 | |2003/2004 |1745 |110 |10 |1586. 36 |100 |0. 2339 | | [pic]0. 715 | (Source: Annual Report of SCBNL) Adjusted Closing MPS of the F/Y 2002/2003 [pic] [pic] = 1366. 67 Return of SCBNL in the F/Y 1996/1997 [pic] [pic] = 0. 1305 or 13. 05% In reported data, the highest closing MPS is Rs. 2144 in 2000/2001 and the lowest closing MPS is Rs. 1575 in 2001/2002. 100 percent cash dividend is given in fiscal year 1999/2000, 2000/2001 and 2001/2002. 110 percent cash dividend is given in fiscal year 2002/2003 and 2003/2004 In reported data, SCBNL’s closing MPS are volatile over the study period.
Highest stock dividend is given in the fiscal year 2002/2003. 10 percent stock dividend is given in the fiscal year 2003/2004 and no stock dividend is given in the fiscal year 1999/2000, 2000/2001 and 2001/2002 When the adjustments are made, in the fiscal year 2000/2001, closing MPS is highest that is Rs. 2144 as data without adjustment. But the lowest closing MPS is different in adjusted data than in without adjusted data that is Rs. 1366. 67 in the fiscal year 2002/2003. SCBNL’s returns are volatile over the study period. SCBNL’s return 0. 339 is highest in the fiscal year 2003/2004 and lowest -0. 2188 in the fiscal year 2001/2002. In the fiscal year 2000/2001, there is a positive return 0. 1305 and in 2002/2003, there is a negative return of -0. 0741. Returns are shown in the figure below. There is no specific pattern in trend of closing MPS. Closing MPS is moving randomly. SCBNL needs to increase working efficiency for raising its market price of the share. Besides, government should establish peace and political stability for promoting institutions in the market. [pic]Figure 3. Returns of SCBNL Table 3. 2 Calculation of Returns of NIBL |Year | Reported | Adjusted | | |Closing MPS |Cash Dividend (%) |Stock Dividend (%) |Closing MPS |Cash Dividend (Rs. )|Return of NIBL | | |(Rs. ) | | |(Rs. ) | |[pic] | |1999/2000 |1401 |25 |25 |1120. |20 |- | |2000/2001 |1150 |- |- |1150 |- |0. 0261 | |2001/2002 |760 |- |30 |584. 62 |- |-0. 4916 | |2002/2003 |795 |20 |- |795 |20 |0. 3941 | |2003/2004 |940 |15 |- |940 |15 |0. 2013 | | [pic] 0. 1299 | Source: Annual Report of NIBL) Adjusted Closing MPS of the F/Y 1999/2000 [pic] [pic] = 1120. 8 Return of NIBL in the F/Y 1996/1997 [pic] [pic] = 0. 0261 or -2. 61% In the reported data, highest closing MPS is Rs. 1401 and lowest closing MPS is Rs. 760 in the fiscal year 1999/2000 and 2001/2002 respectively. Cash dividend is given 25 percent, 20 percent and 15 percent in the fiscal year 1999/2000, 2002/2003 and 2003/2004 respectively. And in the fiscal year 2000/2001 and 2001/2002, no cash dividend is given. Stock dividend is given 25 percent and 30 percent in the fiscal year 1999/2000 and 2001/2002 respectively.
In the fiscal year 2000/2001, 2002/2003 and 2003/2004, no stock dividend is given. In the fiscal year 2000/2001 no cash dividend as well as stock dividend is given. Closing MPS are volatile over the study period. After adjusted the reported data, highest closing MPS is Rs. 1150 and lowest closing MPS is Rs. 584. 62 in the fiscal year 2000/2001 and 2001/2002 respectively. Cash dividend of 20 percent are given in fiscal year 1999/2000 and 2002/2003. 15 percent cash dividend is given in fiscal year 2003/2004 and no cash dividend are given in the fiscal years 2000/2001 and 2001/2002. NIBL’s returns are not uniform over the study period.
Highest return is 0. 3941 and lowest return is -0. 4916 in the fiscal year 2002/2003 and 2001/2002. Other positive returns are 0. 0261 and 0. 2013 in the fiscal year 2000/2001 and 2003/2004. Returns are also shown in the figure. [pic] Figure 3. 2 Returns of NIBL Table 3. 3 Calculation of Returns of NEPSE |Fiscal year |NEPSE Index |Return of NEPSE | | |(RS) |(RM) | |1999/2000 |360. | – | |2000/2001 |348. 43 |-0. 0340 | |2001/2002 |227. 54 |-0. 3470 | |2002/2003 |204. 86 |-0. 0997 | |2003/2004 |222. 04 |0. 839 | | [pic] -0. 3968 | (Source: trading report of NEPSE) Return of NEPSE in the F/Y 1996/1997 =[pic] =[pic] = -0. 0340 or -3. 40% NEPSE index is the highest in the fiscal year 1999/2000, which is Rs. 360. 70. The lowest index is Rs. 204. 86 in the fiscal year 2002/2003. NEPSE price indices are volatile. NEPSE’s returns are negative in the fiscal years 2000/2001, 2001/2002 and 2002/2003 which are -0. 340, -0. 3470 and -0. 0997 respectively. There is a positive return of 0. 0839 in the fiscal year 2003/2004. Total return of NEPSE (1999/2000 to 2003/2004) is -0. 3968. Returns are presented in the table. NEPSE’s indices trend is decreasing in the fiscal year 2000/2001, 2001/2002 and 2002/2003 trend due to political disturbance and lack of peace. For increasing NEPSE index government should make peace and political stability. [pic]Figure 3. 3 Returns of NEPSE Table 3. 4 Mean Rate of Return, Standard Deviation and Co-efficient of Variation Calculation of SCBNL Fiscal year |Return [pic] |[pic] |[pic] | |1999/2000 |- |- |- | |2000/2001 |0. 1305 |0. 1126 |0. 0127 | |2001/2002 |-0. 2188 |-0. 2367 |0. 0560 | |2002/2003 |-0. 0741 |-0. 092 |0. 085 | |2003/2004 |0. 2339 |0. 216 |0. 0467 | | |[pic]0. 0715 |[pic] 0. 1239 | Mean rate of return [pic] = [pic] = [pic] = 0. 0179 or 1. 79% Standard deviation [pic] = [pic] = [pic] = 0. 1760 or 17. 60% Co-efficient of variation [pic] = [pic] = [pic] = 9. 83 times Mean rate of return of SCBNL is 0. 0179. Standard deviation and co-efficient of variation of SCBNL are 0. 760 and 9. 83 times respectively. Mean rate of return of SCBNL is less than standard deviation of SCBNL. In this situation investment is not favorable in SCBNL. Table 3. 5 Mean Rate of Return, Standard Deviation and Co-efficient of Variation Calculation of NIBL |Fiscal Year |Return [pic] |[pic] |[pic] | |1999/2000 |- |- |- | |2000/2001 |0. 261 |-0. 0064 |0. 000041 | |2001/2002 |-0. 4916 |-0. 5241 |0. 2747 | |2002/2003 |0. 3941 |0. 3616 |0. 1308 | |2004 |0. 2013 |0. 1688 |0. 0285 | | |[pic] 0. 1299 | [pic] 0. 340 | Mean rate of return [pic] =[pic] =[pic] = 0. 0325 or 3. 25% Standard deviation [pic] =[pic] = [pic] = 0. 3294 or 32. 94% Co-efficient of variation [pic] = [pic] = [pic] = 10. 14 times Mean rate of return, standard deviation and co-efficient of variation of NIBL are 0. 0325, 0. 3294 and 10. 14 times respectively. Standard deviation of NIBL is greater than mean rate of return of NIBL. Thus, it is not favorable condition to invest money in NIBL’s stock. Table 3. 6 Mean Rate of Return, Standard Deviation and Co-efficient of Variation of NEPSE Fiscal Year |Return (RM) |([pic]-[pic]) |([pic]-[pic])2 | |1999/2000 |- |- |- | |2000/2001 |-0. 034 |0. 0652 |0. 004251 | |2001/2002 |-0. 347 |-0. 2478 |0. 061405 | |2002/2003 |-0. 997 |-0. 0005 |0. 00000025 | |2003/2004 |0. 0839 |0. 1831 |0. 033526 | | |[pic] -0. 3968 | [pic]= 0. 0992 | Mean rate of return [pic] =[pic] =[pic] = -0. 0992 Standard deviation [pic] =[pic] = [pic] = 0. 1575 or 15. 75% Co-efficient of variation [pic] = [pic] =[pic]= -1. 59 times Mean rate of return of NEPSE is -0. 992. In the same way, standard deviation and co-efficient of variation of NEPSE are 0. 1575 and -1. 59 times respectively. 3. 1Calculation of Covariance between SCBNL and NIBL, SCBNL and NEPSE and NIBL and NEPSE. 3. 1. 1Calculation of Covariance between SCBNL and NIBL Co-variance between SCBNL and NIBL, [pic] [pic] [pic] (See appendix 1 for calculation of [pic]) 3. 1. 2Calculation of Covariance between SCBNL and NEPSE Co-variance between SCBNL and NEPSE, [pic] [pic] [pic] (See appendix 2 for calculation of[pic]) 3. 1. 3Calculation of Covariance between NIBL and NEPSE
Co-variance between NIBL and NEPSE, [pic] [pic] [pic] (See appendix 3 for calculation of[pic]) 3. 2Calculation of Correlation Co-efficient between SCBNL and NIBL Correlation co-efficient between SCBNL and NIBL, [pic] Correlation co-efficient between SCBNL and NIBL is 0. 5502. It means there exists positive relationship between SCBNL and NIBL market price of stock. Correlation co-efficient measures the degree of relationship from -1 to +1. If correlation co-efficient is -1, it is perfectly negative correlation. If correlation co-efficient is +1, it is perfectly positive correlation.
Perfectly negative correlation can eliminate risk. Here, correlation co-efficient of SCBNL and NIBL is positive, so risk can’t be diversified fully. 3. 3Calculation of Beta Co-efficient of SCBNL and NIBL 3. 3. 1 Calculation of Beta Co-efficient of SCBNL Beta co-efficient of SCBNL [pic] Beta co-efficient of SCBNL is 1. 0642, which is greater than 1. So, it is considered to be the aggressive stock. 3. 3. 2 Calculation of Beta Co-efficient of NIBL Beta co-efficient of NIBL [pic] Beta co-efficient of NIBL is 1. 6165, which is greater than 1. So, it is considered to be the aggressive stock.
Beta explains the sensitivity or volatility of the stock with market. If beta co-efficient is greater than one, it indicates the asset is an aggressive asset. If the beta co-efficient is less than one, it indicates the asset is a defensive asset. If the beta co-efficient is equal to one, it indicates the asset is an average asset. Here, beta co-efficient of NIBL is 1. 6165. It means high risk or great market sensitivity because beta co-efficient is greater than one. SCBNL’s stock is less aggressive rather than NIBL’s stock because SCBNL’s stock has lower beta co-efficient than that of NIBL’s stock. . 4 Inter Firm Comparison In this part, comparison between SCBNL and NIBL on behalf of Mean Rate of Return, Standard Deviation, Co-efficient of Variation and Beta. Table 3. 7 Mean Rate of Return, Standard Deviation, Co-efficient of Variation and Beta coefficient |Bank |Mean Rate of Return |Standard Deviation |Co-efficient of Variation|Beta coefficient | |SCBNL |0. 0179 |0. 1760 |9. 83 |1. 0642 | |NIBL |0. 325 |0. 3294 |10. 14 |1. 6165 | From the Table 4. 7, it can be seen that stock of NIBL has higher mean rate of return i. e. 0. 0325 than that of SCBNL i. e. 0. 0179. Also the risk is higher in the stock of NIBL i. e. 0. 3294 than of SCBNL i. e. 0. 1760. Co-efficient of variation measures risk per unit. From this study, it seems that co-efficient of variation is 10. 14 times in the stock of NIBL, which is higher than 9. 83 times that of SCBNL. Beta co-efficient of SCBNL’s stock is 1. 642 and beta co-efficient of NIBL’s stock is 1. 6165. It means that both stocks are risky but SCBNL’s stock is less riskier than that of NIBL’s stock or it can be said that NIBL’s stock has greater market sensitivity than that of SCBNL’s stock because an asset or the stock with a beta greater than one is considered to be aggressive and an asset or portfolio with a beta less than one is considered to be defensive. NIBL’s stock is better in all the aspects like mean rate of return, standard deviation and co-efficient of variation than SCBNL’s stock. But as of systematic risk i. . beta, SCBNL’s stock is preferable than that of NIBL’s stock. Chapter IV Summary, Conclusions and Recommendations 1. Summary In this chapter, summary and conclusions are presented of this study. Some recommendations are given, which may be beneficial for all those who are concerned with this subject matter. An economy growth depends on availability, mobilization and utilization of funds. Financial institutions are the building blocks of the economy of any country. They play vital role in the development of the country. Financial sector basically indicates banking sector.
So there are great responsibilities on the banks. Standard Chartered Bank Nepal Limited has been in operation in Nepal since 1987 when it was initially registered as a joint-venture operation. Today the Bank is an integral part of Standard Chartered Group who has 75% ownership in the company with 25% shares owned by the Nepalese public. The Bank enjoys the status the largest international bank currently operating in Nepal. Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd. , was established in 1986 as a joint venture between Nepalese and French partners.
The French partner (holding 50% of the capital of NIBL) was Credit Agricole Indosuez, a subsidiary of one the largest banking group in the world. With the decision of Credit Agricole Indosuez to divest, a group of companies comprising of bankers, professionals, industrialists and businessmen, has acquired on April 2002 the 50% shareholding of Credit Agricole Indosuez in Nepal Indosuez Bank Ltd. The name of the bank has been changed to Nepal Investment Bank Ltd. upon approval of banks Annual General Meeting, Nepal Rastra Bank and Company Registrars office with the following shareholding structure. A group of companies holding 50% of the capital •Rashtriya Banijya Bank holding 15% of the Capital. •Rashtriya Beema Sansthan holding the same percentage. •The remaining 20% being held by the General Public (which means that NIBL is a Company listed on the Nepal Stock Exchange). His Majesty Government, under program initiated to reform capital market, converted Securities Exchange Centre into Nepal Stock Exchange in 1993. Nepal Stock Exchange in short NEPSE is a non-profit making organization operating under Securities Exchange Act 1983.
The basic objective of NEPSE is to impart free marketability and liquidity to the government and corporate securities by facilitating to the government and corporate securities by facilitating transactions in its trading floor through market intermediaries such as brokers, market makers etc. The main objective of the study is to evaluate risk and return of SCBNL and NIBL. Besides this co-variance between SCBNL and NIBL and correlation co-efficient between SCBNL and NIBL are analyzed. Risk can be termed as uncertainty about the future.
Nobody can tell what actually will happen in the future though we can calculate the range of possibilities that we face. Firms should analyze and forecast risk and return as far as possible. Therefore, risk may be defined, as the likelihood that the actual return from an investment will be less than forecast returns. In other words, it is the variability of the return in an investment. Different types of risk can be seen in practical life like interest rate risk, purchasing power risk, bull & bear risk or market risk, management risk, default risk, political risk and industry risk etc.
Investors always want to maximize return by minimizing risk. Investors are motivated with high return. It can be said as a principal reward for the investment. Investors select the investment alternative with low risk and high return. Investment institutions persons and business organization invest their money today with the expectation of earning even more money in future. Return on a typical investment consists of two components. The basic component is the periodic cash receipts (or income) on the investment either in the form of interest or dividends.
The second component is the change in the price of asset commonly called capital gain or loss. This element of return is the difference between purchase price and price at which asset can be or is sold; therefore, it may be gain or loss. Risk and return are key factors to analyze the financial position of the company. The relationship between risk and return can be described as the investor’s perception about bearing the risk and compensation for bearing that risk. Investors will not be ready to invest their capital on risky assets unless they are not assured of adequate compensation for accepting risk.
Two commercial banks SCBNL and NIBL are taken as sample, listed in NEPSE. Secondary data are collected from NEPSE, SEBO/N and related banks. Mean rate of return of SCBNL, NIBL and NEPSE are 0. 0179, 0. 0325 and -0. 0992 respectively. 0. 1760, 0. 3294 and 0. 1575 are standard deviations of SCBNL, NIBL and NEPSE respectively. Co-variations are 9. 83 times, 10. 14 times and -1. 59 times of SCBNL, NIBL and NEPSE respectively. Co-variance between SCBNL and NIBL is 0. 0319, 0. 0264 is the co-variance between SCBNL and NEPSE and co-variance between NIBL and NEPSE is 0. 0401.
Correlation co-efficient between SCBNL and NIBL is 0. 5502. Beta co-efficient of SCBNL and NIBL are 1. 0642 and 1. 6165 respectively. 2. Conclusions Conclusions can be drawn on the basis of data presentation and analyses are as follows: Market price of SCBNL, NIBL and NEPSE index are fluctuating widely over the study period. Due to the fluctuation of market price of the stocks, investors have to bear higher risk. NIBL mean rate of return is [pic] which is higher than that of SCBNL [pic]. So, investors can get higher return in NIBL stock. SCBNL’s stock has less systematic risk [pic] than that of NIBL’s stock [pic].
Beta shows the market sensitivity that is the change in stock price as the change in other factors in the market. So, risk averter investor should choose the less sensitive stock. Here the less sensitive stock is of SCBNL. Correlation co-efficient between SCBNL and NIBL [pic] is positive. This indicates risk cannot be diversified and eliminated by forming a portfolio of the stock of SCBNL and NIBL. 4. 3 Recommendations The recommendations of this study are given as follows: • Those investors who are risk seeker can choose the stock of SCBNL because of it’s higher return and risk rather than NIBL stock Defensive investors can choose the stock of NIBL because of lesser risk and less return than that of SCBNL stock. • On the basis of beta, investors must choose the stock of SCBNL rather than the stock NIBL. • The existing and potential investors should have proper knowledge about the NEPSE’s prevailing rules and regulations. All the individuals and institutions, who are benefited directly with the stock transaction should flow relevant information so that an investors can take prudential decision on the basis of factual information rather than haunch. • Investors will be benefited when they get proper information regarding the stock.
Risk can be minimized with the proper information of the stock. • Bank must collect more money from current deposit comparing to other interest bearing deposit. The bank must locate and explore services and facilities for the more collection. • Media helps for better mobilization of deposits and credits. So, banks can use various media, special publicity campaign to grow the market share and strengthening the services and schemes. Publicity helps to boost up the banking habits, confidence and pride upon the bank among the people. • This is the time of information technology but NEPSE has still traded n open-cry system. The trading system of NEPSE should be modernized, reliable and effective information channel should be launched. Data available in the website should be up-to-date and developed online trading system. Top of Form ———————– [1] R. S. Sayers (1979), Modern Banking, Calcutta: Oxford University Press, p22. [2] Commercial Bank Act (1974), Nepal. [3] The New Encyclopedia Britannica (1985), vol 14, p600. [4] M. C. Vanish (1978), Modern Banking, New Delhi, p50. [5] Prof. Dr. M. K. Shrestha, Capital Market in Nepal: Changing Dimention and Strategy, (KOSH, 39, Kathmendu, EPF Publication), p3-9.
