Do Determinants of Bank Profitability Change Over Time? Evidence from India

Banking stocks have been surging off late. However asset quality issues that have plagued the banking sector over the past five years remain in the back ground. This paper seeks to study the influence of key internal determinants on the profitability of listed banks in India and to see if these determinants change or remain the same over time. The profitability measures chosen were the Return on Assets (ROA) and the Return on Equity (ROE). The internal determinants chosen for the study comprised of key bank metrics such as the deposit/credit ratio and bank size, income measures that include interest income/average working funds and non interest income/average working funds, a measure of fee based income, a key productivity measure in business per employee and risk factors that include the capital adequacy ratio and % Net NPA. The influence exerted by the determinants on ROA and ROE was different across years and varied for both ROA and ROE. The risk factors and income measures studied proved to be key determinants of ROA and ROE. Key stake holders of banks should keep these determinants in mind as they seek to evaluate and understand the rapidly growing Indian banking landscape