Nexus Between Capital Adequacy and Bank Performance in Nepalese Commercial Banks

Abstract

Background: Capital adequacy is an important indicator of the stability, sustainability, and financial performance of commercial banks. In Nepal, commercial banks are required to maintain adequate capital in accordance with Nepal Rastra Bank (NRB) directives. However, maintaining higher capital does not necessarily lead to improved profitability. Therefore, examining the relationship between capital adequacy and bank performance is important for effective banking management and regulation. Objective: This study aims to examine the nexus between capital adequacy and the financial performance of Nepalese commercial banks, with particular emphasis on the relationship between the capital adequacy ratio (CAR), return on assets (ROA), and return on equity (ROE). Methods: The study employed a descriptive and causal-comparative research design using secondary data from annual reports, Nepal Rastra Bank publications, and other relevant sources. Nepal Bank Limited and Nabil Bank Limited were selected for analysis. Data covering ten fiscal years were analyzed using descriptive statistics, Pearson correlation, and least-squares trend analysis. Results: Both banks maintained capital adequacy above the applicable NRB requirements during most of the study period. Nepal Bank Limited recorded an average CAR of 12.45%, ROA of 1.69%, and ROE of 15.82%, while Nabil Bank Limited recorded an average CAR of 12.32%, ROA of 2.26%, and ROE of 22.19%. The correlation between CAR and ROA was positive for Nepal Bank Limited (r = 0.33) but negative for Nabil Bank Limited (r = −0.50). Trend analysis indicated declining ROA for both banks. Conclusion: Adequate capitalization supports banking stability, but higher CAR does not automatically improve profitability. Novelty: The study provides a comparative bank-level assessment demonstrating that the relationship between capital adequacy and performance differs across Nepalese commercial banks.