Profitability Performance Analysis of State Bank of India

By Swati Sinha* Abstract: Profitability performance analysis technique is an important criterion to evaluate the overall efficiency of an organisation. It is concerned with the total earnings or the income generated and the total expenditure or the investments incurred by a bank. Thus, profitability performance analysis may be defined as the ability of a given investment, to earn a return on it. It helps in understanding the profitability and the financial health of a bank through the application of two set of ratios i.e. spread ratios and burden ratios. The profitability performance analysis of SBI reflects that the bank has registered a decrease in its spread ratio and an increase in its burden ratio, which is not suitable for a bank.

* Research Scholar, Faculty of Commerce, Banaras Hindu University, Varanasi-221005

Banking sector plays a vital role in the economic development of a country. It has a crucial role in enriching the economic and social life of nations all over the world. It is also an integral part of the financial system of a modern industrial economy, and plays an important role in the economy by financing the requirements of trade industry and agriculture in the country. In the modern economy, bankers are considered not merely as dealers in money, but more realistically the leaders in investments. Similarly, banks are not just the storehouse of the countrys wealth, but are reservoirs of resources necessary for economic development. Banking, when properly organized, aids and facilitates the growth of trade and industry and hence contributes in the development of the national economy. There are various established methods for appraising the financial performance of a bank, like ratio analysis, cash flow analysis, capital structure analysis etc. Profitability performance analysis is one of them. In the present study, an attempt has been made to appraise the financial position of the bank through the application of profitability performance analysis technique. For the purpose of the study, a major and the largest nationalised bank of India viz., State Bank of India (SBI) has been selected. The financial data of the bank has been taken for a period of six years, i.e., from fiscal 2003 to fiscal 2008.
Profitability Performance Analysis To make an assessment of the financial position of a bank, profitability performance analysis is a reliable technique. It represents the efficiency with which the operations of the banks are carried on. The analysis of the profitability performance is extremely useful to various interested parties like the management, shareholders and the long-term creditors. Profitability performance analysis of the bank has been performed using two sets of ratios. They are as under: (1) Spread as percentage of Working Funds (2) Burden as percentage of Working Funds 1. Spread as percentage of Working Funds Spread is the difference between the interest received and the interest paid. It is the net amount, which a bank utilizes in meeting its operating, administrative and management expenditures. The ratio of spread as percentage of working funds can be computed by taking the difference between interest earned as percentage of working funds and interest paid as percentage of working funds. Higher the ratio, better it is. Thus, the ratio of spread as percentage of working funds for SBI has been calculated as under and can be analyzed with the help of following table: Spread as percentage of working funds Interest earned as percentage of working funds Interest paid as percentage of working funds

Table 1. Spread as percentage of Working Funds Years Interest Earned as % of Interest Paid as % working funds of working funds 2003 9.10% 6.18% 2004 2005 2006 2007 2008 7.97% 7.70% 7.19% 7.34% 5.04% 4.39% 4.05% 4.36%

Spread as % of working funds 2.92% 2.93% 3.31% 3.14% 2.98%

7.32%

4.77%

2.55%

The ratio of spread as percentage of working funds for SBI has been presented in Table 1. It shows that in the last six years, the ratio of SBI has registered a decrease. The range of the ratio lies between 2.55% to 3.31%. In the first year 2003, the ratio was 2.92%, which increased very marginally to 2.93% in 2004. In 2005, it increased to 3.31%. But after that it started declining. In 2006, the ratio decreased to 3.14%, whereas in 2007 it decreased to 2.98%. In the last year 2008, it came down to 2.55%. Therefore, in the last six years, the ratio has decreased from 2.92% to 2.55%, recording an overall decrease of 0.37%. It shows that an increase has been observed in the first three years only, whereas a consistent decrease has been observed in the last three years. It indicates that the performance of SBI in terms of spread ratio has been deteriorated. Statistical analysis shows that the average ratio of spread as percentage of working funds for SBI is 2.97%, with a S.D. and dispersion (C.V.) of 0.23 and 7.74% respectively indicating a high consistency in the ratio. 2. Burden as percentage of Working Funds Burden is the difference between non-interest expenditure and the non-interest income of a bank. It is the amount of non-interest expenditure not covered by non-interest income. It can be calculated by taking the difference between non-interest expenditure as percentage of working funds and non-interest income as percentage of working funds. Lower the ratio, higher is the efficiency of the bank. Thus, the ratio of burden as percentage of working funds for SBI has been calculated as under and can be analyzed with the help following table: Burden as percentage of working funds = Non-interest expenditure as percentage of working funds Non-interest income as percentage of working funds

Table 2. Burden as percentage of Working Funds (SBI) Years Non-Interest Expenditure as % of working funds 2.32% 2.42% 2.39% 2.36% 2.20% 1.89% Non-Interest income as % of working funds Burden as % of working funds

2003 2004 2005 2006 2007 2008

1.68% 1.99% 1.69% 1.48% 1.07% 1.30%

0.64% 0.43% 0.70% 0.88% 1.13% 0.59%

The ratio of burden as percentage of working funds for SBI has been presented in Table 2. It shows that in the last six years, the ratio of SBI has registered a continous increase, except the last year. It lies between the range of 0.43% and 1.13%. In 2003, the ratio was 0.64%, which decreased slightly to 0.43% in 2004. But after 2004, there is a continuous increase in the ratio. In 2005, the burden ratio has increased to 0.70%, whereas in 2006 it has increased to 0.88%. In 2007, it further increased and moved up to 1.13%. But, in the last year 2008, a sudden decrease was observed in the ratio, and it came down to 0.59%. Therefore, in the last six years the burden ratio of SBI has decreased from 0.64% in 2003 to 0.59% in 2008, recording an overall decrease of just 0.05%. As the burden of the bank is increasing, it reflects the inefficiency of the bank in managing its non-interest expenses and non-interest income. Statistical analysis shows that the average burden ratio of SBI is 0.73%, with a S.D. and dispersion (C.V.) of 0.22 and 30.14% respectively, which reflects that there is a high variability, or in other words less consistency, in the ratio of the bank. Conclusion: After going through the spread ratios and the burden ratios of SBI, it can be inferred that in terms of both the ratios, the bank has not performed in a satisfactory manner. The decrease in the ratio of interest earned as the % of working funds has caused a decline in the spread ratio, whereas the decline in the ratio of non-interest income as % of working funds has resulted in an increase in burden ratio. A decreasing spread ratio and an increasing burden ratio is not a healthy sign for the profitability of a bank. Therefore, there is a need of taking some appropriate and corrective measures to increase the income, and restrict the increase in the expenditures and burden of the bank.

REFERENCES: 1. Amandeep (1993) Profits and Profitability in Commercial Banks, New Delhi, Deep & Deep Publications. 2. Annual Reports of SBI. 3. Chaudhary, C.M. (1992) Dynamics of Indian Banking, Jaipur, Printwell Publishers, First edition. 4. Debasish, S.S. and Mishra Bishnupriya (2005) Indian Banking System, New Delhi, Mahamaya Publishing House, First Edition. 5. www.statebankofindia.com