The Impact of Liquidity, Leverage, and Total Size on Banks’ Profitability: Evidence from Nepalese Commercial Banks

This paper examined the impact of liquidity, leverage, and total assets size of the bank on profitability. This study employed bank scope data of all 28 commercial banks operating in Nepal during the period of 2010/11 – 2016/17. Altogether, the168 observations were used in the study. Three ordinary-least-squares models were applied to analyze the impact of liquidity, leverage, and the total size on the bank's profitability. The first regression model reveals that the higher loan to deposit ratio (low level of liquidity) was observed to have the negative effect on the bank's ROA, ROE, and NIM; however, ROE and NIM were statistically insignificant. The result of the second regression model shows that higher equity to assets ratio (lower leverage) positively affected two profitability measures, ROA and NIM, and was statistically significant—but was negatively related to ROE and statistically insignificant. The result of the final regression model reveals that the higher bank size appeared favorable to the Nepalese commercial banks and was found to have positive effects on all three profitability measures: ROA, ROE, and NIM. The results of the study could help bankers and policymakers to take an effective action in order to improve banks' profitability.