A STUDY ON FINANCIAL LEVERAGE ON COMPANY PROFITABILITY AT STATE BANK OF INDIA

Abstract

Financial leverage—the extent to which a firm finances its assets through debt relative to equity—is one of the most consequential determinants of corporate profitability, risk profile, and shareholder value creation. In the banking sector, financial leverage assumes a uniquely central role, as debt in the form of deposits and borrowings constitutes the primary raw material of the lending business and the principal source of interest income generation. State Bank of India (SBI), India's largest public sector bank and the country's most systemically important financial institution, provides an ideal empirical context for examining how the degree of financial leverage influences profitability outcomes across varying macroeconomic and credit cycle conditions. This study analyses the impact of financial leverage on the profitability of SBI over the five-year period FY 2018–19 to FY 2022– 23, employing leverage ratio analysis, profitability ratio computation, DuPont decomposition, and regression modelling to quantify the leverage-profitability relationship. Secondary data sourced from SBI Annual Reports, RBI regulatory returns, and NSE/BSE filings forms the empirical basis. Findings reveal that SBI's Debt-toEquity ratio declined from 15.24x in FY19 to 12.62x in FY23, coinciding with a dramatic improvement in Return on Equity from 0.39% to 15.54% and Return on Assets from 0.02% to 0.98%—confirming that deleveraging, improved asset quality, and enhanced net interest margin together drove the bank's profitability recovery. Regression analysis confirms a statistically significant negative relationship between the Debt-toEquity ratio and ROE (coefficient -1.842, p = 0.018), consistent with the theory that excessive leverage amplifies risk and constrains profitability in banking when asset quality deteriorates.