This study examines the effect of bank specific variables and macroeconomic variables on performance of Nepalese financial institutions. The return on equity, return on assets and net interest margin were selected as dependent variables while capital adequacy ratio, assets quality, management efficiency, liquidity management, GDP growth rate and inflation were chosen as independent variables. The data were collected from the Banking and Financial Statistics and Supervision Report published by Nepal Rastra Bank, and annual reports of selected banks. The regression models were estimated to test the effect of bank specific variables and macroeconomic variables on performance of Nepalese financial institutions. The result shows that higher the capital adequacy ratio, management efficiency and liquidity management, higher would be the return on equity and return on assets. Likewise higher the GDP growth rate and inflation rate, higher would be the return on equity and return on assets. The study also indicates that higher the assets quality lower would be the return on equity and return on assets. The study also reveals that larger the capital adequacy ratio and assets quality, higher would be the net interest margin. It also shows that higher the management efficiency, liquidity management, GDP growth rate and inflation rate, higher would be the net interest margin.