Evaluating the Decisive Factors of Profitability of the Banking Sector using a Panel Regression Model

• Published in: Journal of commerce and accounting research 2022-01, Vol.11 (4), p.42
• Main Author: Azeem Ahmad Khan
• Format: Article
• Language: English
• Subjects: Banking industry; Financial leverage; Public sector; Return on assets; Return on equity; Variables
• ISSN: 2277-2146; 2320-4990

The aim of this paper is to compute various measures to examine the determinants of financial profitability for the listed Indian public sector banks. This paper will also identify the relationship between the return on equity (ROE) and other independent variables of the Indian banking sector, including all public sector banks, over the past 11 years, starting from April 1, 2009, to March 31, 2020. Therefore, a sample of 12 registered public banking companies and a total of 120 balanced observations are selected for the purpose of analysis. The author has used financial profitability as a dependent variable, represented by the return on equity (ROE), and return on assets (ROA), financial leverage (FL), and credit deposit ratio (CDR) as independent variables. In this study, both fixed effects and the random effects model have been used to look at panel data regression. The author also confirmed both panel techniques with Hausman test-correlated random effects, a widely used procedure for selecting a panel effect. For testing series stationarity, the author used the PP–Fisher 2; ADF–Fisher 2; Levin, Lin, and Chu t; Im, Pesaran, and Shin W-stat; and Breitung t-stat. The results show that return on assets (ROA) and financial leverage (FL) increased the effectiveness of banks in India, while the credit deposit ratio (CDR) reduced the profitability of all public sector banks in India. Only two variables, FL and ROA, were found significant under public sector banks, while taking ROE as the dependent variable. On the other hand, the overall PSB data showed that the CDR reduced the profitability of total PSBs in India. The conclusion of this study will help policymakers, financial managers, and investors in making investment decisions.