DU PONT PROFITABILITY
CONCEPT: Du Pont Profitability (also known as the Du Pont identity, Du Pont equation, Du Pont
Model or the Du Pont method) is an expression which breaks ROE (Return on Equity) into three parts,
namely net profit Margin, Assets Turnover and Equity multiplier. The name comes from the Du Pont
Corporation that started using this formula in the 1920s.
The Du Pont identity breaks down Return on Equity (that is, the returns that investors receive from the firm)
into three distinct elements. This analysis enables the analyst to understand the source of superior (or
inferior) return by comparison with companies in similar industries (or between industries).
In order to understand the sources of profitability across bank groups, in the Report on Trend and Progress
of Banking in India 2011-12, RoE analysis and Du Pont analysis have been carried out taking the bank
group-wise data for 2011-12.
RoE Analysis:
 The RoE analysis decomposes the profitability of banks into two components, i.e., profitability of bank
assets, as captured by RoA and leverage, captured by the ratio of total average assets to total average
equity.
 The decomposition of RoE suggests that banks’ profitability can be associated with higher return from
assets or higher leverage or both. While higher return on assets is always considered good, a higher
leverage ratio exposes bank to the risk of insolvency.
 The higher RoE for the SBI group and nationalised banks was associated with a higher leverage ratio,
while for new private sector banks, the higher RoE was attributable to higher profitability of assets and
lower leverage. Among the bank groups, foreign banks had the highest return from assets as well as the
lowest leverage ratio.