Risk and return analysis of Nepalese commercial bank’s stock

Abstract

This is the study conducted to analyze the stocks of Nepalese commercial banks on the basis of stock return and risk. The study mainly focused on two areas, firstly, it tries to find out and focuses on identifying the firm-specific variables and their influences on return and risk to the investors. It is studied to determine the relationship between different variables and their significance on return/risk. Secondly, based on the return is derived based on dividends earned and capital appreciation or depreciation realized at the closing date of each fiscal year from 2017 to 2021. It calculated expected return (mean return), standard deviation, variance, coefficient of variation, correlation of banking sector, market, and each individual selected bank for analysis. It also calculated and segregated diversifiable and undiversifiable risk in each stock, the beta of each stock and sector to find out whether aggressive or defensive stock and the CAPM model to find out over or underpriced stock. The study found that EPS, P/E ratio, ROA, NPL, Market coverage with branches, and firm size have significant influences on risk/return. And ROE, Net worth, Capital, loan mobilization, firm age, and growth rate were found to be insignificant effects on risk/return. It has been found that only NIC Asia bank is performing better than the banking sector and has the lowest risk per unit of return. PRVU bank, Nepal bank, GBIME bank, and Kumari banks were found to be performing better in terms of risk and return. The whole banking sector was found to be a defensive sector with a sector beta of 0.69 and almost all banks except Kumari and PRVU banks were found defensive stock. Most of the banks were also found to be having a greater percentage of systematic risk, only NIBL, NMB, NICA, and PRVU have a higher percentage of unsystematic risk which can be diversified as the market just fell from the bullish trend cycle most stocks found to be overpriced and earning less than the required rate of return.