Modelling the effects of capital adequacy, credit losses, and efficiency ratio on return on assets and return on equity of banks during COVID-19 pandemic
-
DOIhttp://dx.doi.org/10.21511/bbs.17(1).2022.10
-
Article InfoVolume 17 2022, Issue #1, pp. 115-124
- Cited by
- 1071 Views
-
439 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The study aims to determine the impact of Capital Adequacy Ratio, Credit Losses Ratio and Efficiency Ratio on the two significant profitability ratios, namely Return on Assets (ROA) and Return on Equity (ROE), during the pandemic. Panel Data Regression is used to model the effects of Capital Adequacy, Credit Losses and Efficiency Ratio on Return on Assets and Return on Equity of Indian banks. A suitable model has been developed by analyzing the results of the Hausman test and the p-values. It has been found that Capital Adequacy Ratio (CAR) with coefficient value of –0.664, CET1 with coefficient value of 1.83 and efficiency ratio with coefficient value of 1.825 have significantly affected the return on assets as their p-values are less than 0.05. However, the accepted relationship between CAR and ROA, efficiency ratio and ROA were inverse, but their coefficients were significant. The provision for credit losses (PCL) was not affecting the ROA significantly during the pandemic and hence was not considered while framing the model. Again, the dependent variable is the return on equity, except CAR. Other ratios, i.e., CET1, efficiency ratio, and PCL ratio have unacceptable correlations and are even non-significant as their p-values are less than 0.05.
- Keywords
-
JEL Classification (Paper profile tab)C32, C33, C34, C30
-
References33
-
Tables5
-
Figures0
-
- Table 1. Results of the Hausman test for Model-1
- Table 2. Results of OLS model for Model-1
- Table 3. Formulation of fixed effect panel regression model for Model-1
- Table 4. Results of Hausman test for Model-2
- Table 5. OLS model results for Model-2
-
- Abubakar, M. Y., Shaba, Y., Ezeji, M. O., & Ahmad, S. S. (2016). Effect of Credit Risk Management on Return on Assets and Return on Equity: Empirical Evidence from Nigerian Banks. IOSR Journal of Business and Management, 18(12), 96-104.
- Ahmad, F., Tahir, S. H., & Aziz, D. B. (2014). Impact of Loan Loss Provision on Bank Profitability in Pakistan. Research Journal Social Science Management, 3(12), 34-41.
- Almazari, A. A. (2013). Capital Adequacy, Cost Income Ratio and the Performance of Saudi Banks (2007–2011). International Journal of Academic Research in Accounting, 3(4), 284-293.
- Bandaranayake, S., & Jayasinghe, P. (2013, June). Factors Influencing the Efficiency of Commercial Banks in Sri Lanka. Sri Lankan Journal of Management, 18(1).
- Barua, B., & Barua, S. (2021). COVID19 implications for banks: evidence from an emerging economy. SN Business & Economics, 1(1), 1-28.
- Bobade, D. P., & Alex, P. A. (2020). Study The Effect of Covid-19 In Indian Banking Sector. JournalNX – A Multidisciplinary Peer Reviewed Journal, 179-184.
- Dao, B., & Nguyen, K. (2020). Bank Capital Adequacy Ratio and Bank Performance in Vietnam: A Simultaneous Equations Framework. Journal of Asian Finance, Economics and Business, 7(6), 39-46.
- Demirgüç-Kunt, A., Pedraza, A., & Ortega, C. R. (2020, August). Banking Sector Performance During the COVID-19 Crisis. SSRN Electronic Journal.
- Devi, P., & Pant, A. (2020). An Empirical Study on Liquidity and Solvency Performance in ICICI Bank. International Journal of Research in Engineering, Science and Management, 3(11), 50-52.
- Ekinci, R., & Poyraz, G. (2019). The Effect of Credit Risk on Financial Performance of Deposit Banks in Turkey. Procedia Computer Science, 158, 979-987.
- Faisal, F. E., Khan, M. S., & Miah, M. J. (2018). Impact of Different Elements on ROE of Banks. Journal of Hotel and Business Management, 7(2), 1000182.
- Federal Deposit Insurance Corporation (FDIC). (2018). FDIC Law, Regulations, Related Acts (No. 324.10). Minimum capital requirements.
- Ferrouhi, M. (2018). Determinants of banks’ profitability and performance: an overview (MPRA Paper No. 89470).
- Hawaldar, I. T., Babitha, R., Pinto, P., & Rajesha, T.M. (2017a). The Impact of Oil Price Crisis on Financial Performance of Commercial Banks in Bahrain. Banks and Bank Systems, 12(4), 4-16.
- Hawaldar, I. T., Lokesh., & Biso, S.S. (2016a). An empirical analysis of financial performance of retail and wholesale Islamic banks in Bahrain. American Scientific Research Journal for Engineering, Technology, and Sciences, 20(1), 137-147.
- Hawaldar, I. T., Lokesha, K. A., Kumar, Pinto, P., & Sison, S. M. (2017b). Performance Analysis of Commercial Banks in the Kingdom of Bahrain (2001–2015). International Journal of Economics and Financial Issues, 7(3), 729-737.
- Hawaldar, I. T., Pinto, P., & Lokesha. (2016b). An empirical analysis of performance of retail and wholesale conventional banks in Bahrain. British Journal of Economics, Finance and Management Sciences, 12(1), 1-10.
- Hawaldar, I. T., Rahiman, H., Rajesha, T. M., & Naveen, K. K. R. (2017c). A Comparison of Financial Performance of Islamic and Conventional Banks in Bahrain. American Scientific Research Journal for Engineering, Technology, and Sciences, 33(1), 100-110.
- Iqbal, I. T., & Joseph, N. R. (2011). A comparative study of service quality of conventional and interactive banking. Journal on Banking, Financial Services, and Insurance Research, 1(2), 1-15.
- Kajola, S.O., Sanyaolu, W. A., Alao, A., & Ojunrongbe, O. J. (2019). Liquidity and Profitability Dynamics: Evidence from the Nigerian Banking Sector. Accounting and Taxation Review, 3(2), 1-12.
- Katusiime, L. (2021). COVID 19 and Bank Profitability in Low-Income Countries: The Case of Uganda. Journal of Risk and Financial Management, 14(12), 588.
- Klepczarek, E. (2015). Determinants of European Banks’ Capital Adequacy. Comparative Economic Research, 18(4), 81-98.
- Kumar, J., & Selvan, R. T. (2014). Capital Adequacy Determinants and Profitability of Selected Indian Commercial Banks. Global Journal for Research Analysis, 3(11), 57-59.
- Li, F., & Zou, Y. (2014). The impact of credit risk management on profitability of commercial banks: A study of Europe. Journal of Business and Economics, 4(8), 1-93.
- Lotto, J. (2018). The Empirical Analysis of the Impact of Bank Capital Regulations on Operating Efficiency. International Journal of Financial Studies, 6(2), 34.
- Perwej, A. (2020). The Impact of Pandemic COVID-19 on the Indian Banking System. International Journal of Recent Scientific Research, 11(10), 873-883.
- Peterson, K. O., & Erick, O. (2017). Bank loan loss provisions research: A review. Borsa Istanbul Review, 17(3), 144-163.
- Sari, A. R., & Sulistyo, S. (2011). Capital Adequacy Ratio, Loan to Deposit Ratio, and Efficiency Ratio on Return on Assets Banking Companies In Indonesia Stock Exchange. In Proceedings of the Annual Conference on Social Sciences and Humanities (ANCOSH 2018) – Revitalization of Local Wisdom in Global and Competitive Era (pp. 372-375).
- Sebayang, P. (2020). The Impact of the Capital Adequacy Ratio, Non-Performing Loan Against to Return on Equity (Case Study Private Bank in Indonesia).
- Shabani, H., Morina, F., & Misiri, V. (2019). The Effect of Capital Adequacy on Returns of Assets of Commercial Banks in Kosovo. European Journal of Sustainable Development, 8(2), 201.
- Sheeba, J. J. (2017). A Study on the Impact of Credit Risk on the Profitability of State Bank of India. ICTACT Journal on Management Studies, 3(2), 538-542.
- Sohrabi, C., Alsafi, Z., O’Neill, N., Khan, M., Kerwan, A., AlJabir, A., Iosifidis, C., & Agha, R. (2020). World health organization declares global emergency: A review of the 2019 novel coronavirus (COVID-19). International Journal of Surgery, 76, 71-76.
- Udom, I. S., & Eze, R. O. (2018). Effect of Capital Adequacy Requirements on the Profitability of Commercial Banks in Nigeria. International Research Journal of Finance and Economics, 165, 79-90.