Impact of Interest ratio, Earnings per share and P/E Ratio on Dividend

payout of commercial banks of Nepal

(Special reference to NABIL, SBL, SCB)

BY

Ashok Regmi

TU Registration. No. 7-2-22-41-2014

Exam Roll No. 14453/14

A Summer Project Report Submitted to

Faculty of Management, Tribhuvan University

In partial fulfillment of the requirements for the degree of

Bachelor of Business Administration

At the

Patan Multiple campuses

Tribhuwan University

Patandhoka, Lalitpur

May, 2018

ii

Certificate from Supervisor

This is to certify that the summer project entitled “Impact of Interest ratio, Earnings per

share & P/E Ratio on Dividend payout of commercial banks of Nepal(special reference

to NABIL,SBL,SCB)” is an academic work done by “Ashok Regmi” submitted in the partial

fulfillment of the requirements for the degree of Bachelor of Business Administration at

faculty of management, Tribhuwan University under my guidance and supervision.

-------------------------------

Signature of the supervisor

Name: Bijaya Goppal Shrestha

Date: May, 2018

iii

VIVA-VOCE SHEET

We have conducted the viva-voce examination of the summer project report presented

Submitted By:

Ashok Regmi

Patan Multiple Campus

Patandhoka, Lalitpur

TU Registration Number: 7-2-22-41-2014

Entitled:

Impact of Interest ratio, Earnings per Share & P/E ratio on Dividend payout of

commercial banks of Nepal (special reference of NABIL, SBL, SCB)

We found the summer project report to be the original work of the student and written

according to the prescribed format. We recommend the summer project report to be accepted

as partial fulfillment for the degree of Bachelor of Business Administration (BBA).

Viva-Voce Committee

Head, Research Department ………………

Member (Supervisor) ………………

Member (External Expert) ………………

Date: ………………..

iv

Student’s Declaration

This is to certify that I have completed the Summer Project entitle “Impact of Interest ratio,

Earnings per share and P/E Ratio on Dividend payout(special reference to

NABIL,SBL,SCB)”. under the guidance of DR. Yuga Raj Bhattarai and Prof.Bijaya Gopal

Shrestha in partial fulfillment of the requirements for the degree of Bachelor of Business

Administration(BBA) at Faculty of Management, Tribhuvan University.

Date: May, 2018

Signature:

Name: Ashok Regmi

v

Acknowledgment

I would like to express my heartfelt gratitude to all those who have helped me to prepare this

project report.

I would like to thank Tribhuvan University for providing us such project work to broaden our

theoretical knowledge into real practical life. And also want to thank my college, Patan

Multiple Campus for guiding me for the completion of the project. I am also thankful to Mr.

Yugraj Bhattarai, Program Director of Patan Multiple Campus for his direct and indirect

support during my research that counts in my study.

I would like to express my sincere thanks to Mr. Bijaya Gopal Shrestha, my supervisor for the

summer project for guiding me throughout. His suggestions were very useful and have helped

me to a successful completion of this report. I would also like to thank my friends for helping

me when necessary.

vi

Table of Contents

Certificate from Supervisor ...................................................................................................................... ii

VIVA-VOCE SHEET ............................................................................................................................. iii

Student’s declaration ............................................................................................................................... iv

Acknowledgment ...................................................................................................................................... v

List of Tables ........................................................................................................................................ viii

List of Figures ......................................................................................................................................... ix

List of Abbreviation .................................................................................................................................. x

Executive summary ................................................................................................................................. xi

Chapter- I Introduction ......................................................................................................................... 1

1.1 Context information ........................................................................................................................ 1

1.1.1Interest ratio .............................................................................................................................. 5

1.1.2 Earning per share ..................................................................................................................... 5

1.1.3 Price earnings ........................................................................................................................... 6

1.3 Purpose of the study ........................................................................................................................ 8

1.4 Significance of the study ................................................................................................................. 8

1.5 Review of related literature ............................................................................................................. 9

1.5.1 Theoretical Review .................................................................................................................. 9

1.5.2 Empirical review .................................................................................................................... 13

1.5.3 Concluding remarks ............................................................................................................... 17

1.6 Research Methodology ................................................................................................................. 18

1.6.1 Research Design ..................................................................................................................... 18

1.6.2 Data Collection Procedure ..................................................................................................... 18

1.6.3 Population and sample ........................................................................................................... 18

vii

1.6.4 Data Analysis Tools ............................................................................................................... 19

1.6.6 Financial tools ........................................................................................................................ 19

1.6.7 Statistical Tools ...................................................................................................................... 20

1.7 Limitation of the study .................................................................................................................. 23

1.8 Organization of the Study ....................................................................................................... 23

Chapter-II Data Presentation and Analysis ...................................................................................... 24

2.1 Organization profile ...................................................................................................................... 24

2.1.1 Introduction to NABIL(Nabil Bank Limited) ........................................................................ 24

2.1.2 Introduction to SBL(Siddhartha Bank Limited) ..................................................................... 25

2.1.3 Introduction to SCB(Standard chartered Bank limited) ......................................................... 25

2.2 Data presentation........................................................................................................................... 27

2.2.1 Data presentation of DPR........................................................................................................... 27

2.1.2 Data presentation of IR .......................................................................................................... 28

2.1.3 Data presentation of EPS ....................................................................................................... 30

2.1.4 Data presentation of P/E ......................................................................................................... 31

2.2 Descriptive statistics of study variables ........................................................................................ 33

2. 3 Result from correlation analysis................................................................................................... 35

2.4 Result from the regression model ................................................................................................. 36

2.4.1 Analysis of Regression Model ............................................................................................... 36

2.5 Major Finding of the study ............................................................................................................ 37

Chapter III Conclusion and Action implication ................................................................................ 39

3.1 Conclusion .................................................................................................................................... 39

3.2 Action implication ......................................................................................................................... 40

REFERENCES

APPENDICES

viii

List of Tables

Table 2.1 Data analysis of DPR of NABIL, SBL, SCB…………………...…………………...27

Table 2.2 Data analysis of IR of NABIL, SBL, SCB…………………………………...….......28

Table 2.3 Data analysis of EPS of NABIL, SBL, SCB………………………….......................30

Table 2.4 Data analysis of P/E ratio of NABIL, SBL, SCB…………………………………...31

Table 2.5 Descriptive statistics of study variables…………………………………………….33

Table 2.6 Correlation Analysis………………………………………………………………..35

Table 2.7 Regression Analysis ………………………………………………………………..36

ix

List of Figures

Figure 2.1 Trend chart of DPR of NABIL,SBL,SCB.........................................................28

Figure 2.2 Trend chart of IR of NABIL,SBL,SCB.............................................................29

Figure 2.3 Trend chart of EPS of NABIL,SBL,SCB..........................................................31

Figure 2.4 Trend chart of P/Eof NABIL,SBL,SCB............................................................32

x

List of Abbreviation

Acronym Full form

DPR Dividend payout ratio

DPS Dividend per share

EPS Earnings per share

Int.exp Interest expense

Int.In Interest income

IR Interest ratio

NABIL Nabil bank limited

P/E Price earnings

SBL Siddhartha bank limited

SCB Standard chartered bank limited

xi

Executive Summary

This study was performed with an objective of determining the association of the factors IR,

EPS, and P/E on DPR and the impact of those factors on DPR. The independent variables used

in the study were IR, EPS and P/E ratio and the only dependent variable was DPR. Three

commercial banks were taken as a sample out of the total twenty-eight banks. A period of

thirteen years was considered for the study.

Previous studies and documents regarding dividend payout ratio and its determinants were

reviewed in order to conclude which factors that potentially could have an impact on the

companies. It was found that there are several determinants of dividend payout ratio. Out of

those determinants, only three determinants were taken for the study to assess the impact it

posed on Dividend payout ratio. The previous empirical review showed that Earnings per

share and P/E ratio were often taken by scholars for their study. But Interest ratio was hardly

taken by scholars for their study.

The study follows quantitative research method and uses correlation analysis and regression

analysis to examine the relationship between the dependent and independent variables. The

result showed that all three independent variables possessed a significant relationship with the

dependent variable. Therefore, Interest ratio, earning per share and Price Earnings ratio

provided an impact on dividend payout ratio.

1

CHAPTER- I

INTRODUCTION

1.1 Context information

Nepal is a least developed country resulting lower per-capita income. However, in recent days,

many reforms have been made in the financial sector of Nepal like liberalization of interest

rates, the creation of a basic regulatory framework and development of longer-term

government securities market. Participation of private sector in the financial sector will play

an important role in the economic development of the country.

In a capital market, all firms operate in order to generate earnings. Shareholders supply equity

capital, expecting to share in these earnings either directly or indirectly. Once a company

makes a profit, it must decide on what to do with those profits. They could continue to retain

the profits of the company, or they could pay out the profits to the owners of the firm in the

form of dividends.

When a company pays out a portion of its earnings to shareholders in the form of a dividend,

the shareholders benefit directly. If instead of paying dividends, the firm retains the funds to

exploit other growth opportunities, the shareholders can expect to benefit indirectly through a

future increase in the price of their stock. Thus, shareholder wealth can be increased through

either dividends or capital gains.

The dividend is that part of the net earnings of a corporation that is distributed to its

stockholders. It is a payment made to the equity shareholders for their investment in the

company.

Types of Dividends

Classifications of dividends are based on the form in which they are paid. Following given

below are the different types of dividends:

2

1) Cash dividend

2) Bonus Shares referred to as stock dividend in the USA

3) Property dividend interim dividend, annual dividend.

4) Special- dividend, extra dividend etc.

5) Regular Cash dividend

6) Scrip dividend

7) Liquidating dividend

8) Property dividend

Cash dividend

Companies mostly pay dividends in cash. A Company should have enough cash in its bank

account when cash dividends are declared. If it does not have enough bank balance, the

arrangement should be made to borrow funds. When the Company follows a stable dividend

policy, it should prepare a cash budget for the coming period to indicate the necessary funds,

which would be needed to meet the regular dividend payments of the company. It is relatively

difficult to make cash planning in anticipation of dividend needs when an unstable policy is

followed. The cash account and the reserve account of a company will be reduced when the

cash dividend is paid. Thus, both the total assets and net worth of the company are reduced

when the cash dividend is distributed. The market price of the share drops in most cases by the

amount of the cash dividend distributed.

Bonus Shares: (OR Stock -dividend in the USA)

An issue of bonus share is the distribution of shares free of cost to the existing shareholders, In

India, bonus shares are issued in addition to the cash dividend and not in lieu of cash dividend.

Hence, Companies in India may supplement cash dividend by bonus issues. Issuing bonus

shares increases the number of outstanding shares of the company. The bonus shares are

distributed proportionately to the existing shareholder. Hence there is no dilution of

3

ownership. The declaration of the bonus shares will increase the paid-up Share Capital and

reduce the reserves and surplus retained earnings) of the company. The total net-worth (paid-

up capital plus reserves and surplus) is not affected by the bonus issue. Infect, a bonus issue

represents a recapitalization of reserves and surplus. It is merely an accounting transfer from

reserves and surplus to paid-up capital.

Special dividend

In special circumstances Company declares Special dividends. Generally, company declares a

special dividend in case of abnormal profits.

Extra- dividend

An extra dividend is an additional non-recurring dividend paid over and above the regular

dividends by the company. Companies with fluctuating earnings pay additional dividends

when their earnings warrant it, rather than fighting to keep a higher quantity of regular

dividends.

Annual dividend

When annually company declares and pay a dividend is defined as an annual dividend.

Interim dividend

During the year any time company declares a dividend, it is defined as an Interim dividend.

Regular cash dividends

Regular cash dividends are those dividends that company exacts to maintain every year. They

may be paid quarterly, monthly, semiannually or annually.

Scrip dividends

These are promises to make the payment of dividend at a future date: Instead of paying the

dividend now, the firm elects to pay it at some later date. The ‘scrip’ issued to stockholders is

merely a special form of promissory note or notes payable.

4

Liquidating dividends

These dividends are those which reduce paid-in capital: It is a pro-rata distribution of cash or

property to stockholders as part of the dissolution of a business.

Property dividends

These dividends are payable on assets of the corporation other than cash. For example, a firm

may distribute samples of its own product or shares in another company it owns to its

stockholders.

In this study, only cash dividend and stock dividend are taken into consideration.

There are corporate laws that put limitations on the distribution of dividends, as corporations

have to keep reserves for the protection of creditors overall interest. Therefore, a good policy

is required to maintain a balance between shareholders interest with that of corporate growth

from internally generated funds. The return on shareholders should be better paid as dividends

since shareholders have invested opportunities to employ elsewhere. Financial management is

therefore concerned with the activities of a corporation that affect the well being of

shareholders. That well being can be partially measured by the dividends received, but a more

accurate measurement is the market value of the stock (Dean, 1973).

In Nepal, regular payment of dividends is under question. However, most of the joint venture

banks are committed to paying a dividend to the shareholders. The appreciation in the market

value of a share of these joint venture banks has, without any doubt, provided an adequate

sense of protection to shareholders (Shrestha, 1992).

There are several factors that provide an influence on dividend payout ratio of commercial

banks. This study is focused on the impact of three factors that are IR, EPS& P/E on Dividend

payout ratio. Dividend payout ratio shows the amount of dividend as a percentage of earning

available for an equity share. It shows the relationship between bank's earnings per share and

dividend provided to shareholders.

5

1.1.1Interest ratio

This ratio indicates the financial efficiency of the banks. It indicates the interest payment to

the depositors in relation to the amount of interest earned from the borrowers. In the banking

sector, the interest is the primary source of revenue and expense. A higher interest ratio in the

form of the higher interest expense indicates a declining profit and hence resulting into a lower

dividend payout ratio or conversely, a decreased interest earned also have the same

consequences in the form of declining dividend payout ratio. This ratio indicates the risk of a

bank; whether the bank is capable to pay interest to its depositor or not? The lower the ratio

the fewer burdens on the bank for interest payments. Interest ratio acts as financial efficiency

and a risk measurement tool for banks. Interest ratio is given by dividing interest expense from

interest income

Interest income is the revenue earned by a lender for use of his funds or an investor on their

investment over a period of time. Banks are those financial institutions that accept deposits as

well as lend funds. Banks receive revenue in the form of interest by lending funds to those

who need it.

Interest expense is the cost incurred by an entity (such as banks) for borrowed funds.

1.1.2 Earning per share

Earnings per share (EPS) are the portion of a company's profit allocated to each outstanding

share of common stock. The earnings per share are a useful measure of profitability, and when

compared with EPS of other similar companies, it gives a view of the comparative earning

power of the companies. EPS, when calculated over a number of years, indicates whether the

earning power of the company has improved or deteriorated. Investors usually look for

companies with steadily increasing earnings per share.

Growth in EPS is an important measure of management performance because it shows how

much money the company is making for its shareholders, not only due to changes in profit but

also after all the effects of issuance of new shares (this is especially important when the

growth comes as a result of acquisition). Lev (1989) defines Earnings as the “bottom line” or

“net income” and the single most important item in the firm’s financial statements. They

6

indicate the extent to which a company has engaged in value-added activities. Lev (1989) in

fact points out that earnings are a signal that helps direct resource allocation in the capital

markets. An increase in the 2 firm’s earnings represents an increase in company value while a

decrease in earnings represents a decrease in company value. Earnings per Share (EPS) are the

firm’s earnings divided by the number of ordinary shares issued by the firm i.e. it’s the firm’s

net income per unit of ordinary shares issued. Small firms have limited access to additional

capital and therefore retain a higher proportion of earnings for expansion needs (Fama and

French, 2001).

Firms need to carry out effective “earnings management” and at the same time, the executive

needs to understand the effect of the firm’s policies so that they can make the best possible

decisions for the company (Lev, 1989).

1.1.3 Price earnings

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current

share price relative to its per-share earnings. The price-earnings ratio is also sometimes known

as the price multiple or the earnings multiple.

There is a significant negative relationship between business risk and payout. The P/E ratio

implicitly incorporates the risk of a company's future earnings. Fama and French (1998) argue

that high P/E ratio suggest that investors are expecting higher earnings growth in the future

compared to companies with a lower P/E. High P/E ratio may be associated with low risk and

higher payout ratios, whereas low P/E ratio with high risk and lower payouts ratios. This result

is with a line with the agency theory of dividend policy. It is the price of share the outsider is

paying for each rupee reported by the balance sheet of the banks. It is calculated by dividing

the market value per share by book value per share.

1.2 Statement of problem

The dividend payout policy is one of the most debated topics within corporate finance and

many academics have been trying to find the missing pieces in the dividend puzzle for more

than a half century (Baker, 2009 p.30). But dividends is not a new phenomenon, payouts to

shareholders have been a standard procedure for most companies in hundreds of years (Baker,

7

2009 p.30). However, some of the most successful companies during the last years such as

Apple and Google have chosen not to pay dividends (Ciaccia, 2012). This indicates that it is

possible to be successful without paying dividends, so why do firms pay dividends at all?

This question has been extensively debated and one of the most powerful arguments towards

the impact of dividends was presented by Modigliani and Miller (1961). They stated that

under perfect capital markets without any taxes, transaction costs and other market

imperfections, the company value is independent of the dividend policy. Instead the firm value

is solely depended of the earning power of the company’s assets and its investment policy and

not by how its profits are distributed to shareholders (Modigliani & Miller, p.414). If this

would be the case, no companies would pay dividends since it does not create any additional

value for the shareholders and no further research regarding dividends would be necessary.

This is contrary to the view of Brealey et.al (2008 p.973) who has written one of the most

influential undergraduate textbooks in corporate finance. They state that the dividend payout

controversy is one of the ten major unsolved problems in corporate finance and further

research within the area is crucial in order to increase the understanding of the subject.

In the real world disregarding the assumptions made by Modigliani and Miller (1961) various

academics have argued that dividends have an impact on the company’s value. One of the first

studies who claimed that dividends play a major role was presented by Lintner (1956). The

study basically concluded that dividends are determined by a target payout level which

depends on the company’s long term earnings. Lintner’s research was supported by Gordon

(1959) who stated that the shareholders prefer dividends rather than capital gains. If this is

true, the company’s dividend payouts are of major importance both to shareholders and

managers since it contributes to a higher value and shareholders would be willing to pay a

higher price for stocks that pay dividends.

If dividends affect the value of the company it is of importance that the company’s

stakeholders are aware of the factors that affect the dividend payouts. Various studies have

been conducted in order to determine the company factors that influence the dividend payouts.

According to Jensen (1986), the free cash flow is a major determinant of the dividend payouts.

8

Jensen states that this is due to the agency costs connected to free cash flows and shareholders

prefer cash payments in the form of dividends rather than to keep the free cash flow within the

company. Managers should therefore pay excessive free cash flows as dividends in order to

reduce the agency costs. But free cash flow is far from being the only factor that may affect

the company’s dividend payouts. Another famous study was presented by Miller and Rock

(1985) who argued that dividends provide a signal to investors that the company’s profitability

will increase in the future. Consequently, the company’s growth may according to Miller and

Rock be an important determinant of the dividend payouts. These examples reveal two

company factors that may have an impact on the dividend payouts but they are of course not

the only factors that influence the dividend payouts.

A lot of research in various countries has also been conducted in order to describe the

relationship between a number of factors and the company’s dividend payouts to shareholders.

But even though many studies have been conducted, the results indicate that there are some

differences between countries regarding which factors that have an impact on dividend

payouts. To my knowledge, few studies regarding the factors of dividend payouts have been

conducted in Nepal and they are not up to date. Therefore, I have investigated the some the

factors that may provide an impact on the dividend payouts.

1.3 Purpose of the study

The following are the objective of the study:

1) To assess the impact of EPS, IR, P/E on dividend payout.

2) To observe the relationship between the dependent and independent variables used in this

study.

1.4 Significance of the study

Dividend plays a crucial role in every company and dividend payout policy is one of the most

important decisions that need to be taken by the organization. This might prove to give

9

necessary and important information to these selected sample banks. The shareholders and

personnel’s of the organization may take benefits from this study.

1.5 Review of related literature

A literature review is an evaluative report of information found in the literature related to your

selected area of study. Literature review consists of a review of finance theories related to the

study, literature as derived from research work by other researchers, some general literature to

aid in further understanding the purpose and a summary.

1.5.1 Theoretical Review

Dividend Theories

Over the time various theories of dividend have emerged; some of the main theories are as

follows:

The Residual Theory of Dividend Policy

The residual theory of dividend policy holds that the firm will only pay dividend from residual

earnings, that is dividends should be paid only if funds remain after the optimum level of

capital expenditures is incurred i.e. all suitable investment opportunities have been financed.

With a residual dividend policy, the primary focus of the firm is on investments and hence

dividend policy is a passive decision variable. The value of a firm is a direct function of its

investment decisions thus making dividend policy irrelevant.

Dividend Irrelevancy Theory, (Miller & Modigliani, 1961)

The dividend irrelevancy theory asserts that dividend policy has no effect on either the price of

the firm or its cost of capital.

Dividend Irrelevance Arguments Dividend policy does not affect share price because the

value of the firm is a function of its earning power and the risk of its assets. If dividends do

affect value, it is only due to:

a) Information effect: The informational content of dividends relative to management's

earnings expectations

10

b) Clientele effect: A clientele effect exists which allows firms to attract shareholders whose

dividend preferences match the firm's historical dividend payout patterns.

The Bird in the Hand Theory, (John Lintner 1962 and Myron Gordon, 1963)

The essence of this theory is not stockholders are risk averse and prefer current dividends due

to their lower level of risk as compared to future dividends. Dividend payments reduce

investor uncertainty and thereby increase stock value. This theory is based on the logic that

what is available at present is preferable to what may be available in the future'. Investors

would prefer to have a sure dividend now rather than a promised dividend in the future (even

if the promised dividend is larger). Hence dividend policy is relevant and does affect the share

price of a firm.

The Tax Differential Theory, (B. Graham and D.L. Dodd)

This theory simply concludes that since dividends are taxed at higher rates than capital gains,

investors require higher rates of return as dividend yields increase. This theory suggests that a

low dividend payout ratio will maximize firm value.

Per Cent Retention Theory (Clarkson and Eliot 1969)

Clarkson and Eliot (1969) argued that given taxation and transaction costs dividends are a

luxury that is not afforded by shareholders as well as by companies and hence a firm can

follow a policy of 100 percent retention. Firms can thus avail of new investment opportunities

that would be beneficial to shareholders too.

Percent Payout Theory (Rubner 1966)

Rubner (1966) argued that shareholders prefer dividends and directors and managers requiring

additional finance would have to convince the investors that proposed new investments would

increase their wealth. However, to increase their job security and status in the eyes of the

11

shareholder's companies can adopt 100 percent payout. However, this policy is not followed in

practice.

Agency Cost Theory (Jenson)

Since Jenson and Meckling (1976), many studies have provided arguments that link agency

costs with the other financial activities of a firm. It has been argued that firms pay out

dividends in order to reduce agency costs. Dividend payout keeps firms in the capital market,

where monitoring of managers is available at lower cost. If a firm has free cash flows (Jensen

(1986), it is better off sharing them with stockholders as dividend payout in order to reduce the

possibility of these funds being wasted on unprofitable (negative net present value) projects.

This modern view of dividend policy emphasizes the valuable role of dividend policy in

helping to resolve agency problem and thus in enhancing shareholder value.

Signaling Hypothesis

Signaling Hypothesis The second explanation is the signaling model which argues the

existence of asymmetric information between managers and shareholders. M&M’s model

assumed that in a firm, information is available for insiders and outsiders equally; but

managers may have information relevant to the value of the firm which outside investors do

not have (Robinson, 2006). This information gap explains the way managers use dividends

announcements as a signal which conveys valuable information about the future performance

of the firm to investors. Based on the signaling hypothesis, shareholders may interpret an

increase in dividend payment as a signal of future profitability; hence in a positive reaction,

the share price will rise. In the same way, a decrease in dividend payouts may be considered as

a bad news about future earnings; therefore, the share price may react unfavorably (Al-

Malkawi, 2008). Signaling perspective of dividend policy is supported and cited by many

researchers such as Bhattacharya (1979) and Miller and Rock (1985).

Dividend Payout Ratio vs. Dividend Yield

We are going to conduct a study concerning dividends and it is therefore of major importance

that we use the most relevant measure of dividend in order to get an accurate result. The two

most common measures of dividends are the dividend payout ratio and the dividend yield.

12

Both these methods provide reliable measurements, but they measure dividend payments in

different ways. The dividend payout ratio is defined as the percentage of the company’s

earnings that is distributed to shareholders. As can be seen in the formula below, it only takes

internal factors into considerations and the measurement is therefore independent to external

factors (Penman, 2009 p.264).

DPR= Dividend per share/Earnings per share

In contrast to the dividend payout ratio, the dividend yield is influenced by external factors

since it takes the stock price into consideration (Warren et.al 2011 p.685)

Many scholars have discussed the differences between these two measurements and both have

advantages and drawbacks which may affect the results of the study (Fama & French 1988)

(Lamont 1998) (Friend & Puckett 1964) (McManus et al 2004). Even though dividend payout

ratio and dividend yield share the same numerator in their formulas they take different aspects

into consideration.

Dividend yield=Dividend per share/stock price

Previous studies have revealed that dividend yield and dividend payout ratio is extremely

different and it is therefore important to choose the most relevant measurement since it will

have a major impact on the result. In particular, McManus et.al (2004) emphasizes the

significance of dividend payout ratio over the dividend yield, due to the influence of the

former in explaining the returns over the latter. Moreover, McManus et.al have pinpointed,

that the signaling effect of dividend payout ratios is more informative compared to dividend

yields since it only contains internal company factors (McManus et.al, 2004).

Fama & French (1988) have on the contrary revealed that the dividend yield has an ability to

predict the stock returns and it, therefore, provides more information compared to the dividend

payout ratio, (Fama & French, 1988). In addition, the dividend yield changes as the stock price

changes and the measurement are therefore out of the company’s control since it takes market

factors into consideration (Steven & Jose, 1992). It is difficult to say which of the two

measurements those are best since they explain different aspects of dividends. Which

measurement to choose depends therefore on the purpose of the research and the company

13

selected factors included in the research. If we solely would have included internal or external

company selected factors it would be easy to justify the measurement of dividends. But in

order to include the most relevant measurements, we had to include both internal and external

measurements. Totally we have chosen to include four internal factors and two external which

are affected by the stock price.

Based on the company selected factors and the differences between the two measurements we

have chosen to use the dividend payout ratio in the research. The majority of the previous

studies have also used the dividend payout ratio (Rozeff 1982) (Lloyd 1985) (Amidu & Abor

2006).

1.5.2 Empirical review

In the section below, a sample of previous studies regarding the relationship between a

number of company factors and dividend payments are presented.

Rozeff (1982) conducted a study regarding the determinants of dividends in the United States

and the sample consisted of 1000 US companies from 64 different industries. The sample was

collected from value line investment survey of June 5, 1981. Rozeff tested the correlation

between the dividend payout ratio and a number of company factors. The study reveals that

there is a positive relationship between the number of shareholders and the dividend payout

ratio. Rozeff argues that companies with a larger amount of external shareholders have to pay

higher dividends in order to reduce the agency conflict. The results also indicate that there is a

negative relationship between dividends payout ratios and risk, insider ownership, and growth

(in revenue). The negative relationship between dividends and insider ownership is also

related to the agency conflict since a large part of the share is held by insiders the company

does not have to pay high dividends. Rozeff (1982 p.257) also states that future growth

opportunities have a greater impact on the dividends than past realized growth. Lloyd et.al

(1985) presented another research regarding the relationship between the dividend payout ratio

and the company’s selected factors. Lloyd’s research is based on the study made by Rozeff

(1982) and he wanted to test if Rozeff’s results were applicable during another time period.

Lloyd added size as one additional variable to the tested factors. Lloyd et.al (1985 p.21) argues

that large companies tend to have a better access to capital markets, which makes them less

14

dependent on internally generated funds which in turn contributes to that they are able to pay

higher dividends. This argument is supported by empirical data and it shows a positive

relationship between a firms dividend payments and the size of the company. Apart from size,

Lloyd’s research found the same results as Rozeff and dividend payments are negatively

correlated to risk, insider ownership, and growth (in revenue). Lloyd et.al states that risk is

negatively correlated to dividend payments since riskier companies face higher uncertainty

and therefore chose to retain earnings instead of paying dividends to shareholders.

Holder et.al (1998) presented a study regarding the determinants of dividend policies in the

United States. The sample consisted of 477 US companies and the time period for the data

collection was 1983-1990. The results of the study indicate that there is a positive relationship

between dividend payout ratio and size (log of sales) and the free cash flow. Holder et.al states

that large companies have easier access to capital markets and should, therefore, be able to pay

higher dividends compared to small firms. Companies with high free cash flow also tend to

pay higher dividends and the authors’ states that this supports the agency theory, companies

with larger free cash flow have to pay higher dividends in order to reduce the agency conflict.

A negative relationship was discovered between dividends and risk (standard deviation of

returns), internal ownership and growth (in sales).

Gill et.al (2006) conducted a study in the United States. They argue that it is beneficial for

companies to pay dividends due to a number of reasons; dividends indicate financial

wellbeing, attractive for investors and dividends help to maintain the market price of the stock.

The sample consisted of 266 randomly selected public companies from different industries in

the United States. The company selected factors in the study are: profit (EBIT/Total assets),

cash flow, tax (corporate profit/net profit), growth, market to book value and debt to equity

ratio. There was a positive relationship between dividends and profit and tax and negative

relationship between dividends and growth. However, Gill et.al (2006) argues that the impact

of the profit is industry specific and varies a lot depending on which industry the company is

located. No significant relationship between dividend payments and cash flow, market to book

value and debt to equity ratio could be established. This is contrary to previous research which

has found a rather strong relationship between cash flow and dividends.

15

Amidu and Abor (2006) investigated the relationship between a number of company selected

factors and the dividend payout ratio in Ghana. The sample consists of companies that have

been listed on Ghana stock exchange during 1998-2003 and even though the sample just

consists of 20 companies, they represent 76 percent of all listed firms in Ghana during the time

period. The factors included in the research are profit (EBIT/total assets), risk (variability in

profit), cash flow, tax (corporate profit/net profit), institutional holding, growth (in sales) and

market to book value. Amidu and Abor (2006) found a positive correlation between the

companies’ dividend payout ratios and profitability and cash flow. A positive correlation was

also established between dividends and taxes. The authors state that the result came as a

surprise and it contradicts existing literature. A negative correlation between dividends and

growth (in sales) and market to book value was revealed. There also existed a negative but

insignificant relationship between the dividend payout ratio and risk and institutional holdings.

Hedensted and Raaballe (2006) conducted a study in Denmark regarding the determinants of

dividends. The sample consists of 365 companies that were listed on Copenhagen stock

exchange during 1988-2004. The variables used in the research in order to reveal the

relationship between dividends are: earnings, return on equity, market to book value, leverage

(debt/equity) and size. Hedensted and Raaballe used dividend yield instead of dividend payout

ratio as a measurement of the dividend payments. But they did not use the regular dividend

yield since it is heavily influenced by the stock price and is therefore not a good measurement.

Instead, they used dividend yield with equity measured in fixed market prices. The authors

found a positive relationship between the dividend yield and retained earnings, return on

equity and size. There existed no significant relationship between dividend yield and market to

book value and the firms leverage (debt/equity). As a conclusion, the authors state that the

results of the study support both the agency and the signaling theories of dividends.

Anil and Kapoor (2008) conducted a study among Indian IT-companies and the data was

collected during the period 2000-2006. The authors used five company factors in order to test

the relationship with the company’s dividend payout ratio. The authors state that there is a

positive but insignificant relationship between the dividend payout ratios and the companies’

profit (EBIT/total assets) and taxes. The results indicate that profit is not of major importance

when an IT-company decides to pay dividends. However, the results indicate that there is a

16

strong relationship between cash flow and dividend payments. Anil and Kapoor state that a

good liquidity position is an important factor which influences companies’ dividend payout

ratios. Companies with stable and high cash flows are more likely to pay dividends compared

to companies who have low or unstable cash flows. The author also found an insignificant

negative correlation between dividends and growth and market to book value

Daunfeldt et.al (2009) conducted the only relevant Swedish study that we were able to find.

The main focus of the study is towards the taxation of Swedish companies’ dividend

payments, but it also deals with the determinants of dividends and investigates the relationship

between a number of company selected factors and the dividend yield. Even though the study

was presented in 2009 it is based on data collected during 1991- 1995 from Stockholm stock

exchange and it is therefore not up to date, but we still think that it is important to include a

study from Sweden. A fairly strong positive relationship was established between dividends

and size (logarithm of employees) and the authors’ state that this is due to the higher agency

costs connected to larger companies. A positive but insignificant relationship was established

between dividends and cash flows and earnings. The authors explain the results by stating that

profitable companies should pay higher dividends and the same applies to firms with higher

liquidity (cash flow). However, a negative relationship was established between the market to

book value and the dividend yield. Daunfeldt et.al (2009) states that the negative relationship

can be explained by the fact that firms with growth opportunities pay low dividends in order to

exploit their growth opportunities. But the authors further argue that this is against the

signaling theory since companies with higher growth opportunities should pay higher

dividends in order to inform shareholders about the growth prospects.

Al-Kuwari (2009) conducted a research among companies listed on Gulf-cooperation council

stock exchanges (GCC), which includes six countries at the Arabian Peninsula. The sample

consists of 191 non-financial companies and data from the period 1999- 2003 was collected. A

strong relationship between the companies’ dividend payout ratios and government ownership,

size and profit existed. Al-Kuwari (2009) explains the positive relationship between

government ownership and dividends by stating that a high degree government ownership

makes it easier for a company to attract external funds. With the external funds, the company

may pay additional dividends or make additional investments in profitable projects. Al-Kuwari

17

(2009) also states that larger firms pay additional dividends in order to reduce agency costs

due to the dispersion of the ownership. A strong negative relationship could be established

between the companies leverage (debt/equity) and dividend payout ratio. Al-Kuwari (2009)

explains the result by stating that companies with higher leverage face higher transaction costs

connected to external financing. But no significant relationship between dividend payout ratios

and companies free cash flows, growth and risk (beta) was revealed. Al Shabibi and Ramesh

(2011) presented a study regarding determinants of dividends in the United Kingdom. The

sample consisted of 102 non-financial companies listed on the stock exchange in the United

Kingdom in 2007. Al Shabibi and Ramesh used a large number of company selected factors in

order to determine the relationship with the dividend payments. The result revealed no

significant relationship between dividends and growth, industrial type, tangibility and gearing

ratio. However, a fairly strong relationship was established between the companies’ dividends

and profit, size, and risk. The authors explain the positive relationship with risk by referring to

the signaling theory. They state that riskier firms may want to signal stability and therefore

chose to pay dividends to shareholders.

1.5.3 Concluding remarks

Though many research studies have been undertaken in the field Dividend payout ratio and its

determinants very few studies have been undertaken to find the impact of Interest ratio(IR),

Earning per share (EPS) and Price Earning( P/E) on DPR. It is found that many scholars

haven’t considered interest ratio as one of the main determinants of DPR. In this study, we

examine whether or not IR establishes itself as a core determinant of dividend payout ratio and

provide an impact on dividend payout. Therefore, to fill this gap in the literature and shed

light, the present study attempts to analyze the impact of IR, EPS and P/E with special

reference to the selected bank in Nepal. The main contribution of this study is to make a

financial comparison based on IR, EPS and P/E to determine the market price of the share.

Like any other study, this study is also not without its limitations.

18

1.6 Research Methodology

With a view to attaining the overall objectives of the research, the research has been carried

out following the systematic methodology. The section provides a description of the type

of data and with the description of methods and procedures for analyzing data.

1.6.1 Research Design

The research study is constructed through descriptive as well as explanatory designs. The

explanatory design considers reviewing of past journals, annual reports as well as related

schedules and consultation to suffice the qualitative and quantitative information regarding the

stated objectives. Concurrently, descriptive design comprises a unique approach to this issue

by using the multivariate linear regression model to identify the factors that influenced the

dividend policy of the Nepalese commercial banks to test the theoretical relation between

dividend payout ratio with variables namely Interest ratio, Earning per share, P/E ratio and

their analysis and the practices of these banks.

1.6.2 Data Collection Procedure

This study is based on secondary data. The basic data have been collected from the annual

reports of the selected banks. Other supplementary data and information have been obtained

from various sources such as Nepal Rastra Bank, Nepal stock exchange limited, previous

dissertation, research publication, and relevant websites.

1.6.3 Population and sample

There has been a remarkable development in the banking sector in Nepal. There are altogether

28 commercial banks operating in the country. The list of banks operating in the country is

provided in the appendices.

It will be lengthy, time-consuming and vague while taking all of these institutions into

consideration. The sampling method has been selected to select the banks to study for this

research. The banks that have been sampled for the study are Nabil bank limited, Siddhartha

bank limited and Standard chartered bank Nepal Limited.

19

1.6.4 Data Analysis Tools

This study is quantitative in nature and analysis all the way through is based on the historical

data. Therefore, tools of the study are selected accordingly as demanded by the purpose of the

study and data nature. Specifically, different statistical tools such as; descriptive statistics and

regression equations are adapted for the data analysis. Under the descriptive statistics mean,

standard deviation, the coefficient of variation, skewness, and kurtosis have been used.

Similarly, multivariate linear regression has been used for the analysis of effects by the

variables. In addition, the correlation coefficient between the variables has also been

examined. To analyze the phenomenon, statistical graphics have been used as per the data

nature. In this study, statistical parameters are calculated with the help of computer via Excel,

the data analysis tool pack.

1.6.6 Financial tools

1) Dividend Payout Ratio (DPR)

This ratio shows the amount of dividend as a percentage of earning available for equity share.

It shows the relationship between bank's earnings per share and dividend provided to

shareholders. The ratio increases if the DPS increases faster than EPS, which is expected. DPR

also increases if EPS decreases but this phenomenon is not recommended as this tendency

does not positively explain the financial health of banks. It is calculated by dividing DPS by

EPS.

Dividend payout ratio: Dividend per share (DPS)/Earning per share (EPS)

2) Interest Ratio: This ratio indicates the financial efficiency of the banks. It indicates the

interest payment to the depositors in relation to the amount of interest earned from the

borrowers.

Interest ratio = Interest expense / Interest income

3) Earnings per share: Earnings per share (EPS) is the portion of a company's profit allocated

to each outstanding share of common stock. It reflects the earning power of a company. It

makes easy to compare past and present EPS of the company and compare with competitions.

20

It is calculated by dividing total earnings available to the common shares holders by number

of common shares outstanding.

4) Price Earning ratio (P/E ratio): There is a significant negative relationship between business

risk and payout policy. The P/E ratio implicitly incorporates the risk of a company's future

earnings. Fama and French (1998) argue that high P/E ratio suggest that investors are

expecting higher earnings growth in the future compared to companies with a lower P/E. High

P/E ratio may be associated with low risk and higher payout ratios, whereas low P/E ratio with

high risk and lower payouts ratios. This result is with a line with the agency theory of dividend

policy. It is the price of share the outsider is paying for each rupee reported by the balance

sheet of the banks. It is calculated by dividing the market value per share by book value per

share.

P/E = Market Price per Share (MPS)/ Earning Per Share (EPS)

1.6.7 Statistical Tools

Statistical tools are used to analyze the relationship between two or more variables and to find

how these variables are related. In this study, following statistical tools are used.

Arithmetic mean or average

Arithmetic mean is an average of a given set of data this is divided by the number of

observation/ years. The arithmetic mean (AM) is denoted by X:

Standard Deviation

Standard deviation is the measure of dispersion of a set of data from its mean. It measures the

absolute variability of a distribution; the higher the dispersion or variability, the greater is the

standard deviation and greater will be the magnitude of the deviation of the value from their

mean.

Coefficient of variation (C.V)

A coefficient of variation (CV) is a statistical measure of the dispersion of data points in a data

series around the mean. The coefficient of variation represents the ratio of the standard

21

deviation to the mean, and it is a useful statistic for comparing the degree of variation from

one data series to another, even if the means are drastically different from one another.

C.V = standard deviation/Mean

Coefficient of correlation

Correlation is a statistical tool design to measure the degree of association between two or

more variables. In another word, if the changes in one variable affect the changes in another

variable, then the variable is said to be co-related when it is used to measure the relationship

between two variables, then it is called simple correlation. The coefficient of correlation

measures the degree of relationship between to sets of figures. Among the various methods of

finding out the coefficient of correlation, Karl Pearson's method is applied in the study. The

result of coefficient of correlation always lies between +1 and -1. The formula for the

calculation of the coefficient of correlation between X and Y is given below.

The interpretation of calculated value of correlation coefficient by following way

1. If r = 0, then there is no correlation between variables

2. If r > 0, then there is positive correlation between variables

3. If r < 0, then there is negative relation between variables

4. If r = +1, then there is perfect positive correlation

5. If r = -1, then there is perfect negative correlation

Kurtosis

Kurtosis is a statistical measure that is used to describe the distribution, of observed data

around the mean sometimes referred to as the volatility of volatility. Kurtosis is used in the

statistical field to describe in the trend charts. Kurtosis can be present in a chart with fat tails

and a low, even distribution, as well as be present in a chart with skinny tails and distribution

concentrated toward the mean.

22

Interpretation style of calculated value

1. If K = 3, the distribution is mesokurtic or normal

2. If K > 3, the distribution is leptokurtic

3. If k < 3, the distribution is platykurtic

Skewness

Skewness is asymmetry in a statistical distribution, in which the curve appears distorted or

skewed either to the left or to the right. Skewness can be quantified and define the extent to

which a distribution differs from a normal distribution.

Interpretation of calculated value of the coefficient of skewness

If Sk(P) = 0, then this shows that the distribution is symmetrical (non -skewed)

If Sk(P) > 0, then this shows that the distribution is positively skewed or right skewed

If Sk(P) <0, then this shows that the distribution is negatively skewed or left skewed

Regression analysis

The regression equation to be estimated has therefore been specified as

DPRit=β0+β1IRit+ β2EPSit + β3P/Eit +εit

Where,

DPRit represents Dividend payout ratio of bank I in year t;

IRit represents interest ratio of bank I in year t;

P/Eit represents Price earning ratio of bank i in year t;

EPSit represents Earning per share of bank i in year t;

β0 is the intercept (constant);

23

βn represents the slope which represents the coefficient of changes.

1.7 Limitation of the study

The following are some of the limitations of the study:

1) The output of proposed study cannot be claimed as errorless due to the different limitation

of methodological aspects. The study is entirely based on secondary data of commercial

banks.

2) This study is based on thirteen-year data starting from 2003/04 to 2015/16 A.D

3) Only three commercial banks have been taken for the study.

4) Moreover, the reliability of tools, lack of research experiences and lack of data are the other

limitations of this study.

5) Another limitation is the consideration of only four variables and not a large observation.

Therefore, the precondition of regression may not be fulfilled.

1.8 Organization of the Study

This project report is prepared for the partial fulfillment of the requirements for the degree of

Bachelor of Business Administration. In this report whole chapter is classified into the three

parts.

Chapter I: Introduction section includes context of the study, statement of the problem,

objective of the study, significance of the study, literature review, Research Methodology,

limitation of the study and Organization of the study

Chapter II: Data presentation and analysis section includes organization profile, Data analysis

and major finding of the study.

Chapter III: Conclusion and Action Implications.

24

Chapter-II

Data Presentation and Analysis

This chapter deals with the data presentation and Analysis. Data for Analysis can be obtained

from the different sources and they can be presented as tables or charts like bar diagram,

graphs etc. the methods of data presentation and analysis are used to analyze the given data

and to present them in very finest manner and let the data to present for drawing inferences.

The data collected from the concerned Samples Banks, NRB directives and from various other

sources like libraries, booklets, published reports, journals, internet website are organized and

classified for analysis.

2.1 Organization profile

2.1.1 Introduction to NABIL (Nabil Bank Limited)

Nabil Bank Limited is the nation’s first private sector bank, commencing its business since

July 1984. Nabil was incorporated with the objective of extending international standard

modern banking services to various sectors of the society. Pursuing its objective, Nabil

provides a full range of commercial banking services through its 67 points of representation.

In addition to this, Nabil has presence through over 1500 Nabil Remit agents throughout the

nation.

Nabil, as a pioneer in introducing many innovative products and marketing concepts in the

domestic banking sector, represents a milestone in the banking history of Nepal as it started an

era of modern banking with customer satisfaction measured as a focal objective while doing

business. Operations of the bank including day-to-day operations and risk management are

managed by highly qualified and experienced management team. Bank is fully equipped with

modern technology which includes international standard banking software that supports the

E-channels and E-transactions.

25

Nabil is moving forward with a Mission to be “1st Choice Provider of Complete Financial

Solutions” for all its stakeholders; Customers, Shareholders, Regulators, Communities and

Staff. Nabil is determined in delivering excellence to its stakeholders in an array of avenues,

not just one parameter like profitability or market share. It is reflected in its Brand Promise

“Together Ahead”. The entire Nabil Team embraces a set of Values “C.R.I.S.P”, representing

the fact that Nabil consistently strives to be Customer Focused, Result Oriented, Innovative,

Synergistic and Professional.

2.1.2 Introduction to SBL (Siddhartha Bank Limited)

Siddhartha Bank Limited (SBL), established in 2002 and promoted by prominent personalities

of Nepal, today stands as one of the consistently growing banks in Nepal. While the promoters

come from a wide range of sectors, they possess immense business acumen and share their

valuable experiences towards the betterment of the Bank.

Within a short span of time, Siddhartha Bank has been able come up with a wide range of

products and services that best suits its clientele. Siddhartha Bank has been posting growth in

its portfolio size and profitability consistently since the beginning of its operations. The

management of the Bank has been thoroughly professional.

Siddhartha Bank has been able to gain significant trust of the customers and all other

stakeholders to become one of the most promising commercial banks in the country in less

than 15 years of its operation. The Bank is fully committed towards customer satisfaction. The

range and scope of modern banking products and services the Bank has been providing is an

example to its commitment towards customer satisfaction. It is this commitment that has

helped the Bank register quantum growth every year. And the Bank is confident and hopeful

that it will be able to retain this trust and move even further towards its mission of becoming

one of the leading banks of the industry.

2.1.3 Introduction to SCB (Standard chartered Bank 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

26

Standard Chartered Group having an ownership of 70.21% in the company with 29.79%

shares owned by the Nepalese public. The Bank enjoys the status of the largest international

bank currently operating in Nepal. Standard Chartered has a history of over 150 years in

banking and operates in many of the world's fastest-growing markets with an extensive global

network of over 1700 branches (including subsidiaries, associates and joint ventures) in over

70 countries in the Asia Pacific Region, South Asia, the Middle East, Africa, the United

Kingdom and the Americas. As one of the world's most international banks, Standard

Chartered employs almost 87,000 people, representing over 115 nationalities, worldwide. This

diversity lies at the heart of the Bank's values and supports the Bank's growth as the world

increasingly becomes one market. With 15 points of representation, 23 ATMs across the

country and with more than 450 local staff, Standard Chartered Bank Nepal Ltd. is in a

position to serve its clients and customers through an extensive domestic network. In addition,

the global network of Standard Chartered Group gives the Bank a unique opportunity to

provide truly international banking services in Nepal.

Standard Chartered Bank Nepal Limited offers a full range of banking products and services to

a wide range of clients and customers encompassing individuals, mid-market local corporate,

multinationals, large public sector companies, government corporations, airlines, hotels as

well as the DO segment comprising of embassies, aid agencies, NGOs and INGOs.

The Bank has been the pioneer in introducing 'customer focused' products and services in the

country and aspires to continue to be a leader in introducing new products in delivering

superior services. 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.

27

2.2 Data presentation

2.2.1 Data presentation of DPR

Table 2.1

Data analysis of DPR of NABIL, SBL and SCB

Year DPR of NABIL DPR of SBL DPR of SCB

2003/04 70.18 0 76.62

2004/05 66.36 0 83.83

2005/06 65.78 0 79.61

2006/07 102.13 99.43 77.67

2007/08 92.33 91.32 98.54

2008/09 79.62 68.98 90.91

2009/10 89.05 45.61 90.14

2010/11 42.45 79.66 71.93

2011/12 71.8 41.25 82.64

2012/13 68.32 74.19 76.1

2013/14 85.59 59.95 78.66

2014/15 65.36 55.73 77.04

2015/16 75.92 117.38 76.34

Mean 74.99 56.42 81.54

S.D 15.16 38.41 7.51

C.V 0.2021 0.6808 0.0921

Source: Annual reports of NABIL, SBL, SCB

As depicted in table 2.1 the average dividend payout ratio of the standard chartered bank is the

highest among NABIL and SBL. SCB limited has an average of 81.54 percent of dividend

payout ratio yearly. The standard deviation of DPR shows the fluctuation of the values from

the mean. S.D of SBL is 38.41 percent and is the highest among the rest of the sample. The

coefficient of variation (CV) represents the ratio of the standard deviation to the mean. CV of

SBL is the highest i.e. 68.08 percent among the rest of the sample.

Figure 2.1 gives the glimpse of the trend of DPR of NABIL, SBL and SCB

28

Figure 2. 1 Trend chart of DPR of NABIL, SBL and SCB

2.1.2 Data presentation of IR

Table 2. 2

Data analysis of Interest ratio of NABIL, SBL and SCB

Year IR of NABIL IR of SBL IR of SCB

2003/04 20.84 63.01 14.72

2004/05 19.31 46.32 17.63

2005/06 25.21 50.88 21.02

2006/07 31.20 60.43 23.20

2007/08 32.83 56.46 23.90

2008/09 36.50 72.77 17.91

2009/10 42.55 70.53 18.67

2010/11 49.2 70.17 23.71

2011/12 44.66 59.42 25.08

2012/13 31.52 51.77 15.88

2013/14 26.47 50.76 13.31

2014/15 30.11 54.53 13.24

2015/16 20.42 52.53 14.72

Mean 31.60 58.43 18.69

S.D 9.51 8.54 4.27

C.V 0.3011 0.1462 0.2283

Source: Annual reports of NABIL, SBL, SCB

As depicted in table 2.2 the average dividend interest ratio of SBL is the highest among the

two banks. SBL has an average of 58.42 percent of interest ratio yearly. The standard

deviation of IR shows the fluctuation of the values from the mean. S.D of NABIL is 9.51

0

20

40

60

80

100

120

140

DPR

Year

NABIL

SBL

SCB

29

percent and is the highest among the rest of the sample. The coefficient of variation (CV)

represents the ratio of the standard deviation to the mean. CV of NABIL is the highest i.e.

30.11 percent among the rest of the sample.

Figure 2.2 gives the glimpse of the trend of IR of NABIL, SBL and SCB

Figure 2.2 Trend chart of IR of NABIL, SBL and SCBL

0

10

20

30

40

50

60

70

80

IR

Year

NABIL

SBL

SCB

30

2.1.3 Data presentation of EPS

Table 2. 3

Data and descriptive statistics of EPS of NABIL, SBL and SCB

Year EPS of NABIL EPS of SBL EPS of SCB

2003/04 92.61 -8.89 143.55

2004/05 105.49 20.08 143.14

2005/06 129.21 13.05 175.84

2006/07 137.08 15.88 167.37

2007/08 115.86 17.29 131.92

2008/09 113.44 22.89 109.99

2009/10 83.81 21.99 77.65

2010/11 70.67 19.82 69.51

2011/12 83.23 20.41 72.6

2012/13 91.05 29.8 65.7

2013/14 76.12 38.63 65.47

2014/15 57.24 37.77 57.38

2015/16 59.27 41.53 45.96

Mean 93.46 22.32 102.006

S.D 25.38 13.13 45.09

C.V 0.2715 0.5885 0.4420

Source: Annual reports of NABIL, SBL, SCB

As depicted in table 2.3 the average EPS of SCB is the highest among the two banks. SCB has

an average of Rs102.006 of EPS yearly. The standard deviation of EPS shows the fluctuation

of the values from the mean. S.D of SCB is 45.09 percent and is the highest among the rest of

the sample. The coefficient of variation (CV) represents the ratio of the standard deviation to

the mean. CV of SBL is the highest i.e. 58.85 percent among the rest of the sample.

Figure 2.3 gives the glimpse of the trend of EPS of NABIL, SBL and SCB

31

Figure 2.3 Trend chart of EPS of NABIL, SBL and SCB

2.1.4 Data presentation of P/E

Table 2. 4

Data and descriptive statistics of P/E ratio of NABIL, SBL and SCB

Year PE of NABIL PE of SBL PE of SCB

2003/04 10.8 0 12.16

2004/05 14.27 0 16.38

2005/06 17.34 27.59 21.47

2006/07 36.84 48.98 35.25

2007/08 45.53 63.04 51.77

2008/09 43.19 43.7 54.64

2009/10 28.45 20.19 42.23

2010/11 17.72 13.62 25.9

2011/12 16.21 16.91 24.78

2012/13 19.08 10.07 27.7

2013/14 33.38 20.97 42.75

2014/15 33.37 17.95 33.86

2015/16 39.55 20.93 78.33

Mean 27.36 23.38 35.94

S.D 11.98 18.52 18.11

C.V 0.4380 0.7922 0.5040

Source: Annual reports of NABIL, SBL, SCB

-50

0

50

100

150

200

EPS

Year

NABIL

SBL

SCB

32

As depicted in table 2.4 the average P/E ratio of SCB is the highest among the two banks. SCB

limited has an average of 35.94 percent of P/E ratio yearly The standard deviation shows the

fluctuation of the values from the mean. S.D of SBL is 18.52 percent and is the highest among

the rest of the sample. The coefficient of variation (CV) represents the ratio of the standard

deviation to the mean. CV of SBL is the highest i.e. 79.22 percent among the rest of the

sample.

Figure 2.4 gives the glimpse of the trend of P/E ratio of NABIL, SBL and SCB

Figure 2. 4 Trend chart of P/E ratio of NABIL, SBL and SCB

0

10

20

30

40

50

60

70

80

90

P/E ratio

Year

NABIL

SBL

SCB

33

2.2 Descriptive statistics of study variables

In this section mean, standard deviation, kurtosis, skewness and min-max of variables (DPR,

IR, EPS&P/E is analyzed. On the basis of data, combine analysis has been done.

Table 2. 5

Descriptive statistics of study variables

Variable

all sample

Mean S.D Coefficient

of

variation

Kurtosis Skewness Minimum Maximum

DPR 70.98

25.93

0.3653 2.59 -1.46 0 117.38

IR 36.24

18.40 0.5076

-1.091 0.488 13.248 72.77

EPS 72.60 47.005 0.6474

-0.64 0.41 -8.89 175.84

P/E 28.89 16.89 0.5848

0.68 0.75 0 78.33

Table 2.5 depicts that the average dividend payout ratio of Nepalese commercial bank is

70.98%.The standard deviation is 25.93% and it represents variation in DPR. The coefficient

of variation (CV) represents the ratio of the standard deviation to the mean. The C.V of DPR

is 36.53%.The kurtosis is a statistical measure that is used to describe the distribution, of

observed data around the mean sometimes referred to as the volatility of volatility. The

kurtosis of 2.59 represents that the distribution is platykurtic. Platykurtic describes a statistical

distribution with thinner tails than a normal distribution. Skewness is asymmetry in a

statistical distribution, in which the curve appears distorted or skewed either to the left or to

the right. Skewness can be quantified and define the extent to which a distribution differs from

a normal distribution. The skewness of -1.46 represents that the distribution is negatively

skewed or left skewed. The maximum and minimum represents the highest and lowest value

of the variable of the selected sample. The maximum DPR was 117.38% and minimum DPR

was 0%

Similarly, the average interest ratio of commercial banks in Nepal is 36.24%. The interest ratio

indicates the financial efficiency of banks. It indicates the interest payment to the depositors in

34

relation to the amount of interest earned from the borrowers. In the banking sector, the interest

is the primary source of revenue and expense. A higher interest ratio in the form of the higher

interest expense indicates a declining profit and hence resulting into a lower dividend payout

ratio or conversely, a decreased interest earned also have the same consequences in the form

of declining dividend payout ratio. The standard deviation is 18.40 and it represents variability

in IR. The coefficient of variation (CV) of IR is 50.76 percent. Kurtosis of -1.091 represents

that the distribution is less peaked and it has less fat tails than the normal distribution.

Skewness of 0.488 represents that the distribution is positively skewed or right-skewed. The

maximum IR ratio was 72.77% and minimum IR was 13.248%

Likewise, the EPS represents the profitability of the firm. EPS has a positive relationship with

the DPR. Higher profit represents higher dividend payouts. The average EPS is Rs.72.60.It’s

S.D. is 47.005 percent. The coefficient of variation (CV) of EPS is 64.74 percent. Kurtosis is -

0.64 which means that the distribution is less peaked and it has less fat tails than the normal

distribution and skewness is 0.4 which means that the distribution is positively skewed.

Maximum EPS is 175.84 and the minimum EPS is (8.89).

In a similar manner, Higher P/E ratio indicates profitability. Hence, higher the P/E ratio higher

will be the dividend payout. The average P/E ratio of commercial banks in Nepal is

28.89%.It’s S.D. is 16.89%. The coefficient of variation (CV) of P/E is 58.48 percent. Kurtosis

is 0.68 and skewness is 0.75. Maximum P/E is 78.33% and minimum P/E is 0%.

35

2. 3 Result from correlation analysis

One of the most commonly used measurements, in order to test the relationship between a

number of variables, is correlation coefficient (Keller, 2005, p.602).

Table 2. 6

Correlation Analysis

Variables DPR IR EPS P/E

DPR 1

IR -0.34 1

EPS 0.45 -0.6829 1

P/E 0.50 -0.24 0.04 1

Correlation coefficients vary between -1 and 1. Negative values indicate negative correlation,

and positive values indicate positive correlations. Values close to zero reflect the absence of

correlation. The above table shows the correlation between DPR, IR, and EPS&P/E. The table

depicts that there is a negative relation between DPR and IR. Here relation between DPR and

IR is -0.34. A higher interest ratio in the form of the higher interest expense indicates a

declining profit and hence resulting into a lower dividend payout ratio or conversely, a

decreased interest earned also have the same consequences in the form of declining dividend

payout ratio. This ratio indicates the risk of a bank i.e. whether the bank is capable to pay

interest to its depositor or not. The lower the ratio the fewer burdens on the bank for interest

payments. Interest ratio acts as financial efficiency and a risk measurement tool for banks. The

table shows that the interest payments are negatively correlated with dividend payout.

The table also elucidates that there is a positive relation between DPR and EPS. Here relation

between DPR and EPS is 0.45. EPS indicates profitability of the banks. When the profitability

is higher, the banks offer higher payout ratio to its shareholders. Therefore, when EPS is high

the dividend payout ratio will be higher.

Likewise, the relation between DPR and P/E ratio is 0.5. It means that the relationship is

positive. When the P/E ratio is high the dividend payout ratio will be higher and vice versa.

36

2.4 Result from the regression model

Regression analysis is set of statistical process for estimating the relationship between

variables. It includes many techniques for modeling and analyzing several variables when the

focus is on the relationship between dependent variables and independent variables. For the

finding result regression analysis was conducted without control variables.

Test of significance was carried out for all variables studied using the t-test at 95% level of

significance.

From the observation,

Any p-value that is greater than 0.05 will be deemed to have a significant relationship with the

dependent variable else the relationship is considered insignificant

The standardized coefficient and the t-statistic indicate the strength of the relationship between

the dependent and independent variables.

The adjusted R square measures the degree of variability of the dependent variable due to the

change in the independent variable.

2.4.1 Analysis of Regression Model

Table 2. 7

Regression analysis

Variable Coefficient t stat p-value

Constant 24.68

1.41 0.1671

IR 0.1393 0.5486 0.5867

EPS 0.2656 2.7443 0.0095

P/E 0.7600 3.7508 0.00063

Multiple R=0.6588,R2=0.4341 ,Adjusted R

2 =0.3856 ,Standard Error=20.32 , F-Stat=8.94 ,Sig-

F=0.0001546 , N = 39

Multiple R is 0.6588.The Multiple R is the correlation coefficient. It tells you how strong

the linear relationship is. For example, a value of 1 means a perfect positive relationship and a

37

value of zero means no relationship at all. R2

is the coefficient of determination. It tells us how

many points fall on the regression line. R2 is 43.41 percent which means that 43.41 percent of

the variation of y-values around the mean is explained by the x-values. In other words, 43.41

percent of the values fit the model. Adjusted R2 is 0.3856. The adjusted R-squared compares

the descriptive power of regression models that include diverse numbers of predictors. The

standard error of the regression is 20.32. It is an estimate of the standard deviation of the error

μ. This is not the same as the standard error in descriptive statistics. The standard error of the

regression is the precision that the regression coefficient is measured; if the coefficient is large

compared to the standard error, then the coefficient is probably different from 0. The statistic

in the table shows that there is a perfect model fit with an F statistics of 8.94, significant at

95%. This means that the model specification is correct and that the selected independent

variables are determinants of Dividend payout ratio. The obtained p-value is 0.0001546. It is

less than 0.05 and is significant. That means a selected variable is affected by the independent

variables. The number of observations taken in the sample was 39.

The regression result shows the positive intercept 24.68.The intercept is known as constant.

The size of the coefficient for independent variable gives the size of the effect on the

dependent variable. The sign on the coefficient (positive or negative) gives the direction of the

effect.

2.5 Major Finding of the study

Interest ratio, Earning per share and P/E ratio are some of the factors that influence the

dividend payout of commercial banks in Nepal. The objective of the study was to assess the

impact of these factors on dividend payout of Nepalese commercial banks.

The major findings of the research from the above presentation and analysis have been

highlighted below.

1) There is a negative relationship between IR and DPR. IR represents the financial efficiency

of the banks. Therefore, when the interest ratio is higher the dividend payout is lower and vice

versa.

38

2) There is a positive relationship between EPS and DPR. EPS is the indication of profitability

of the bank. Therefore, when the EPS of the bank is higher, the dividend payout ratio is also

higher and vice versa.

3) There is a positive relationship between P/E ratio and DPR. High P/E ratio may be

associated with low risk and higher payout ratios, whereas low P/E ratio with high risk and

lower payouts ratios. This result is with a line with the agency theory of dividend policy.

Therefore, when the P/E ratio of the bank is higher, it is decided by the management of the

bank to increase the DPR.

4) The regression analysis showed that there is a significant relationship between the

dependent and dependent variables used in the study.

5) The trend chart variables showed that there is irregular pattern in the dividend distribution

of the selected banks in the study. It also showed that SCB had the lowest IR in all the selected

thirteen years for this study among the other selected banks for the study. The burden for

interest payments will be lower if the banks have lower IR. There weren’t any huge change in

trends of IR for all the selected banks in this study. The trend chart of P/E ratio showed that

every bank had upward trend at the beginning followed by downward trend and some near

stability in the middle. The trend chart of EPS showed there is a similarity in trends between

NABIL and SCB.

39

Chapter III

Conclusion and Action implication

3.1 Conclusion

Dividends refer to that portion of a firm’s net earnings which are paid out to the shareholders.

Dividend serves as a simple, comprehensive signal of management’s interpretation of the

firm’s recent performance and its future prospects. Dividend payout ratio shows the amount of

dividend as a percentage of earning available for equity share. There are several factors that

influence the dividend payout policy. The study was about the influence of factors like IR,

EPS and P/E ratio on dividend policy. Thirteen-year data was taken each of three commercial

banks. Multivariate linear regression and correlation analysis were performed to analyze the

association and strengths of the relationship between the dependent variable and independent

variables. From the analysis, it was found that there is a relationship between DPR and the

mentioned factors. Interest ratio possesses negative association with DPR. If the banks have

too many interest payments to make and receive a very few interest revenue then it will result

in less dividend payment. EPS and P/E both possess positive association with DPR. A stronger

position of P/E ratio and greater EPS will result in greater payment of Dividends. The result

obtained from the regression analysis showed that there was a significant relationship between

the dependent and independent variables. With the above findings, it can be concluded that

there are differences in the dividend payout practice of every bank. There is no uniformity in

distribution of dividend by the commercial banks. There is fluctuation in the dividend.

Different banks are following policies maintaining their own rules and regulations. It is well-

known fact that distribution of dividend in the Nepalese companies is unclear and uncertain.

The trend analysis of DPR of the sample banks showed that there was no uniformity in

distribution of dividend. Banks have been found to adopt unstable dividend payment policies.

40

3.2 Action implication

This study is focused on the influence of some of the factors (IR, EPS, P/E ratio) on dividend

payout policy of commercial banks on Nepal. From the above data analysis, it is concluded

that the above-mentioned factors influence the DPR to some extent. However, the above-

mentioned factors are not the sole determinants of dividend payout policy. This study has

taken only three of the possible factors which were believed to have some influence on the

dividend payout decision. There are many other factors which are believed to have the same or

greater influence on dividend payout.

The results and the analysis have revealed some additional questions which need to be

answered in future studies. More factors than the ones included in the research should have an

impact on the dividend payout ratio. It would, therefore, be interesting to conduct a similar

study with different factors that may provide an impact on dividend payout ratio.

The dependent variable in the study was the dividend payout ratio. However, a suggestion for

future studies is to replace the dividend payout ratio and instead use the dividend yield as the

dependent variable. Most previous studies have also used the dividend payout ratio and it

would, therefore, be interesting to see the impact of a number of company selected factors on

the dividend yield.

A time period of thirteen years has been used in this study and for future research we

recommend to use a longer time period. It would be interesting to see whether the results from

this study are applicable if a study is conducted over a longer period of time or during another

time period.

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APPENDICES

Appendix I

List of Commercial Banks in Nepal

S.N. Name of Commercial Banks Established year (A.D)

1 Laxmi Bank Limited 2002

2 Siddhartha Bank Limited 2002

3 Nepal Bank Limited 1937

4 RstriyaBanijya Bank Limited 1966

5 Agriculture Development Bank 2006

6 Nabil Bank Limited 1984

7 Nepal Investment Bank Limited 1986

8 Standard chartered bank Nepal Limited 1987

19 Himalayan Bank Limited 1993

10 Nepal SBI Bank Limited 1993

11 Nepal Bangladesh Bank limited 1993

12 Everest Bank Limited 1994

13 Kumari Bank Limited 2001

14 Bank of Kathmandu Limited 1995

15 Nepal credit and commerce Bank limited 1996

16 Global IME Bank Limited 2007

17 Citizens Bank international limited 2007

18 Prime Commercial Bank Limited 2007

19 Sunrise Bank Limited 2007

20 NMB Bank Limited 2008

21 NIC Asia Bank Limited 1998

22 Machhapuchhre Bank Limited 2000

23 Mega Bank Nepal Limited 2010

24 Civil Bank Limited 2010

25 Century Bank Limited 2011

26 Sanima Bank limited 2012

27 Janta Bank Limited 2010

28 Prabhu Bank limited 2016

Source: https://www.nrb.org.np/bfr/pdffiles/List_of_BFIs_Jan_2017_English.pdf

Appendix II

DPS, Int.In, Int.E of SCB

year DPS(in Rs.) Int.In(in %) Int.exp(in%)

2003/04 110 8.83 1.3

2004/05 120 7.43 1.31

2005/06 140 6.23 1.31

2006/07 130 7.11 1.65

2007/08 130 6.65 1.59

2008/09 100 8.54 1.53

2009/10 70 8.78 1.64

2010/11 50 11.05 2.62

2011/12 60 11.16 2.8

2012/13 50 9.76 1.55

2013/14 51.5 9.31 1.24

2014/15 44.21 8.68 1.15

2015/16 35.09 6.86 1.01

Source: Annual reports

Appendix III

DPS, Int.In, Int.E of SBL

year DPS(in Rs.) Int.In(in %) Int.exp(in%)

2003/04 0 7.3 4.6

2004/05 0 7.49 3.47

2005/06 0 7.37 3.75

2006/07 15.79 6.37 3.85

2007/08 15.79 6.96 3.93

2008/09 15.79 8.41 6.12

2009/10 10.03 10.86 7.66

2010/11 15.79 13.01 9.13

2011/12 8.42 13.26 7.88

2012/13 22.11 11.53 5.97

2013/14 23.16 10.4 5.28

2014/15 21.05 8.49 4.63

2015/16 48.75 6.89 3.62

Source: Annual reports

Appendix IV

DPS, Int.In, Int.E of NABIL

year DPS(in Rs.) Int.In(in %) Int.exp(in%)

2003/04 65 9.45 1.97

2004/05 70 8.7 1.68

2005/06 85 8.29 2.09

2006/07 140 8.14 2.54

2007/08 106.97 8.04 2.64

2008/09 90.32 8.82 3.22

2009/10 74.63 10.41 4.43

2010/11 30 12.5 6.15

2011/12 59.75 12.55 5.74

2012/13 62.2 11.64 3.67

2013/14 65.15 10.16 2.69

2014/15 37.41 8.5 2.56

2015/16 45 8.08 1.65

Source: Annual reports