What Influences ROA of the Bank Nifty?

Abstract

Banking stocks have been selling off of late. Lingering asset quality issues that have plagued the banking sector over the past five years have come to the fore front following a slowing economy and a weakening Rupee. The bank nifty index is a key index comprising of the largest bank stocks in India. It would prove useful to understand the key drivers of profitability of the components of this index which would throw light on the profitability of the banking sector at large. This paper studied the influence of key internal determinants on the profitability of bank nifty components over a ten-year period form 2007-2016. The profitability measure chosen was the Return on Assets. The internal determinants chosen for the study comprised of the logarithm of bank size as measured by stock market capitalization, a key lending measure the deposit/credit ratio, income measures that include interest income/average working funds and non-interest income/average working funds, a key productivity measure in business per employee, a key asset quality measure the %Net NPA and a measure of capital adequacy the capital adequacy ratio. Asset quality, capital adequacy, income measures and bank size proved to be the important drivers of profitability of bank nifty components. Stakeholders of banks should focus on these determinants as they seek to understand the rapidly evolving Indian banking landscape.

Keywords: Bank Profitability, Determinants, Indian Banking Sector, Market Capitalization, NPA, Capital Adequacy

JEL Classification: G00, G20, G21, P34