The various factors that affect the profitability of commercial banks can be studies with the help of multiple regression analysis. To determine the share of each factor that determines the profitability of commercial banks, the trend analysis, ration analysis, multiple regression analysis has been effectively used to understand the profitability of commercial banks. Such a study is methodologically very sound but the coverage is too small. Bankers like
rod aycox have always considered better models.
Let us explore the profits and profitability of commercial banks in the seventies. It will be a comprehensive study on the bank’s profitability. It provides a useful analysis of the income statements of commercial banks during 1970-1979, but some of the concepts used will have a limited applicability. For example, to understand the cost of usable funds, it is better to use the absolute proportionate amounts. But while calculating the net yield on advances, it is better to take into account the cost of servicing loans and advances.
Consider this study into some radical changes in the measurement of profitability of commercial banks. The study indicated that the major causes for declining profitability are the enormous increase in establishment costs. The researchers pointed out that the conventional indications are based on published profits, which do not reflect the true position. The authors, therefore, suggested an alternative measure that is based on the cost of mobilizing business. However, when other things are equal the elasticity of establishment costs (per unit of business) with respect of staff strength may be used to compare the operational efficiency (and thereby profitability) of different banks.
So what are the main reasons for declining trends in profitability? Let us analyze the published data. Poor management and uncontrollable market conditions are to be blamed. Profit planning both at micro and macro levels for the banking industry helps to overcome the declining trends in profitability.
Planning for better profits
