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International journal of Emerging Trends in Science and Technology

Profitability Analysis of Selected New Private Sector Banks in India:

Who is better?
Authors

Jyoti Ainapur
Asst. Prof. GNDEC Bidar , Karnataka state (India)

Email: [Link]@[Link]
Abstract
New private sector banks developed the concept of direct selling agents who reached out to
customers with credit products, taking loans to the customer’s doorstep. Not only did the
private sector banks expand in this manner, their example forced public sector banks to also
adopt similar strategies. Financial ratio analysis is a technique for evaluating the financial
strengths and weaknesses of business entity. These ratios allow investors to look at the
company in an objective way, for most of the profitability ratios having a higher value relative
to competitor’s ratio or the same ratio form a previous period is indicative that the company is
doing well. So the present study has been undertaken to analyze the profitability of selected
new private sector banks in India and to know who is better

INTRODUCTION 1. The promoters holding should be a

The banks, which came in operation after minimum of 25% of the paid-up
1991, with the introduction of economic capital.
reforms and financial sector reforms are 2. Within 3 years of the starting of the
called “new private-sector banks”. Banking operations, the bank should offer
regulation act was then amended in 1993, shares to public and their net worth
which permitted the entry of new private- must increased to 300 crores.
sector banks in the Indian banking sector.
However, there were certain criteria set for Financial ratio analysis is a useful tool for
the establishment of the new private-sector users of financial statement.
banks, some of those criteria set for the I. It simplifies the financial statements.
establishment of the new private-sector II. It helps in comparing firms of
banks, some of those criteria are. The bank different size with each other
should have a minimum net worth of Rs.200 III. It highlights important information in
crores. simple form quickly. A user can judge
a company by just looking at few

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numbers instead of reading the whole 2011- 2013 .The present study helps to know
financial statement. the profitability position of new private
sector banks in India; it provides invaluable
PROFITABILITY RATIO evidence concerning the earnings potential of
INTRODUCTION a bank and the effectiveness of management.
Every firm is most concerned with its
profitability. One of the most frequently used DATA COLLECTON
tools of financial ratio analysis is profitability Data is gathered from secondary sources such
ratios which are used to determine the as Bank’s websites, research papers etc.
company's bottom line and its return to its
investors .Profitability ratios are typically TOOLS OF DATA ANALYSIS
based on net earnings, but variations will Statistical tools are used such as Mean,
occasionally use cash flow or operating Standard Deviation, Coefficient of Variation
earnings . Profitability is a measure of and Chi-square tests have been used
efficiency and control. Profitability ratios are for data analysis.
employed by management in order to assess
how efficiently they carry on business Mean:
operation. Profitability is the main base for
liquidity as well as solvency. Creditors,
banks and financial institutions are interested Standard Deviation:
in profitability ratios

OBJECTIVE OF THE STUDY

1) To study the profitability position of
some selected new private sector SD
banks they are AXIS Bank, HDFC Coefficient of Variation = ------------- x 100
Bank, YES Bank and KOTAK MEAN
MAHINDRA Bank.
2) To compare and highlight the overall Chi square:
profitability of banks by following
ratiosuch as Operating profit ratio,
Gross profit margin ratio, Net profit
Where:
margin ratio, Adjusted cash margin
ratio, Reported return on net worth. is the value for chi square.
is the sum.
Return on long term funds.
O is the observed frequency
SCOPE OF THE STUDY E is the expected frequency.
Profitability ratios measure a company’s Degree of Freedom = (R-1) (C-1)
ability to generate earnings relative to sales,
LIMITATION OF THE STUDY
assets and equity. These ratios assess the
ability of a company to generate earnings, The study is related to a period of 3 years.
profits and cash flows relative to some As the data are only secondary, i.e., they are
metric, often the amount of money invested. collected from the published annual reports
They highlight how effectively the and bank websites.
Only profitability ratio is taken for the study.
profitability of a company is being managed.
The study covers a period of 3 years from

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OPERATING MARGIN RATIO high or increasing operating margin is

Operating margin or operating profit preferred because if the operating margin is
margin measures what proportion of a increasing, the company is earning more per
company's revenue is left over, after dollar of sales. Operating margin can be used
deducting direct costs and overhead and to compare a company with its competitors
before taxes and other indirect costs such as and with its past performance. It is best to
interest. Ope rating margin formula is: analyze the changes of operating margin over
time and to compare company's figure to
those of its competitors. Operating margin
Operating margin is used to measure shows the profitability of sales resulting from
company's pricing strategy and operating regular business. Operating income results
efficiency. It gives an idea of how much a from ordinary business operations and
company makes (before interest and taxes) excludes other revenue or losses,
on each dollar of sales. Operating margin extraordinary items, interest on long term
ratio shows whether the fixed costs are too liabilities and income taxes.
high for the production or sales volume. A
Mean, Standard Deviation and Coefficient of Variance

TABLE -1

YEAR AXIS HDFC YES KOTAK

MARCH 2011 13.6 19.5 25.31 15.33

MARCH 2012 10.69 15.57 21.45 12.85

MARCH 2013 11.41 14.9 11.28 14.03

MEAN 11.9 16.65 19.34 14.07

SD 1.237 2.029 5.917 1.0128

CV 10.394 12.186 30.594 7.198

INTERPRETATION: margin is increasing, the company is earning

Table-1 exhibits that bank wise mean more per dollar of sales.
standard deviation & coefficient of variation
of operating margin of selected new private Hypothesis:
sector banks. YES has highest mean value & H0: μ1= μ2= μ3= μ4 (There is no significant
AXIS has lowest value when compare to relationship between operating margin
other banks. Standard deviation of operating among different new private sector banks in
margin to sales of YES has 5.917 % with India)
highest coefficient of variation and AXIS has H1:μ1≠ μ2 ≠ μ3 ≠ μ4 (There is a significant
low standard deviation of 1.237 % and low relationship between operating margin
coefficient of variation of 12.186%, YES is among different new private sector banks in
having A high or increasing operating margin India)
which is preferred because if the operating

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Profitability Degrees of Calculated value Tabular value at H0 : Null

Freedom (Chi Square) 5% level of Hypothesis
significance Accepted/Rejected

Operating Margin 6 32.72 12.592 Rejected

Since the calculated value of Chi-square factors. Although, a high gross profit margin
(32.72) is more than the table value (12.592) indicates that the company can make a
as shown in table, Null hypothesis is rejected. reasonable profit, as long as it keeps the
It is therefore, concluded that there is a overhead cost in control. A low margin
significant relationship between the indicates that the business is unable to control
Operating Margin among (AXIS, HDFC, its production cost.
YES, KOTAK) new private sectors banks in Gross profit margin can be used to compare a
India. company with its competitors. More efficient
firms will usually see a higher margin. Also,
GROSS MARGIN RATIO: it provides clues about company's pricing,
Gross profit margin is a key financial cost structure and production efficiency.
indicator used to asses the profitability of a Therefore, gross profit margin can be used to
company's core activity, excluding fixed cost. compare company's activity over time.
Gross Profit Margin formula is: For most of the businesses, gross profit
margin is affected by seasonality. Generally,
in the good months, this margin is higher
Gross profit margin measures company's than in the slower months, when the
manufacturing and distribution efficiency company may use sales and other marketing
during the production process. It is a tools to attract more customers.
measurement of how much from each dollar Gross profit margin is related to operating
of a company's revenue is available to cover margin, which asses the profitability after
overhead, other expenses and profits. including fixed cost and net profit margin,
The ideal level of gross profit margin which asses the profitability after including
depends on the industries, how long the fixed cost, interest expenses and taxes.
business has been established and other
Mean, Standard Deviation and Coefficient of Variance

TABLE-2

YEAR AXIS HDFC YES KOTAK

MARCH 2011 11.76 17.01 24.56 12.99

MARCH 2012 9.14 13.58 20.88 10.96

MARCH 2013 10.12 13.04 10.66 12.38

MEAN 10.34 14.54 18.7 12.11

SD 1.080 1.757 5.879 0.850

CV 10.44 12.08 31.43 7.018

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INTERPRETATION: gross profit margin of YES indicates that the

Table-2 exhibits that bank wise mean company can make a reasonable profit, as
standard deviation & coefficient of variation long as it keeps the overhead cost in control.
of Gross profit margin of selected new
private sector banks. YES has highest mean Hypothesis:
value & AXIS has lowest value when H0: μ1= μ2= μ3= μ4 (There is no significant
compare to other banks. Standard deviation relationship between Gross Profit margin
of Gross profit margin to net sales of YES among different new private sector banks in
has 5.879 % with highest coefficient of India)
variation 31.43% and KOTAK has low H1:μ1≠ μ2 ≠ μ3 ≠ μ4 (There is a significant
standard deviation of 0.850 % and low relationship between Gross Profit margin
coefficient of variation of 7.018%.The Gross among different new private sector banks in
profit margin of YES is high as compare to India)
other banks only in 2013 it decreased. High
Profitability Degrees of Calculated value Tabular value at H0 : Null
Freedom (Chi Square) 5% level of Hypothesis
significance Accepted/Rejected

Operating Margin 6 3.377 12.592 Accepted

Since the calculated value of Chi-square Net profit margin provides clues to the
(3.377) is less than the table value (12.592) company's pricing policies, cost structure and
as shown in table, Null hypothesis is production efficiency. Different strategies
accepted. It is therefore, concluded that there and product mix cause the net profit margin
is no significant relationship between the to vary among different companies.
Gross Profit Margin among (AXIS, HDFC, Net profit margin is an indicator of how
YES, KOTAK) new private sectors banks in efficient a company is and how well it
India. controls its costs. The higher the margin is,
NET PROFIT MARGIN RATIO: the more effective the company is in
Net profit margin is a key financial indicator converting revenue into actual profit.
used to asses the profitability of a company. Net profit margin is mostly used to compare
Net profit margin formula is: company's results over time. To compare net
profit margin, even between companies in the
same industry, might have little meaning. For
Net profit margin measures how much of example, if a company recently took a long-
each dollar earned by the company is term loan to increase its production capacity,
translated into profits. A low profit margin the net profit margin will significantly be
indicates a low margin of safety: higher risk reduced. That does not mean, necessarily,
that a decline in sales will erase profits and that the company is less efficient than other
result in a net loss. competitors.

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Mean, Standard Deviation and Coefficient of Variance

TABLE-3

YEAR AXIS HDFC YES KOTAK

MARCH 2011 17.12 16.18 15.56 16.46

MARCH 2012 15.47 15.88 13.66 15.15

MARCH 2013 15.35 16.04 13.61 14.78

MEAN 15.98 16.01 14.27 15.46

SD 0.807 0.122 0.579 0.519

CV 0.05 0.762 4.057 3.357

profit margin of HDFC is indicator of how

INTERPRETATION: efficient a company is and how well it
Table-3 exhibits that bank wise mean controls its costs. The higher the margin is,
standard deviation & coefficient of variation the more effective the company is in
of Net profit margin of selected new private converting revenue into actual profit.
sector banks. HDFC has highest mean value
& YES has lowest value when compare to Hypothesis:
other banks. Standard deviation of Net profit H0: μ1= μ2= μ3= μ4 (There is no significant
margin to net sales of YES has 0.579% with relationship between Net Profit margin
highest coefficient of variation 4.057%, among different new private sector banks in
HDFC has low standard deviation of 0.122 India)
and AXIS has 0.050% low coefficient of H1:μ1≠ μ2 ≠ μ3 ≠ μ4 (There is a significant
variation .The Net profit margin of HDFC is relationship between Net Profit margin
high as compare to other banks. High Net among different new private sector banks in
India)

Profitability Degrees of Calculated value Tabular value at H0 : Null

Freedom (Chi Square) 5% level of Hypothesis
significance Accepted/Rejected

Operating Margin 6 0.0814 12.592 Accepted

Since the calculated value of Chi-square ADJUSTED CASH MARGIN:
(0.0814) is less than the table value (12.592) Adjusted cash margin also known as
as shown in table, Null hypothesis is operating cash flow margin, the cash flow
accepted. It is therefore, concluded that there margin measures how well a company's daily
is no significant relationship between the Net operations can transform sales of their
Profit Margin among (AXIS, HDFC, YES, products and services into cash. A key
KOTAK) new private sectors banks in India. profitability ratio, relating cash flow from
operations to net sales provides powerful
view into the inner workings of a company
using two crucial measures of company

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performance. The cash flow margin ratio Adjusted cash margin = Cash Flow from
measures the ability of a firm to translate Operations / Net sales
sales into cash.

Mean, Standard Deviation and Coefficient of Variance

TABLE-4

YEAR AXIS HDFC YES KOTAK

MARCH 2011 18.58 18.23 16.31 18.43

MARCH 2012 16.72 17.55 14.25 16.79

MARCH 2013 16.39 17.60 14.15 16.22

MEAN 17.23 17.79 14.90 17.14

SD 0.964 0.309 0.995 0.936

CV 5.59 1.73 6.67 5.46

High Adjusted cash margin of HDFC is

INTERPRETATION: indicator of how well a company's daily
Table-4 exhibits that bank wise mean operations can transform sales of their
standard deviation & coefficient of variation products and services into cash.
of Gross profit margin of selected new
private sector banks. HDFC has highest mean Hypothesis:
value & YES has lowest value when compare H0: μ1= μ2= μ3= μ4 (There is no significant
to other banks. Standard deviation of relationship between Adjusted Cash margin
Adjusted cash margin to net sales of YES among different new private sector banks in
has 9.995% with highest coefficient of India)
variation 6.67% , HDFC has low standard H1:μ1≠ μ2 ≠ μ3 ≠ μ4 (There is a significant
deviation of 0.309 and low coefficient of relationship between Adjusted Cash margin
variation 1.73% .The Adjusted cash margin among different new private sector banks in
of HDFC is high as compare to other banks . India)

Profitability Degrees of Calculated value Tabular value at H0 : Null

Freedom (Chi Square) 5% level of Hypothesis
significance Accepted/Rejected

Operating Margin 6 47.28 12.592 Rejected

Since the calculated value of Chi-square significant relationship between the Adjusted
(47.28) is more than the table value (12.592) Cash Margin among (AXIS, HDFC, YES,
as shown in table, Null hypothesis is rejected. KOTAK) new private sectors banks in India.
It is therefore, concluded that there is a

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REPORTED RETURN ON NET returns. The ratio is useful as a measure of

WORTH: how well a company is utilizing the
The Return on Net Worth ratio ratio states shareholder investment to create returns for
the return that shareholders could receive on them, and can be used for comparison
their investment in a company, if all the purposes with competitors in the same
profit earned were to be passed through industry.
directly to them. Thus, the ratio is developed Net worth ratio = Net after tax
from the perspective of the shareholder, not profits/shareholders capital + Retained
the company, and is used to analyze investor earnings
Mean, Standard Deviation and Coefficient of Variance

TABLE-6

YEAR AXIS HDFC YES KOTAK

MARCH 2011 17.83 15.47 19.16 12.03

MARCH 2012 18.59 17.26 20.89 13.65

MARCH 2013 15.64 18.57 23.39 14.40

MEAN 17.35 17.1 21.147 13.36

SD 1.250 1.270 1.736 0.989

CV 7.20 7.42 8.20 7.40

high returns to its shareholders compare to

INTERPRETATION: other banks.
TABLE-6 exhibits that bank wise mean
standard deviation & coefficient of variation Hypothesis:
of Reported Return on net worth of selected H0: μ1= μ2= μ3= μ4 (There is no significant
new private sector banks. YES has highest relationship between Reported return on net
mean value and KOTAK has lowest value worth ratio among different new private
when compare to other banks. YES has sector banks in India)
highest standard deviation (1.736) and H1:μ1≠ μ2 ≠ μ3 ≠ μ4 (There is a significant
coefficient of variation (8.20) YES is giving relationship between Reported return on net
worth among different new private sector
banks in India)

Profitability Degrees of Calculated value Tabular value at H0 : Null

Freedom (Chi Square) 5% level of Hypothesis
significance Accepted/Rejected

Operating Margin 6 0.740 12.592 Accepted

Since the calculated value of Chi-square accepted. It is therefore, concluded that there
(0.740) is less than the table value (12.592) is no significant relationship between the
as shown in table, Null hypothesis is Reported return on net worth ratio among

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(AXIS, HDFC, YES, KOTAK) new private The term long term fund refers to total
sectors banks in India. investment made in the business of long run.
RETURN ON LONG TERM FUNDS: Return on Long term fund % = Net profit /
This ratio establishes the relationship Long term fund
between net profit and the long term fund.
Mean, Standard Deviation and Coefficient of Variance

TABLE-7

YEAR AXIS HDFC YES KOTAK

MARCH 2011 72.25 59.91 102.46 48.25

MARCH 2012 88.84 75.20 131.35 66.29

MARCH 2013 75.72 80.09 137.76 72.07

MEAN 78.937 71.733 123.85 62.203

SD 7.14 8.595 15.35 10.14

CV 9.04 11.98 12.39 16.30

INTERPRETATION: Efficiently long term funds and making good

TABLE-6 exhibits that bank wise mean profits compare to other banks.
standard deviation & coefficient of variation
of Return on long term funds of selected new Hypothesis:
private sector banks. YES has highest mean H0: μ1= μ2= μ3= μ4 (There is no significant
value and KOTAK has lowest value when relationship between Return on long term
compare to other banks. YES has highest funds ratio among different new private
standard deviation (15.35%) and coefficient sector banks in India)
of variation (12.39%). YES Bank is utilizing H1:μ1≠ μ2 ≠ μ3 ≠ μ4 (There is a significant
relationship between Return on long term
funds ratio among different new private
sector banks in India)
Profitability Degrees of Calculated value Tabular value at H0 : Null
Freedom (Chi Square) 5% level of Hypothesis
significance Accepted/Rejected

Operating Margin 6 2.739 12.592 Accepted

Since the calculated value of Chi-square (AXIS, HDFC, YES, KOTAK) new private
(2.739) is less than the table value (12.592) sectors banks in India.
as shown in table, Null hypothesis is
accepted. It is therefore, concluded that there
is no significant relationship between the
Return on long term funds ratio among

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CONCLUSION: 2. Gupta P.K. and Ashima Jain, Factor

By analyzing the performances on the basis Modelling For IndianPrivate Sector
of profitability it can be concluded that the Banks’ Problem Loans,
YES Bank is good in profitability ratios and InternationalConference On Applied
is efficiently managing its funds and giving Economics Publishing (2010).
high returns to shareholders compare to 3. Makesh, K.G. (2008), “Financial
AXIS Bank, HDFC Bank and KOTAK PerformanceAnalysis of Commercial
MAHINDRA Bank. Banks: A Comparison
REFERENCES: 4. of Federal Bank, Dhanlakshmi Bank,
1. Prasad K.V., Ravinder N.G. and and SBI”,Professional Banker, Vol. 8,
Maheshwari Reddy D., ACAMEL No. 9, pp. 34-44.
Model Analysis of Public and Private 5. Dangwal, R.C., and Reetu Kapoor
Sector Banks in India, Journal of (2010),“Financial Performance of
Banking Financial Services and Nationalised Banks “,NICE Journal of
Insurance Research, 1(5) (2011). Business, Vol. 5, No. 2, pp. 67-79.

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