Executive summary

The core objective of this project is to analyze the impact of

interest rates changes on the profitability of commercial banks
being operated in India by examining the financial statements of
five major banks during 2015-2018. Like the efficiency of
banking sector is considered most important for economic
growth, monetary policy implementation and macro-economic
stability. From the past few years, interest spread of banking
sector of India is rising. As a result variations in the interest rate
depress the savings and investment and on the other hand it
increases the efficiency of banks‟ lending. In this paper interest
rate is an independent variable and bank profitability is a
dependent variable. Various profitability ratios like gross margin,
net profit margin, Return on equity, Return on Assets, Return on
long term funds etc are calculated taking into consideration the
interest spread rate which has a great impact on the profitability
of various banks. The study is based on the sample of top 5
public banks over 5 years of period.

Page | 1
 CHAPTER-1

INTRODUCTION

Page | 2
 Interest rate spread has always been one of the most important and significant
economic issues in different countries of the world. Significant studies and
researches were carried out by banking system researchers in order to find the
reason of fluctuations of this rate and affecting factors on that. The high spread rate
declares the problems in the regulatory environment of bank and asymmetry of
information. In other words, higher spread rate can improve profitability of banking
system, the depth of banking and financial stability with increased tolerance against
negative shocks (Doliente, 2005) and also the high spread rate cannot always be a
good indication of the efficiency of the banking system, but it may indicate
inadequate regulation and banking system instability. If a bank is with poor
performance, it tries to reduce lending interest rates in order to obtain a greater
share of the market (Brock and Suarez, 2000, p. 113, Nazarian, Hashemi Nejad,
2010, p.131)

1.1 BANKING SECTOR

The banking sector is the lifeline of any modern economy. It is one of the important
financial pillars of the financial sector, which plays a vital role in the functioning of
an economy. It is very important for economic development of a country that its
financing requirements of trade, industry and agriculture are met with higher degree
of commitment and responsibility. Thus, the development of a country is integrally
linked with the development of banking. In a modern economy, banks are to be
considered not as dealers in money but as the leaders of development. They play an
important role in the mobilization of deposits and disbursement of credit to various
sectors of the economy. The banking system reflects the economic health of the
country. The strength of an economy depends on the strength and efficiency of the
financial system, which in turn depends on a sound and solvent banking system. A
sound banking system efficiently mobilized savings in productive sectors and a
solvent banking system ensures that the bank is capable of meeting its obligation to
the depositors.

Page | 3
1.2 HISTORY OF BANKING SECTOR
A Bank Is A Financial Institution And Financial Intermediary That Accepts Deposits
And Channels Those Deposits Turns Into Lending Activities, Either Directly Or
Through Capital Markets. Bank Connects Customers That Have Capital Deficits To
Customers With Capital Surpluses. Due To Their Critical Status Within The Financial
System And The Economy Generally, Banks Are Highly Regulated In Most Of The
Countries. They Are Generally Subject To Minimum Capital Requirements Which Are
Based On An International Set Of Capital Standards, Known As The Basel Accords.
Banking In India Originated In The Last Decades Of The 18th Century. The First
Banks Were The General Bank Of India, Which Started In 1786, And Bank Of
Hindustan, Which Started In 1790; Both Are Now Defunct. The Oldest Bank In
Existence In India Is The State Bank Of India, Which Originated In The Bank Of
Calcutta In June 1806, Which Almost Immediately Became The Bank Of Bengal. This
Was One Of The Three Presidency Banks, The Other Two Being The Bank Of
Bombay And The Bank Of Madras, All Three Of Which Were Established Under
Charters From The British East India Company. For Many Years The Presidency
Banks Acted As Quasi-Central Banks, As Did Their Successors. The Three Banks
Merged In 1921 To Form The Imperial Bank Of India, Which, Upon India's
Independence, Became The State Bank Of India In 1955. Structure Of Indian Banking
As Per Section 5(B) Of The Banking Regulation Act 1949: “Banking” Means The
Accepting, For The Purpose Of Lending Or Investment, Of Deposits Of Money From
The Public, Repayable On Demand Or Otherwise, And Withdrawal By Cheque, Draft,
Order Or Otherwise.” All Banks Which Are Included In The Second Schedule To The
Reserve Bank Of India Act, 1934 Are Scheduled Banks. These Banks Comprise
Scheduled Commercial Banks And Scheduled Cooperative Banks. Scheduled
Commercial Banks In India Are Categorised Into Five Different Groups According To
Their Ownership And / Or Nature Of Operation. Besides The Nationalized Banks
(Majority Equity Holding Is With The Government), The State Bank Of India (Sbi)
(Majority Equity Holding Being With The Reserve Bank Of India) And The Associate
Banks Of Sbi (Majority Holding Being With State Bank Of India), The Commercial
Banks Comprise Foreign And Indian Private Banks. While The State Bank Of India
And Its Associates, Nationalized Banks And Regional Rural Banks Are Constituted
Under Respective Enactments Of The Parliament, The Private Sector Banks Are

Page | 4
Banking Companies As Defined In The Banking Regulation Act. These Banks, Along
With Regional Rural Banks, Constitute The Public Sector (State Owned) Banking
System In India. The Public Sector Banks In India Are Back Bone Of The Indian
Financial System. The Cooperative Credit Institutions Are Broadly Classified Into
Urban Credit Cooperatives And Rural Credit Cooperatives. Scheduled Co-Operative
Banks Consist of Scheduled State Co-Operative Banks and Scheduled Urban Co-
Operative Banks Regional Rural Banks are State Sponsored, Regionally Based And
Rural Oriented Commercial Banks. The Government Of India Promulgated The
Regional Rural Banks Ordinance On 26th September 1975, Which Was Later
Replaced By The Regional Rural Bank Act 1976. The Preamble To The Act States
The Objective To Develop Rural Economy By Providing Credit And Facilities For
The Development Of Agriculture, Trade, Commerce, Industry And Other Productive
Activities In The Rural Areas, Particularly To Small And Marginal Farmers,
Agricultural Labourers, Artisans And Small Entrepreneurs. The Reserve Bank Of
India Is The Central Bank Of The Country. Central Banks Are A Relatively Recent
Innovation And Most Central Banks, As We Know Them Today, Were Established
Around The Early Twentieth Century. The Reserve Bank Of India Was Set Up On The
Basis Of The Recommendations Of The Hilton Young Commission. The Reserve
Bank Of India Act, 1934 (Ii Of 1934) Provides The Statutory Basis Of The
Functioning Of The Bank, Which Commenced Operations On April 1, 1935. The Bank
Was Constituted To • Regulate The Issue Of Banknotes • Maintain Reserves With A
View To Securing Monetary Stability

1.3 HOW THE BANKING SECTOR MAKES PROFIT?

The banking sector's profitability increases with interest rate hikes. Institutions in the
banking sector, such as retail banks, commercial banks, investment banks, insurance
companies, and brokerages have massive cash holdings due to customer balances and
business activities.

Increases in the interest rate directly increase the yield on this cash, and the proceeds go
directly to earnings. Now if the question is how the banking sector makes profit? These
companies hold their customers' cash in accounts that pay out set interest rates below

Page | 5
short-term rates. They profit off of the marginal difference between the yield they
generate with this cash invested in short-term notes and the interest they pay out to
customers. When rates rise, this spread increases, with extra income going straight to
earnings.

For example, a brokerage has $1 billion in customer accounts. This money earns 1%
interest for customers, but the bank earns 2% on this money by investing it in short-term
notes. Therefore, the bank is yielding $20 million on its customers' accounts but paying
back only $10 million to customers.

If the central bank brings up rates by 1%, and the federal funds rate rises from 2% to 3%,
the bank will be yielding $30 million on customer accounts. Of course, the payout to
customers will still be $10 million. This is a powerful effect. Whenever economic data or
comments from central bank officials hint at rate hikes, these types of stocks begin to
rally first.

Another indirect way in which interest rate hikes increase profitability for the banking
sector is the hikes tend to occur in environments in which economic growth is strong, and
bond yields are rising. In these conditions, consumer and business demands for loans
spike, which also augments earnings for banks.

As interest rates rise, profitability on loans also increases, as there is a

greater spread between the federal funds rate and the rate the bank charges its
customers. The spread between long-term and short-term rates also expands during
interest rate hikes because long-term rates tend to rise faster than short-term rates. This
has been true for every rate hike since the Federal Reserve was established early in the
20th century. It reflects the strong underlying conditions and inflationary pressures that
tend to prompt an increase in interest rates. This is an optimal confluence of events for
banks, as they borrow on a short-term basis and lend on a long-term basis.

Page | 6
1.4 RECENT STATUS OF BANKING SECTOR IN INDIA

A bank is a financial institution which accepts deposits from the general public and
extends loans to the households, the firms, and the government. The Indian banking
sector is the lifeline of the nation and its people. It is a vital component of the economy of
the country. The banking sector is considered to be the backbone of the modern economy.
The efficiency and growth of a nation depend on the strength and efficiency of its
financial institutions.   The banking sector of India is the hope and aspiration of millions
of people in the country. But to achieve this success the banking sector had to pass many
hurdles. The cooperative banks in connivance with the Indian banking sector is now
providing need-based finance especially for the development of the agricultural sector
which is the backbone of Indian economy. t has been seen that the growth of the Indian
banking sector has been more qualitative rather than quantitative. Further, the credits
take-off has been surging ahead over the past few decades aided by strong economic
growth, rising disposable incomes, increasing consumerism and easier access to credit.
The Indian banking sector has also witnessed an increase in demand for both corporate
and retail loans particularly the services, real estate, consumer durables and agriculture
allied sectors have led to the growth of credit. The Indian banking sector is recently now
focusing on adopting an integrated approach to risk management. The Indian banking
sector has already embraced the international banking supervision accord. The Reserve
Bank of India has decided to set up the public credit registry (PCR), an extensive
database of credit information which is accessible to all stakeholders. The current
scenario of the Indian banking sector is also witnessing a surge in the deposits made
under Pradhan Mantri Jan Dhan Yojana. Efforts are also being made to raise the income
level so as to enhance the banking sector in the rural areas.

Page | 7
CHAPTER-2

OBJECTIVES

Page | 8
2.1 OBJECTIVES

This study is carry out to know the impact of interest rate changes in banks
profitability. Impact of interest rate on banks profitability can be understood by calculating
profitability ratios of various banks and by comparing those ratios with the interest rates.
Profitability ratios are divided into two types: margins and returns. Ratios that show
margins represent the bank’s ability to translate sales dollars into profits at various stages
of measurement. Ratios that show returns represent the bank’s ability to measure the
overall efficiency of the bank in generating returns for its shareholders. It strives to achieve
the following objectives:

 To know the effect of interest rate changes by calculating various profitability ratios
of the bank.

 Gross profit margin ratio

 Operating margin

 Return on assets

 Return on equity

 Return on sales

 Return on investment

 To study the net profit margin of the banks.

 To know the banks efficiency in generating returns for its shareholders.

 Financial analysis of banks using profitability ratios

2.2 SCOPE OF THE STUDY

The research project can be used by the financial authorities of the banks for evaluating
performance in future , and also help to apply the resources of the company properly for
the development of the company. Investors can get a view on the unfavourable public
records and financial position of public banking sector.

Page | 9
The research can also be used by the students to gain knowledge about the banking sector
and evaluate the financial growth and profitability of banking sector.

Researchers can use and refer to this research project for their research work.

Page | 10
 CHAPTER-3

LITERATURE REVIEW

Page | 11
3.1 LITERATURE REVIEW

 Alhassan M, Fred K.A. & Erasmus D.G. (2018), the study examines the effect of
interest rate spread on the profitability of commercial banks in Ghana.The study
measured interest rate spread using net interest income and net interest margin and
bank profitability using return on assets (ROA) and return on equity (ROE). The
study is based on a sample of 24 banks over a ten year period using a panel data.
The results of the study show that there is a positive and statistically significant
association between interest rate spread and bank profitability in Ghana. The
findings could be interpreted within the context of the loanable funds theory to
suggest that the demand for loans exceed the supply of same allowing banks to
charge higher interest on lending relative to deposits to increase profitability. The
results of the study have significant implications on research on interest rate
spread and more specially on government policy to reduce interest rate spread in
Ghana. With profit as a motivation banks will only reduce interest rate spread if it
reduce their profitability but the current evidence shows that banks charge higher
interest margin to maximize profitability.

 Amna K.& Muhammad K.(2016), The purpose of this study is to explain the
relationship between interest rate spread and profitability. Interest rate spread is
actually the difference between deposit rate and lending rate of bank. Interest rate
spread is an important factor in profitability of banks. It means increase or
decrease in interest rate will affect profitability. Many other factors also contribute
in the profitability of banks. The growth of any organization depends on its
profitability. When the organization increases the value of shareholders also
increase.

 Arezoo G. & Malihe R.(2016), this study is done to consider affecting factors on
spread rate and define a suitable model of spread rate in banking industry. Spread
rate is a difference between two related interest rates. In banking industry, spread
rate is the between debts rate and assets rate. Interest rate spread has always been
one of the most important and significant economic issues in different countries of
the world. In this study, affecting factors on spread rate are considering in an
Iranian bank during the last 19 month. Some variables such as NPL ratio, ratio of

Page | 12
 demand deposits on deposits, non interest income, and interest assets to assets,
capital adequacy ratio, ROA ratio and inflation and exchange rate are analyzed on
spread rate and a model is defined for bank according to prior studies and
economical issues of iran.

 Maureen W. & Joseph W.(2014), the paper empirically investigates the

determinants of interest rate spread in Kenya’s banking sector based on panel data
analysis. The findings show that bank-specific factors play a significant role in the
determination of interest rate spreads. These include bank size, credit risk as
measured by non-performing loans to total loans ratio, return on average assets
and operating costs, all of which positively influence interest rate spreads. On the
other hand higher bank liquidity ratio has a negative effect on the spreads. On
average, big banks have higher spreads compared to small banks. The impact of
macroeconomic factors such as real economic growth is insignificant. The effect
of the monetary policy rate is positive but not highly significant. The results
largely reflect the structure of the banking industry, in which a few big banks
control a significant share of the market.

 Michael Y. M. (2012), This study adopted a descriptive research design on a

sample of quoted commercial banks in Kenya. The study used secondary data,
collected from Bank Supervision Report. The study used quantitative techniques
in data analysis to the relationship between the interest rate spread and
performance of commercial banks. The data is presented using tables. The
findings of the research concludes that interest rate spread affect the performance
of commercial banks, as it increases the cost of loans charged on the borrowers,
regulations on interest rates have far reaching effects on performance of
commercial since they determine the interest rate spread in banks and also help
mitigate moral hazards incidental to performance of commercial banks, credit risk
management technique remotely affects the value of a bank’s interest rates spread
as interest rates are benchmarked against the associated nonperforming loans and
non-performing loans is attributable to high cost of loans.

Page | 13
 P. Ramful (2001), This paper examines the determinants of interest rate spread in
the Mauritian banking sector both analytically and empirically. Using balance
sheets and income statements of commercial banks, the spread is decomposed into
its various components. The empirical analysis shows that interest rate spread in
Mauritius is used not only to cover the costs of operating expenses and required
reserves but also reflects the prevalence of market power and compensates for the
quality of loans.

Page | 14
 CHAPTER-4

RESEARCH METHODOLOGY

Page | 15
4.1 Population

Currently there are total of 34 banks in India out of which 12 are public sector
banks and rest 22 are private sector banks.

4.2 Sample Selection

Sample is taken of top 5 public sector banks on the basis of performance parameters
ranging from profitability to customer satisfaction.

COMPANY NAME NET PROFIT 2020

(Rs.cr)
SBI 726.10
INDIAN BANK -4274.45
BANK OF BARODA -12355.15
CANARA BANK -12571.26
UNION BANK -14395.34
(https://www.moneycontrol.com/stocks/marketinfo/netprofit/bse/bank-
public.html)

5.3 Research Design

Project report is descriptive. Descriptive research is characterized by a pre-planned

and structured design. The research design employed for the project is Secondary
Resource Analysis. It is a detailed study and analysis of data that has been
previously collected and published.

5.4 Data Collection

Page | 16
  Data collection method

Secondary data sources are used for the financial analysis of the Indian top five
public sector banks (STATE BANK OF INDIA, INDIAN BANK, BANK OF
BARODA, CANARA BANK AND UNION BANK OF INDIA). Secondary data is
that information which is not research specific and has been collected and compiled
by another investigative or research body. The information is recorded and
published in a structured format.

 Data collection sources

The various sources of secondary data that I have used in formulation of the project
report are:

 Ministry of corporate affairs

 National stock exchange

 Bombay stock exchange

 Annual statements of past 5 years

The selected data was analysed using various profitability ratios like gross profit
margin, operating margin etc.

5.5 Tool and Technique

Page | 17
5.5.1 Financial ratios

Profitability ratios

Every firm is most concerned with its profitability. One of the most frequently used
tools of financial ratio analysis is profitability ratios, which are used to determine
the company's bottom line and its return to its investors. Profitability measures are
important to company managers and owners alike. If a small business has outside
investors who have put their own money into the company, the primary owner
certainly has to show profitability to those equity investors. Profitability ratios show
a company's overall efficiency and performance. Profitability ratios are divided into
two types: .

a) Margin ratios

Ratios that show margins represent the firm's ability to translate sales dollars
into profits at various stages of measurement. Various margin ratios are as
follows:

 Gross profit margin

Gross profit margin is a ratio that indicates the performance of a company's

sales and production. This ratio is made by accounting for the cost of goods
sold which include all costs generated to produce or provide your product or
service and your total revenue. The gross profit margin looks at the cost of
goods sold as a percentage of sales. This ratio looks at how well a company
controls the cost of its inventory and the manufacturing of its products and
subsequently pass on the costs to its customers. The larger the gross profit
margin, the better for the company.  If your business has a gross profit
margin of 24%, it means that 24% of your total revenue became profit.

Gross profit margin = (net sales—the cost of goods sold) ÷ net

sales

A higher gross profit margin indicates efficient processes in a company. A lower

ratio indicates your processes may not be as efficient as they could be. Gross profit
margin is the percent of revenues that remain after deducting the cost of goods sold.

Page | 18
 Operating profit margin

The operating profit margin ratio indicates how much profit a company
makes after paying for variable costs of production such as wages, raw
materials etc. It is also expressed as a percentage of sales and then shows
the efficiency of the company controlling the costs and expenses

associated with business operations.  Furthermore, it is the return achieved

from standard operations and does not include unique or one time
transaction.

Operating profit margin = Operating income ÷ Total revenue

Or = EBIT ÷ Total revenue

Operating profit is also known as EBIT and is found on the company's

income statement. EBIT is earnings before interest and taxes. The operating
profit margin looks at EBIT as a percentage of sales. The operating profit
margin ratio is a measure of overall operating efficiency, incorporating all of
the expenses of ordinary, daily business activity.

 Net profit margin

Net profit margin is the percentage of revenue remaining after all

operating expenses, interest , taxes and preferred stock dividends ( but
not common stock dividends) have been deducted from a company’s
total revenue.

Net profit margin = Total Revenue – Total Expenses)/Total

Revenue

The net profit margin shows how much of each sales dollar shows up as net
income after all expenses are paid. For example, if the net profit margin is 5
percent, that means that 5 cents of every dollar are profit. The net profit

Page | 19
 margin measures profitability after consideration of all expenses including
taxes, interest, and depreciation.

 Cash flow margin

The Cash Flow Margin ratio is an important ratio as it expresses the

relationship between cash generated from operations and sales. The
company needs cash to pay dividends, suppliers, service debt, and invest in
new capital assets, so cash is just as important as profit to a business firm.
The Cash Flow Margin ratio measures the ability of a firm to translate sales
into cash.

Cash flow margin = Cash flows from operating activities/net

sales

The cash flow margin is a measure of how efficiently a company converts

its sales dollars to cash. Because expenses and purchases of assets are paid
from cash, this is an extremely useful and important profitability ratio.

b) Return ratios

Ratios that show returns represent the firm's ability to measure the overall
efficiency of the firm in generating returns for its shareholders. Various
Return ratios are as follows:

 Return on assets (also called return on investment)

The return on assets ratio, often called the return on total assets, is a
profitability ratio that measures the net income produced by total assets
during a period by comparing net income to the average total assets. In other
words, the return on assets ratio or ROA measures how efficiently a
company can manage its assets to produce profits during a period.

Return on assets = Net Income/Total Assets

Page | 20
 The Return on Assets ratio is an important profitability ratio because it
measures the efficiency with which the company is managing its investment
in assets and using them to generate profit. It measures the amount of profit
earned relative to the firm's level of investment in total assets. The return on
assets ratio is related to the asset management category of financial ratios.

 Return on Equity

Return on Equity (ROE) is the measure of a company’s annual return (net

income) divided by the value of its total shareholders’ equity, expressed as a
percentage. ROE can also be derived by dividing the firm’s dividend growth
rate by its earnings retention rate (1 – dividend payout ratio).

Return on Equity = Net Income / Shareholders’ Equity

The Return on Equity ratio is perhaps the most important of all the financial
ratios to investors in the company. It measures the return on the money the
investors have put into the company. It is the ratio potential investors look at
when deciding whether or not to invest in the company

 Cash return on Assets

Cash return on assets measures the proportional net amount of cash spun
off as the result of owning a group of assets. The measure is commonly
used by analysts to compare the performance of businesses within the
same industry, since it is very difficult for someone to obfuscate the cash
flow figure.

Cash return on assets = Cash flow from operations ÷ Total average

assets

 It is used as a comparison to return on assets since it is a cash comparison to this

ratio as the return on assets is stated on an accrual basis. Cash is required for
future investments.
Page | 21
Page | 22
 CHAPTER-5

DATA ANALYSIS AND DATA

INTERPRETATION

5.1 Financial analysis using profitability ratio

 Interest spread

Page | 23
Bank Mar’’1 Mar’1 Mar’ Mar’1 Mar’1
name 9 8 7 6 5
State 6.45 6.65 6.36 6.01 6.26
bank
Of
India
Indian 5.80 6.18 6.98 6.10 5.97
Bank

Bank 6.22 5.91 6.48 6.33 5.47

Of
Barod
a
Canar 5.89 5.64 6.21 6.79 6.43
a
Bank
Union 6.28 6.18 5.74 5.65 5.83
Bank
of
India

Page | 24
 8

5
State bank Of India
Indian Bank
4
Bank Of Baroda
Canara Bank
3
Union Bank of India
2

0
Mar’’19 Mar’18 Mar’7 Mar’16 Mar’15

For any business that lends money, the interest rate spread is what the company
charges on a loan compared to its cost of money. A bank runs on interest rate
spreads, paying a certain rate on savings and CD deposits and making loans at
higher rates than it pays to savers. Publicly traded financial companies such as
banks often report the net interest rate spread earned on quarterly and annual
financial reports. The World Bank supplies interest rate spread data from countries
around the world showing the difference between the average lending rate and
deposit rate.

Net interest spread refers to the difference in borrowing and lending rates of financial
institutions (such as banks) in nominal terms. It is considered analogous to the gross
margin of non-financial companies.

Net interest spread is expressed as interest yield on earning assets (any asset, such as a
loan, that generates interest income) minus interest rates paid on borrowed funds.

Net interest spread is similar to net interest margin; net interest spread expresses the
nominal average difference between borrowing and lending rates, without compensating
for the fact that the amount of earning assets and borrowed funds may be different.

Page | 25
  Gross profit margin

Bank Mar’19 Mar’18 Mar’7 Mar’16 Mar’15

name
State 1.45 -1.36 6.05 6.07 8.12
bank
Of
India
Indian 2.75 7.66 8.60 4.78 6.64
Bank

Bank 2.39 -3.11 3.86 -9.97 7.89

Of
Baroda

Canara 1.43 20.73 2.96 -5.40 6.47

Bank

Union -6.69 -12.94 2.10 4.45 5.62

Bank
of
India

Page | 26
 25

20

15

10 State bank Of India

Indian Bank
5 Bank Of Baroda
Canara Bank
0 Union Bank of India
Mar’’19 Mar’18 Mar’7 Mar’16 Mar’15
-5

-10

-15

Gross profit margin is a metric analysts use to assess a

company's financial health by calculating the amount of money left
over from product sales after subtracting the cost of goods
sold (COGS). Sometimes referred to as the gross margin ratio, gross
profit margin is frequently expressed as a percentage of sales. The
highest gross profit margin ratio in 2018-19 is in Bank of baroda and
lowest in Union bank of India. Table shows the drastic increase in
gross profit ratio of Bank of Baroda from 2018 to 2019. Great fall in
gross profit ratio is seen from 2018 to 2019 in Canara bank and
Indian bank . Gross profit margin of Canara bank decrease from
20.73 to 1.43 from 2018 to 2019 and gross proft margin of Indian
bank decreased from 7.66 to 2.78 from 2018 to 2019.

Page | 27
  Net profit margin

Bank Mar’19 Mar’18 Mar’7 Mar’16 Mar’15

name
State 0.35 -2.96 5.97 6.06 8.59
bank
Of
India
Indian 1.67 7.35 8.76 4.37 6.34
Bank

Bank 0.86 -5.57 3.27 -12.24 7.91

Of
Baroda

Canara 0.74 -10.23 2.71 -6.38 6.17

Bank

Union -8.65 -16.02 1.69 4.19 5.55

Bank
of
India

Page | 28
 15

10

5
State bank Of India
0 Indian Bank
Mar’’19 Mar’18 Mar’7 Mar’16 Mar’15 Bank Of Baroda
-5 Canara Bank
Union Bank of India
-10

-15

-20

The net profit margin is equal to how much net income or profit is generated
as a percentage of revenue. Net profit margin is the ratio of net profits
to revenues for a company or business segment. Above graph depicts the Net
profit margin ratio of the top 5 public banks. Banks like state bank of india,
Bank of Baroda, canara bank and union bank of India shows positive change
from 2018 to 2019. On the other hand Indian bank shows tremendous decline
in its net profit ratio from 7.35 to 1.67 from year 2018 to 2019.

 Return on Long term funds

Bank Mar’19 Mar’18 Mar’7 Mar’16 Mar’15

name
State 79.55 66.97 82.01 83.57 90.85
bank
Of
India
Indian 76.41 75.35 85.04 94.61 102.40
Bank
Bank 69.62 58.38 77.31 61.25 88.35
Of
Page | 29
Baroda
Canara 100.92 132.86 117.11 118.78 142.07
Bank
Union 82.15 72.50 102.85 126.29 144.10
Bank
of
India

160

140

120

100 State bank Of India

Indian Bank
80
Bank Of Baroda
60 Canara Bank
Union Bank of India
40

20

0
Mar’19 Mar’18 Mar’7 Mar’16 Mar’15

The fall in return on long term funds which is not good for the company or a bank
as the return the investors get on the investment made by them has decreased. Bank
of baroda has the lowest return on long term funds ratio of 69.62 in the year 2019
and canara bank has the highest return on long term fund ratio of 100.92 in the year
2019.

 Return on Equity

Page | 30
Bank Mar’19 Mar’18 Mar’7 Mar’16 Mar’15
name
State 0.43 -3.37 6.69 6.89 10.20
bank
Of
India
Indian 1.97 7.95 9.72 5.27 8.00
Bank

Bank 69.62 58.38 77.31 61.25 88.35

Of
Baroda

Canara 1.16 -14.51 3.96 -10.75 10.21

Bank

Union -12.15 -20.90 2.36 6.65 9.68

Bank
of
India

100
80
60 State bank Of India
40 Indian Bank
Bank Of Baroda
20 Canara Bank
0 Union Bank of India
Mar’19 Mar’18 Mar’7 Mar’16 Mar’15
-20
-40

Page | 31
 Return on Equity (ROE) is the measure of a company’s annual return (net income)
divided by the value of its total shareholders’ equity, expressed as a percentage.
Rise in return on equity ratio is seen in all the banks except Indian bank. Indian
bank shows the decline in return on equity ratio from 7.95 to 1.97 from 2018 to
2019. Bank of baroda has risen to 69.62 from 58.38 from 2018 to 2019.

 Return on Assets

Bank Mar’19 Mar’18 Mar’7 Mar’16 Mar’15

name
State 247.53 245.53 236.14 185.85 172.04
bank
Of
India
Indian 403.69 384.11 357.32 338.54 308.84
Bank

Bank 173.66 163.64 174.92 174.46 180.13

Of
Baroda

Canara 480.29 485.58 563.97 582.02 670.44

Bank

Union 150.24 214.76 340.90 332.99 310.81

Bank
of
India

Page | 32
 800
700
600
500 State bank Of India
Indian Bank
400
Bank Of Baroda
300 Canara Bank
Union Bank of India
200
100
0
Mar’19 Mar’18 Mar’7 Mar’16 Mar’15

Return on assets (ROA) is a financial ratio that shows the percentage of profit a

company earns in relation to its overall resources. It is commonly defined as net
income divided by total assets. Return on assets ratio of all the banks has risen from
2018 to 2019 except Canara bank and Union bank of India. Canara bank’s return on
assets ratio has declined to 480.29 from 485.58 . Union bank of India’s return on
assets ratio has declined from 214.76 to 150.24 from 2018 to 2019.

Page | 33
 Chapter-6

Findings and Conclusions

Page | 34
 FINDINGS

On the basis of financial ratio (profitability ratio) analysis:

 The interest rate spread is what the company charges on a loan compared to its cost
of money. State Bank of India has the highest spread rate in the year 2019 , on the
other hand Indian bank has the lowest spread rate.

 Contrary to other ratios, Indian bank in the year 2019 shows highest gross profit
ratio of 2.75 and on the other hand Union Bank Of India’s gross profit ratio is
negative. But the gross profit margin of Indian bank declined from 2018 to 2019 as
interest spread rate of this bank also declined from 2018 to 2019. This shows
interest spread rate has a major impact on gross profit ratio.

 Again union bank of India shows Negative Net profit ratio with -8.64 in the year
2019 and Indian bank has the highest net profit ratio in the 2019 but it’s net profit
margin declined from 2018 to 2019. On the otherhand other banks net profit margin
has risen from 2018 due to rise in interest spread rate.

 In the year 2019, Canara bank is showing highest return on long term funds with the
ratio 100.92 and Bank of baroda is showing the lowest. But the return on long term
funds ratio has declined for canara bank from 2018.

 Bank of Baroda is providing highest return on equity with the ratio of 69.62 and on
the other hand Union bank of India is showing negative return. As inerest spread
rate has risen for all the banks except Indian bank . their return on equity has also
risen except Indian bank whose return on equity declined from 2018.

 Canara bank is providing highest return on assets and State bank of India is
providing the lowest.

Page | 35
 CONCLUSION

The banking sector's profitability increases with interest rate hikes. Institutions in the

banking sector, such as retail banks, commercial banks, investment banks, insurance
companies, and brokerages have massive cash holdings due to customer balances and
business activities.

Increases in the interest rate directly increase the yield on this cash, and the proceeds go
directly to earnings. These companies hold their customers' cash in accounts that pay out
set interest rates below short-term rates. They profit off of the marginal difference
between the yield they generate with this cash invested in short-term notes and the
interest they pay out to customers. When rates rise, this spread increases, with extra
income going straight to earnings. Another indirect way in which interest rate hikes
increase profitability for the banking sector is the hikes tend to occur in environments in
which economic growth is strong, and bond yields are rising. In these conditions,
consumer and business demands for loans spike, which also augments earnings for banks.

As interest rates rise, profitability on loans also increases, as there is a

greater spread between the federal funds rate and the rate the bank charges its
customers. The spread between long-term and short-term rates also expands during
interest rate hikes because long-term rates tend to rise faster than short-term rates.

It is shown in the study that interest spread rate has the great impact on the various
profitability ratios of the banks. Various profitability ratios like gross profit margin
ratio, net profit margin ratio. Return on equity ratio, return on assets ratio is directly
proportional to the interest rates. Interest rate spread is the difference between the
interest receive by banks from borrowers and interest paid to savers.

Interest spread rate of all the banks except Indian bank has declined fron 2018 to
2019 which has great impact on their profitability ratios. If Indian bank is taken into
consideration it is perceive that its interest spread rate has declined from 6.18 to
5.80 which resulted in the decline of various ratios like gross margin ratio, net
profit margin ratio etc . Although the ratio of Indian bank in the year 2019 is the
highest as compare to other banks but it is at lowest as compare to previous year.

Page | 36
 CHAPTER-8

SUGGESTIONS
Some of the recommendations and suggestions are as follows:

 The banks are charging more to borrowers but paying less to

depositors. For the betterment of economy management of bank
should concentrate on their profitability by charging lower
interest rate and providing handsome return to depositors.

 The involvement of money is not necessary to decrease the risk

of bank. It can be minimized by increasing their concentration or
non interest income.

 To regulate the interest spread, Reserve bank of India should play

its significant role.

 About the unexpected variation in the interest rate and capital

adequacy ratio bank must take conscious steps.

Page | 37
 CHAPTER-9

LIMITATIONS

 There are many factors affect to the profitability of the banking sector.
Generally, these factors are categorized as bank specific factors, industry
specific factors and macroeconomic factors. Bank specific factors such as
bank size, capital ratio, deposits ratio, Liquidity ratio and Overhead
expense management. These are internal determinants of bank
profitability. Macroeconomic factors such as inflation, GDP and Market
Capitalization. Many researchers in different countries have investigated
determinants of bank profitability. They have found different factors
affecting bank profitability. But they don’t give a clear picture. Only
interest spread is taken into consideration and rest of the factors are
ignored which is the major drawback of this study.

 The financial details of the bank are collected for 5 years only.

 Ratio analysis is considered only as a tool for analysis rather than an end
by itself. The reliability and significance attached to ratios will largely
depend on the quality of data on which they are based.

 Short time span for the research work. Due to which data was collected
only for 5 years.

Page | 38
 BIBLOGRAPHY

BOOKS

 Kothari, C.R.., “Research Methodology methods & techniques”, 2nd edition, new
publication (pages 1-95)

 Grewal T.S., 2017, “Analysis of financial Statements”, Sultan Chand & Sons Pvt
Ltd (ch4)

 Grag Sandeep, “ Analysis of FIinancial statements”, 3rd Edition, Dhanpat Raj

Publication, (ch4)

JOURNAL

 Ghasemi, A, & Rostami, M. (2016) Determinants of interest rate spread in banking

industry. Ecoforum Journal,5(1)

 Kalsoom A. & Khurshid M.K.(2016), A Review of Impact of Interest Rate Spread

on Profitability, IISTE journal, Vol.25.

 Mang’eli, M. (2012). Relationship between interest rate spread and financial

performance of the commercial banks in Kenya. Un-published Mba project ,
University of Nairobi, Kenya.

 Musah, A., Anokye, F. K., & Gakpetor E. D. (2018) ,The Impact of Interest Rate
Spread on Bank Profitability in Ghana., European journal of Business, Economics
and Accountancy, Vol6

 Ramful P,(2001).The determinants of interest rate spread empirical evidence on the

Mauritian banking sector.Research Department, Bank of Mauritius, ay, 1-20

WEBSITE

 https://www.moneycontrol.com/financials/unionbankindia/ratios/ubi01, accessed on
24.04.2020

Page | 39
 https://www.moneycontrol.com/financials/canarabank/ratios/cb06, accessed on
24.04.2020

 https://www.moneycontrol.com/financials/bankofbaroda/ratios/bob, accessed on
24.04.2020

 https://www.moneycontrol.com/financials/statebankindia/ratios/SBI, accessed on
24.04.2020

 https://www.moneycontrol.com/financials/indianbank/ratios/ib04,accessed on
24.04.2020

 www.moneycontrol.com , accessed on 24.04.2020

 http://mca21.gov.in/mcafoportal/showdirectorMasterData.do , accessed on
24.04.2020

 https://www.moneycontrol.com/stocks/marketinfo/netprofit/bse/bank-public.html,
accessed on 24.04.2020

 https://www.moneycontrol.com/financials/statebankofindia/consolidated-balance-
sheet/sbi, accessed on 25.04.2020

 https://www.moneycontrol.com/financials/unionbankindia/consolidated-balance-
sheet/ubi01, accessed on 25.04.2020

 https://www.moneycontrol.com/financials/bankofbaroda/consolidated-balance-
sheetVI/bob, accessed on 25.05.2020

 https://www.moneycontrol.com/financials/canarabank/consolidated-balance-
sheet/cb06, accessed on 25.05.2020

 https://www.moneycontrol.com/financials/indian%20bank/consolidated-balance-
sheetVI/ib04, accessed on 25.05.2020

Page | 40
 ANNEXURE

Balancesheet of state bank of india

BALANCE MAR '19 MAR '18 MAR '17 MAR '16 MAR '15  
SHEET OF
STATE
BANK OF
INDIA (in
Rs. Cr.)

  12 mths 12 mths 12 mths 12 mths 12 mths  

CAPITAL  
AND
LIABILITIE
S:

Total Share 892.46 892.46 797.35 776.28 746.57  

Capital

Equity 892.46 892.46 797.35 776.28 746.57  

Share
Capital

Reserves 208,949.26 204,581.50 180,800.92 178,442.05 160,640.97  

NET 209,841.72 205,473.96 181,598.27 179,218.33 161,387.54  

WORTH

Deposits 2,940,541. 2,722,178. 2,599,810. 2,253,857. 2,052,960.  

06 28 66 56 79

Borrowings 413,747.66 369,079.34 336,365.66 361,399.39 244,663.47  

TOTAL 3,354,288. 3,091,257. 2,936,176. 2,615,256. 2,297,624.  

DEBT 72 62 32 95 26

Page | 41
Other 293,645.69 290,238.19 285,272.44 271,366.42 235,601.11  
Liabilities &
Provisions

TOTAL 3,863,813. 3,591,585. 3,409,527. 3,072,109. 2,700,110.  

LIABILITIE 12 02 68 10 03
S

ASSETS  

Cash & 177,362.74 150,769.46 161,018.61 160,424.57 144,287.55  

Balances
with RBI

Balance 48,149.52 44,519.65 112,178.54 44,134.90 44,193.50  

with Banks,
Money at
Call

ADVANCE 2,226,853. 1,960,118. 1,896,886. 1,870,260. 1,692,211.  

S 67 54 82 89 33

Investment 1,119,247. 1,183,794. 1,027,280. 807,374.58 673,507.48  

s 77 24 87

Gross 39,940.76 40,300.72 50,245.82 14,469.99 11,978.98  

Block

NET 15,286.82 15,452.73 14,651.94 13,095.96 11,978.98  

BLOCK

Capital 762.30 925.07 694.92 785.70 400.32  

Work In
Progress

Other 276,150.31 236,005.33 196,815.98 176,032.52 133,530.86  

Assets

TOTAL 3,863,813. 3,591,585. 3,409,527. 3,072,109. 2,700,110.  

ASSETS 13 02 68 12 02

Contingent 1,048,507. 1,172,632. 1,187,536. 1,333,889. 1,125,067.  

Liabilities 00 62 34 05 75

Page | 42
Book Value 235.13 230.23 227.75 230.87 216.17  
(Rs)

Balancesheet of Indian bank

BALANCE MAR 19 MAR 18 MAR 17 MAR 16 MAR 15  

SHEET OF
INDIAN
BANK (in Rs.
Cr.)

  12 mths 12 mths 12 mths 12 mths 12 mths  

EQUITIES AND  
LIABILITIES

SHAREHOLDER  
'S FUNDS

Equity Share 480.29 480.29 480.29 480.29 480.29  

Capital

TOTAL SHARE 480.29 480.29 480.29 480.29 480.29  

CAPITAL

Revaluation 3,095.04 2,621.44 2,700.42 2,781.43 2,275.52  

Reserve

Reserves and 480.29 480.29 480.29 480.29 480.29  

Surplus

TOTAL 19,235.17 18,235.15 16,953.55 16,009.54 14,548.67  

RESERVES
AND SURPLUS

TOTAL 16,140.13 15,613.71 14,253.13 13,228.11 12,273.15  

SHAREHOLDER
S FUNDS

Page | 43
Minority Interest 20.46 19.87 19.12 17.25 16.27  

Deposits 242,040.8 208,261.8 182,480.0 178,258.9 169,204.1  

0 1 4 2 8

Borrowings 12,137.54 19,760.17 12,636.89 3,509.32 2,646.09  

Other Liabilities 6,474.02 6,224.12 5,937.55 5,665.77 6,140.22  

and Provisions

TOTAL 280,388.2 252,981.4 218,507.4 203,941.0 193,035.7  

CAPITAL AND 8 1 4 9 2
LIABILITIES

ASSETS  

Cash and 11,701.87 10,501.60 5,588.70 9,174.46 8,301.13  

Balances with
Reserve Bank of
India

Balances with 8,325.74 2,431.90 4,458.54 2,825.16 4,780.71  

Banks Money at
Call and Short
Notice

Investments 65,271.55 71,619.14 67,781.19 53,282.93 46,060.45  

Advances 181,261.9 156,568.9 127,707.7 129,055.4 125,870.2  

1 3 1 4 0

Fixed Assets 3,964.99 3,422.08 3,446.68 3,515.60 2,973.80  

Other Assets 9,862.22 8,437.76 9,524.62 6,087.50 5,049.43  

TOTAL ASSETS 280,388.2 252,981.4 218,507.4 203,941.0 193,035.7  

8 1 4 9 2

CONTINGENT  
LIABILITIES,
COMMITMENTS

Bills for 5,394.56 13,110.61 3,230.56 8,337.10 5,940.16  

Page | 44
Collection

Contingent 36,219.00 25,225.69 29,385.56 24,589.29 35,11

Liabilities

Balancesheet of Canara Bank

BALANCE MAR '19 MAR '18 MAR '17 MAR '16 MAR '15  
SHEET OF
CANARA
BANK (in
Rs. Cr.)

  12 mths 12 mths 12 mths 12 mths 12 mths  

CAPITAL  
AND
LIABILITIES
:

Total Share 753.24 733.24 597.29 542.99 475.20  

Capital

Equity Share 753.24 733.24 597.29 542.99 475.20  

Capital

Reserves 30,487.82 29,639.72 28,714.96 26,422.02 26,610.66  

NET 31,241.06 30,372.96 29,312.25 26,965.01 27,085.86  

WORTH

Deposits 599,123.0 524,846.9 495,266.3 479,748.9 473,724.9  

2 8 4 4 9

Borrowings 41,042.64 38,909.50 39,591.76 26,963.42 25,762.82  

TOTAL 640,165.6 563,756.4 534,858.1 506,712.3 499,487.8  

DEBT 6 8 0 6 1

Page | 45
Other 33,260.04 30,259.50 26,117.18 24,153.66 26,199.38  
Liabilities &
Provisions

TOTAL 705,334.6 624,910.7 590,785.6 558,280.2 553,151.7  

LIABILITIES 3 4 0 6 0

ASSETS  

Cash & 29,921.43 22,102.42 19,924.49 20,665.03 21,976.76  

Balances
with RBI

Balance with 36,609.81 28,122.19 39,042.89 36,078.71 26,670.80  

Banks,
Money at
Call

ADVANCES 428,114.7 382,074.5 342,320.1 324,992.3 330,293.8  

7 8 4 6 7

Investments 168,678.0 157,443.5 162,072.9 152,469.8 155,406.4  

5 6 2 0 6

Gross Block 8,432.78 8,335.30 7,185.00 7,205.64 6,968.93  

NET BLOCK 1,984.61 1,810.57 1,811.85 1,760.98 1,563.08  

Capital Work 0.00 0.00 0.00 0.12 1.05  

In Progress

Other Assets 40,025.97 33,357.43 25,613.32 22,313.25 17,239.66  

TOTAL 705,334.6 624,910.7 590,785.6 558,280.2 553,151.6  

ASSETS 4 5 1 5 8

Contingent 388,113.0 320,612.7 459,853.3 314,712.1 297,570.3  

Liabilities 9 5 3 3 1

Book Value 414.75 414.23 490.75 496.60 569.99  

(Rs)

Page | 46
Balancesheet of Bank of Baroda

BALANCE MAR 19 MAR 18 MAR 17 MAR 16 MAR 15  

SHEET OF
BANK OF
BARODA (in Rs.
Cr.)

  12 mths 12 mths 12 mths 12 mths 12 mths  

EQUITIES AND  
LIABILITIES

SHAREHOLDER  
'S FUNDS

Equity Share 530.36 530.36 462.09 462.09 443.56  

Capital

TOTAL SHARE 530.36 530.36 462.09 462.09 443.56  

CAPITAL

Revaluation 0.00 0.00 0.00 0.00 0.00  

Reserve

Reserves and 530.36 530.36 462.09 462.09 443.56  

Surplus

TOTAL 49,423.76 46,035.87 42,605.48 42,041.07 41,574.09  

RESERVES
AND SURPLUS

TOTAL 49,423.76 46,035.87 42,605.48 42,041.07 41,574.09  

SHAREHOLDER
S FUNDS

Minority Interest 341.36 272.52 232.53 193.69 186.72  

Page | 47
Deposits 665,588.6 607,451.3 617,256.8 586,690.4 629,981.2  
9 6 7 7 5

Borrowings 68,867.53 64,859.82 31,242.00 33,845.23 35,501.52  

Other Liabilities 29,878.24 28,654.98 27,421.54 27,946.53 26,290.24  

and Provisions

TOTAL 819,671.9 747,804.9 719,220.5 691,179.0 733,977.3  

CAPITAL AND 4 2 1 8 8
LIABILITIES

ASSETS  

Cash and 28,225.35 24,034.99 23,915.13 22,810.75 23,556.94  

Balances with
Reserve Bank of
India

Balances with 69,659.49 73,387.76 130,199.8 114,188.3 128,074.2  

Banks Money at 6 0 5
Call and Short
Notice

Investments 195,716.2 175,137.2 140,716.4 128,894.0 130,246.4  

4 3 3 6 5

Advances 484,214.8 437,941.2 392,262.3 391,485.9 435,415.4  

1 6 0 9 9

Fixed Assets 7,367.62 5,532.28 5,929.68 6,359.17 2,978.41  

Other Assets 34,488.44 31,771.40 26,197.11 27,440.81 13,705.84  

TOTAL ASSETS 819,671.9 747,804.9 719,220.5 691,179.0 733,977.3  

4 2 1 8 8

CONTINGENT  
LIABILITIES,
COMMITMENTS

Bills for 49,212.86 67,476.84 37,680.81 49,338.69 37,721.10  

Collection

Page | 48
Contingent 381,543.4 277,405.9 253,394.6 212,910.3 247,332.3  
Liabilities 9 9 0 9 7

Balansheet of Union bank of India

BALANCE MAR '19 MAR '18 MAR '17 MAR '16 MAR '15  
SHEET OF
UNION
BANK OF
INDIA (in
Rs. Cr.)

  12 mths 12 mths 12 mths 12 mths 12 mths  

CAPITAL  
AND
LIABILITIES
:

Total Share 1,763.02 1,168.57 687.44 687.44 635.78  

Capital

Equity Share 1,763.02 1,168.57 687.44 687.44 635.78  

Capital

Reserves 22,733.82 21,741.36 20,426.84 19,779.43 17,838.68  

NET 24,496.84 22,909.93 21,655.28 20,466.87 18,474.46  

WORTH

Deposits 417,504.8 410,288.4 379,687.2 344,117.5 317,450.3  

1 3 6 1 4

Borrowings 43,275.60 45,680.39 41,225.50 30,636.61 35,168.00  

TOTAL 460,780.4 455,968.8 420,912.7 374,754.1 352,618.3  

DEBT 1 2 6 2 4

Page | 49
 Other 10,964.48 9,925.77 10,643.88 9,562.33 11,042.64  
Liabilities &
Provisions

TOTAL 496,241.7 488,804.5 453,211.9 404,783.3 382,144.2  

LIABILITIES 3 2 2 2 5

ASSETS  

Cash & 20,800.40 21,017.35 16,522.37 15,606.92 15,063.87  

Balances
with RBI

Balance with 22,362.68 28,463.01 16,383.55 14,009.89 7,539.14  

Banks,
Money at
Call

ADVANCES 298,780.1 290,571.5 287,949.8 268,249.5 255,921.1  

0 1 3 6 2

Investments 128,391.2 125,510.7 113,441.2 90,573.21 95,449.41  

1 1 6

Gross Block 3,774.46 3,846.05 3,905.41 3,939.33 2,690.14  

NET BLOCK 1,539.65 1,504.17 1,448.61 1,358.09 1,265.43  

Capital Work 0.00 0.00 0.00 12.53 4.29  

In Progress

Other Assets 24,471.69 21,737.78 17,466.30 14,973.13 6,900.99  

TOTAL 496,345.7 488,804.5 453,211.9 404,783.3 382,144.2  

ASSETS 3 3 2 3 5

Contingent 218,673.4 260,255.2 248,005.8 412,467.4 362,805.8  

Liabilities 9 2 3 8 7

Book Value 138.95 196.05 307.14 297.73 290.58  

(Rs)

Source : Dion Global Solutions Limited

Page | 50
 
 Development Fina]
The commercial banks in
Pakistan are charging
more to borrowers but
paying

Page | 51