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Capital Adequacy, Cost Income Ratio and the Performance of Saudi Banks (2007-2011)

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  • Ahmad Aref Almazari

    () (King Saud University-RCC)

Abstract

This paper examines the relationship between Capital adequacy and profitability. Necessary data were gathered from the financial statements of nine Saudi banks listed in the stock exchange market over the period of 2007-2011. The results of analyzing the data based on the implementation of linear regression technique reveals that there is a meaningful relationship between capital adequacy, cost-income ratio and bank size with profitability. Profitability represented in this study by the return on assets and return on equity has a negative relationship with capital adequacy. It was also found that Saudi banks efficiency as measured by the cost-income ratio is negatively related to bank profitability. The essence of capital adequacy enhances bank profitability and help in reducing the expected costs of financial distress, including bankruptcy.

Suggested Citation

  • Ahmad Aref Almazari, 2013. "Capital Adequacy, Cost Income Ratio and the Performance of Saudi Banks (2007-2011)," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(4), pages 284-293, October.
  • Handle: RePEc:hur:ijaraf:v:3:y:2013:i:4:p:284-293
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    References listed on IDEAS

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    1. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-456, May.
    2. Ho, Shirley J. & Hsu, Su-Chu, 2010. "Leverage, performance and capital adequacy ratio in Taiwan's banking industry," Japan and the World Economy, Elsevier, vol. 22(4), pages 264-272, December.
    3. Molyneux, Philip & Thornton, John, 1992. "Determinants of European bank profitability: A note," Journal of Banking & Finance, Elsevier, vol. 16(6), pages 1173-1178, December.
    4. Saibal Ghosh & D. M. Nachane & Aditya Narain & Satyananda Sahoo, 2003. "Capital requirements and bank behaviour: an empirical analysis of Indian public sector banks," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(2), pages 145-156.
    5. Athanasoglou, Panayiotis & Delis, Manthos & Staikouras, Christos, 2006. "Determinants Of Bank Profitability In The South Eastern European Region," MPRA Paper 10274, University Library of Munich, Germany.
    6. Fadzlan Sufian & Royfaizal Razali Chong, 2008. "Determinants of Bank Profitability in a Developing Economy: Empirical Evidence from the Philipinnes," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 4(2), pages 91-112.
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