Professional Documents
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KanchiMamunivar Centre for Post Graduate Studies (Autonomous with A Grade and Centre with Potential for
Excellence by UGC) (Government of Puducherry) Affiliated to Pondicherry University
Puducherry 605 008, India
Abstract: The objective of this study is to analyze the financial performance of banking sector in India by
classifying the banks based on their financial characteristics. A total of thirty six banks (17 private and 19 public
sector banks) were considered for analysis, and simple regression model was used to estimate the impact of asset
management, operational efficiency, and bank size on the financial performance. The study reveals that the banks
with higher total capital, deposits, and total assets do not always mean that they have better financial performance.
The overall banking industry is strongly influenced by asset utilization (ASSTUTZ), operational efficiency
(OPEFF), log of asset size (Log of ASSTSIZ), in addition to return on assets (ROA) and interest income (INTINC).
Private sector banks are positively influenced by asset utilization (ASSTUTZ), and operational efficiency (OPEFF)
with interest income (INTINC).While, public sector banks are strongly and positively influenced by operational
efficiency (OPEFF), asset management (ASSTMGT), return on assets (ROA) and interest income (INTINC). This
shows that public sector banks performed remarkably well during the period than that of the private sector banks.
The overall regression analysis shows that the financial performance of the banking industry is strongly and
positively influenced by the operational efficiency, asset management, and interest income size.
Keywords: Asset management, commercial bank, financial performance, operational efficiency
JEL Classification: M12, M 41, G 24
Introduction
The banking sector is considered to be an important
source of financing for most businesses. The
common assumption, which underpins much of the
financial performance research and discussion, is that
increasing financial performance will lead to
improved functions and activities of the
organizations. The subject of financial performance
and research into its measurement is well advanced
within finance and management fields. Generally,
there are three principal factors to improve financial
performance viz., the institution size, its asset
management, and the operational efficiency. To that
there have been few published research studies to
explore the impact of these factors on the financial
performance, especially the commercial banks.
In general, banks mobilize, allocate, and invest much
of societys savings, so bank performance has
substantive repercussions on investment, firm
growth, industrial expansion, and economic
development. Thus, research on the banking
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industry in India
H09: There is no significant impact of operational
efficiency on log of interest income in banking
industry in India
H010: There is no significant impact of log of assets
size on log of interest income in banking industry in
India
H011: There is no significant impact of assets
utilization on return on assets in banking industry in
India
H012: There is no significant impact of operational
efficiency on return on assets in banking industry in
India
H013: There is no significant impact of log of assets
size on return on assets in banking industry in India
H014: There is no significant impact of return on
deposit on log of interest income in banking industry
in India.
Research Methodology
To achieve the aforementioned research objectives,
the data for the study is collected from the annual
reports of the banks concerned. The annual data for
selected banks during 2008-2012 are used for
calculating key financial ratios to analyze the
financial performance of the banks. Besides, another
source of data forms in the form of reference to the
library and the review of different articles, papers,
and relevant previous studies.
Sources of Data
The study used secondary data collected from the
money control data source and websites of various
banks. The period covered by the study extends to 5
years ranging from 2008 to 2012.
Sampling Technique
The study used multistage sampling technique to
select sample units for the study. Out of 27 public
sector banks and 24 private sector banks in India, 45
banks only have been selected for the study based on
the data availability in the data source concerned.
Out of the selected 45 banks, we have taken only 36
banks (17 private sector banks and 19 public sector
banks) to which full-fledged data were available in
the data source concerned.
Research Methods and Plan of Analysis
Financial ratios viz., return on assets (ROA), asset
utilization (ASSTUTZ), log of asset size (log of
21
Total assets.
Variable /
Measure
Formula
Return on Assets
(ROA)
Net Profit /
Total Assets
Interest Income
(INT INC)
Return on Equity
(ROE)
Log of Interest
Income
Net Profit /
Owners Equity
Asset Utilization
(ASST UTZ)
Operational
Income / Total
Assets
Inference
ROA gives an idea as how efficiently management uses its assets to generate
earnings. Higher return on assets reflects good utilization of available assets and
lower return indicates otherwise.
INTINC is an indicator of a firms overall financial health.
ROE measures the rate of return on shareholders equity. It measures a firms
efficiency in generating profit from every unit of shareholders equity.
ASSTUTZ measures managements ability to make the best of its available assets to
generate revenue. A high ratio means more efficient management and low ratio
indicates otherwise.
In order to attain OPEFF a firm needs to minimize redundancy and waste while
leveraging the resources that contribute most to its success and utilizing the best of
Operational
its workforce, technology and business processes. The reduced internal costs that
5
Efficiency
result from OPEFF enable a firm to achieve higher profit margins or be more
(OPEFF)
successful in highly competitive markets. On the other hand, lower OPEFF results
to lower profit margin.
Total assets or total net assets are used to describe a funds size. If the assets rise,
Asset Size (ASST
the number of appropriate new stock prospects shrinks and transaction costs
6
Log of Assets
SIZ)
increases. If the assets size is high there is high scope for more investment and low
the assets size which indicates otherwise.
Source: www.scibd.com/essays/finance/gross profit.php
Total
Operational
Expenses / Net
Interest Income
22
Minimum
Maximum
Mean
Std. Deviation
ROE
36
-0.07
13.70
4.04
3.74
ROD
36
0.00
0.14
0.02
0.02
ROA
36
0.00
0.04
0.01
0.01
ASSTUTZ
36
0.07
0.41
0.10
0.05
OPEFF
36
0.15
1.33
0.30
0.19
Log of INTINC
36
2.76
6.02
4.68
0.63
Log of ASSTSIZ
36
2.85
5.60
3.93
0.64
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
Table 2 shows the results of descriptive statistics of
selected predictor variables of banks. The mean of
ROE is 4.04, and standard deviation is 3.74, which
show that the ROE deviates to the extent of 3.74
times from both the ends. The maximum of ROE is
13.7 and minimum is -0.07. The mean of ROD,
ROA, ASSTUTZ and OPEFF is 0.02, 0.01, 0.10, and
0.30 respectively; the standard deviation of which is
0.02, 0.01, 0.05 and 0.19 respectively. To study the
profitability, ROA and log of INTINC are taken into
consideration. The maximum of ROA is 0.04 and
minimum is 0.00 respectively. OPEFF shows the
average of 0.30 and the standard deviation of 0.19 for
the period. The mean of log of assets is 3.93 and that
of the log of interest income is 4.68 over the period
ROE measures the rate of return on the ownership
interest (shareholders equity) of the common stock
owners.
It measures the firms efficiency at
generating profit from every unit of shareholders
Table 3 Results of Correlation Analysis for Selected Variables of Banks in India from 2008-2012 ( in
crore)
VARIABLES
ROD
ROA
ASSTUTZ OPEFF
23
ROA
ASSTUTZ
Pearson
Correlation
.301
Sig. (2-tailed)
N
Pearson
Correlation
.075
36
36
.291
.866**
Sig. (2-tailed)
N
Pearson
Correlation
.085
36
.000
36
36
.320
.758**
.941**
OPEFF
Sig. (2-tailed)
.057
.000
.000
N
36
36
36
36
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
** Significant at 1% level
Correlation Analysis
Pearsons correlation analysis is used to study the
relationship between predictor variables and
responding variable, and the relationship between
ROA and ASSTUTZ (0.86); ROA and OPEFF (0.75);
ASSTUTZ and OPEFF (0.94) is highly significant
positively at 1% level; whereas the relationship
between ROD and ROA (0.30); ASSTUTZ and ROD
(0.29) is significant positively at 10% level; however
the relationship between OPEFF and ROD is
significant positively (0.32) at 5% level.
Regression Analysis
Table 4 Results of Regression Analysis for Selected Variables of Private Sector Banks in India with Log of
INTINC as Responding Variable from 2008-2012 ( in crore)
Variables
Log of INTINC
ROD
ASSTUTZ
OPEFF
Log of ASSTSIZ
Un-standardized
Coefficients
Std.
Error
8.73
1.69
-0.10
3.40
-43.38*
18.36
-3.078*
1.33
0.10
0.13
Standardized
Coefficients
Sig.
Beta
-0.01
-0.48
-0.50
0.15
5.17
-0.03
-2.36
-2.31
0.73
0.00
0.98
0.04
0.04
0.48
R2
0.652
2
Adjusted R
0.536
F-Statistics
5.625 (0.009)**
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
** Significant at 1% level; Figure in parenthesis shows p value
The regression result shows (see table 5) that OPEFF
has significant negative co-efficient (-0.024) on ROA
in private sector banks in India. Hence, H03: there is
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Table 5 Results of Regression Analysis for Selected Variables of Private Sector Banks in India with ROA as
Responding Variable from 2008-2012 ( in crore)
Un-standardized
Standardized
Coefficients
Coefficients
Variables
t
Sig.
Std.
Error
Beta
ROA
0.01
0.01
0.54
0.60
ROD
0.02
0.02
0.22
0.99
0.34
ASSTUTZ
0.03
0.13
0.05
0.22
0.83
OPEFF
-0.026*
0.01
-0.74
-2.86
0.01
Log of
ASSTSIZ
0.00
0.00
0.48
1.99
0.07
R2
0.499
Adjusted
R2
0.332
F-Statistics 2.987 (0.063)
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
** Significant at 1% level; Figure in parenthesis shows p value
Table 6 Results of Regression Analysis for Selected Variables of Public Sector Banks in India with Log of
INTINC as Responding Variable from 2008-2012 ( in crore)
Un-standardized
Standardized
Coefficients
Coefficients
Variables
t
Sig.
Std. Error
Beta
Log of INTINC
1.07
0.09
11.42
0.00
ROD
-0.02
2.60
0.00
-0.01
0.99
ASSTUTZ
-1.26*
0.65
-0.28
-1.93
0.07
OPPEFF
0.40*
0.19
0.30
2.15
0.05
Log of ASSTSIZ
1.01**
0.02
0.98
45.69
0.00
R2
0.996
2
Adjusted R
0.995
F-Statistics
827.39 (0.00)**
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
** Significant at 1% level; Figure in parenthesis shows p value
Table 6 shows that ASSTUTZ has negative copublic sector banks in India. Hence, H07: there is no
efficient (-1.26) on log of INTINC in public sector
significant impact of log of ASSTSIZ on log of
banks. Hence, H05: there is no significant impact of
INTINC is rejected at 1% level. However, ROD has
ASSTUTZ on log of INTINC is rejected at 10%
insignificant negative co-efficient (-0.02) on log of
level. OPEFF has significant positive co-efficient
INTINC. The overall regression model represented
(0.40) on log of INTINC in public sector banks in
by R is at 99% of the changes in log of interest
India. Hence, H06: there is no significant impact of
income. F statistics (827.39) is significant at 1%
OPEFF on log of INTINC is rejected at 5% level.
level, indicating the extent of variance in the
However, log of ASSTSIZ (1.01) has highly
responding variable explained by the predictor
significant positive co-efficient on log of INTINC in
variables.
Table 7 Results of Regression Analysis for Selected Variables of Public Sector Banks in India with ROA as
Responding Variable from 2008-2012 ( in crore)
25
Variables
Un-standardized
Coefficients
ROA
ROD
ASSTUTZ
OPEFF
Log of ASSTSIZ
0.00
0.00
0.06
0.01
0.00
Standardized
Coefficients
Std. Error
0.01
0.27
0.07
0.02
0.00
Sig.
Beta
0.45
0.01
0.94
0.46
-0.29
0.66
0.99
0.36
0.65
0.78
R2
0.909
Adjusted R2
0.883
F-Statistics
34.846 (0.00)**
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
** Significant at 1% level; Figure in parenthesis shows p value
Table 7 shows the determinants of financial
INTINC for all the banks selected for the study.
performance of public sector banks in India with R
Hence, H09: there is no significant impact of OPEFF
0.90. All the variables selected for the study are in
on log of INTINC is rejected at 5% level. Log of
positive domain. The F statistics is 34.84 (0.000),
ASSTSIZ has highly significant positive co-efficient
which shows that the model is justifiable for the
(0.38) on log of INTINC for the overall banks
purpose. The ROE, ROD, ASSTUTZ, OPEFF, and
selected for the study in India. Hence, H010: there is
log of ASSTSIZ have insignificant positive cono significant impact of log of ASSTSIZ on log of
efficient on ROA.
INTINC is rejected at 5% level. ROD has significant
negative co-efficient (-8.59) on log of INTINC for all
Table 8 shows that the ASSTUTZ has significant
the banks selected for the study. Hence, H014: there
positive co-efficient (14.02) on log of INTINC for all
is no significant impact of ROD on log of INTINC is
the banks selected for the study. Hence, H08: there
rejected at 10% level. The F statistics is 2.421(0.069),
is no significant impact of ASSTUTZ on log of
which shows that the model is justifiable at 10% level
INTINC is rejected at 5% level. OPEFF has
for the purpose.
significant negative co-efficient (-4.04) on log of
0.00
0.64
0.30
-0.03
Table 8 Results of Regression Analysis of Selected Variables of Banks (Both Public & Private Sector) in
India with Log of INTINC as Responding Variable from 2008-2012 ( in Crore)
Variables
Un-standardized
Coefficients
Std. Error
Standardized
Coefficients
Sig.
Beta
Log of INTINC
ROD
ASSTUTZ
OPEFF
3.17
-8.59
14.02*
-4.04*
0.76
4.70
6.11
1.74
-0.31
1.21
-1.21
Log of ASSTSIZ
0.38*
0.18
0.39
4.17
-1.83
2.29
-2.32
0.00
0.08
0.03
0.03
2.14
0.04
0.238
2
Adjusted R
0.14
F-Statistics
2.421(0.069)
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
** Significant at 1% level; Figure in bracket shows p value
Table 9 Results of Regression Analysis of Selected Variables of Banks (Both Public & Private Sector) in
India with ROA as Responding Variable from 2008-2012 ( in crore)
26
Variables
Un-standardized
Coefficients
ROA
ROD
ASSTUTZ
OPEFF
Log of ASSTSIZ
Std. Error
-0.01
0.01
0.17**
-0.02**
0.00
0.02
0.03
0.01
0.00*
0.00
Standardized
Coefficients
Sig.
Beta
0.04
1.62
-0.80
-2.03
0.45
6.30
-3.11
0.05
0.65
0.00
0.00
0.20
2.27
0.03
R2
0.816
2
Adjusted R
0.792
F-Statistics
34.415(0.00)**
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
** Significant at 1% level; Figure in bracket shows p value
Table 9 shows that ASSTUTZ has highly significant
positive co-efficient (0.17) on ROA for all the banks
selected for the study. Hence, H011: there is no
significant impact of ASSTUTZ on ROA is rejected
at 1% level. OPEFF has highly significant negative
co-efficient (-0.02) on ROA for all the banks selected
for the study. Hence, H012: there is no significant
impact of OPEFF on ROA is rejected at 1% level.
Log of ASSTSIZ has significant positive co-efficient
(0.00) on ROA for all the banks selected for the
study. Hence, H013: there is no significant impact of
log of ASSTSIZ on ROA is rejected at 5% level. The
overall regression model is represented by R
(>81%), which shows that the predictor variables
determine more than 81% of the changes in ROA.
The F statistics (34.41) is significant @ 1% level,
indicating that the variance in the responding variable
is explained by the predictor variables to the extent of
79%.
Summary of Findings of the Study
The major findings of the study are:
ROA and ASSTUTZ show an average of 0.01
times and 0.10 times respectively, which
implies that the private and public sector
banks are better in translating the assets into
profits.
The average log of assets is 3.93, which
helps to describe fund size and also use that
fund to attain future goals.
The mean of log of INTINC is 4.68, which is
an indication that the financial health of both
the private and public sector banks is good.
ROA and ASSTUTZ (0.86); OPEFF and
ROA (0.75); OPEFF and ASSTUTZ (0.94)
have highly significant positive association
at 1% level.
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