A Comparison of Key Determinants on Profitability of India's Largest Public and Private Sector Banks

The banking sector in India has come under the scanner following some key changes in monetary policy. With the Reserve bank of India (RBI) raising interest rates to support the falling Indian currency the Rupee, the cost of funds of banks has increased significantly. This could manifest itself in rising non-performing assets (NPAs) and declining profitability. The profitability of banks is impacted by both internal and external factors. This paper is an attempt to compare the key drivers of profits at India’s largest public and private sector banks. Bank specific metrics and risk factors were important drivers of profits at both banks. Productivity measures were key drivers of profits at India’s largest public sector bank SBI but had no effect on profits at India’s largest private sector bank, HDFC bank. Asset usage efficiency measures were key determinants of profitability at HDFC bank but not at SBI. The single most important determinant of SBI proved to be business per employee, a productivity measure while advances and bank size which are traditional bank metrics were key drivers of profits at HDFC bank. Managers at both banks and their share holders thus can look at these drivers to develop a broad understanding of profitability at the two banks.