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The Effect of Capital Adequacy on the Profitability of Deposit Money

Banks in Nigeria

Okeke Ijeoma Chinwe.,

Chidi-Okeke Chioma Nnenna.,

Obialo Kenechi Rosita

Department 0f Banking and Finance, Nnamdi Azikiwe University, Awka Anambra State Nigeria

Department 0f Banking and Finance, Federal Polythechic Oko Anambra State Nigeria

DOI: https://dx.doi.org/10.47772/IJRISS.2025.910000042

Received: 02 October 2025; Accepted: 08 October 2025; Published: 03 November 2025

ABSTRACT

The study examines the effect of capital adequacy on the profitability of Nigerian deposit money banks for the

period of 2010 – 2023. The objective of this study is to examine how capital adequacy has helped deposit money

banks achieve an efficient performance. This study adopts an ex-post facto research design, and the sample size

is all deposit money banks in Nigeria. The data used are mainly secondary data collected from the Central bank

of Nigeria statistical bulletin and audited annual publications financial statements of all the deposit money banks

listed on the Nigerian Stock Exchange. The study employed ordinary least square multiple regression (OLS),

descriptive statistical analysis, in addition to E-view electronic packages. According to empirical results at 5%

level of significance, findings shows that Capital Adequacy ratio has a positive and insignificant effect on the

profitability of deposit money Bank in Nigeria,Loan to deposit ratio has a positive and insignificant effect on the

profitability of deposit money Bank in Nigeria,Debt to equity ratio has a negative and insignificant effect on the

profitability of deposit money Bank in Nigeria and Liquid Asset ratio has a positive and insignificant effect on

the profitability of deposit money Bank in Nigeria. The study recommends that the regulatory authorities and

Banks should continue to enforce capital adequacy requirements, focus on credit quality and risk management,

optimize capital structure and manage liquidity effectively.These recommendations aim to promote financial

stability, resilience, and profitability in the banking sector.

Keywords: Return on assets, Capital Adequacy ratio

INTRODUCTION

Background of the Study

Capital adequacy refers to the amount of capital a financial institution, such as a bank, has in relation to its risk-

weighted assets. It ensures that the institution has enough capital to absorb potential losses and maintain

stability.Capital adequacy is crucial for financial institutions to maintain trust and stability in the

financial system.In Africa, where businesses vary widely in regulatory compliance and face unique challenges,

credit defaults can significantly affect banks' profitability and stability, posing a substantial threat to their

financial health(Odebode, Ezi and Ishioro 2024). Capital adequacy refers to a bank’s capacity to maintain

sufficient equity to meet withdrawal demands from depositors while also having enough financial strength to

support asset growth through lending (Nwokoji, 2017). It remains one of the most heavily regulated aspects of

the global banking sector.

The Capital Adequacy Ratio (CAR) serves as a key indicator of a bank's financial health. Adequate capital

enables banks to absorb losses, meet regulatory capital requirements, and enhance overall performance. The

capital adequacy ratio (CAR) is crucial for evaluating banks' financial stability, as sufficient capital enables them

to absorb losses and meet regulatory requirements. The Basel Accords, especially Basel III, enforce stricter

capital adequacy regulations to shield banks from credit defaults and other financial risks(Lucky and

Tamunoiduabia, 2024). A strong capital base often translates into higher financial stability, fostering trust among

depositors and attracting more funds under favorable conditions. In financial systems worldwide, including

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Nigeria’s, banks play a pivotal role by acting as intermediaries between surplus and deficit units—mobilizing

savings and allocating credit (Singh, 2010). One of Nigeria’s most significant financial sector reforms was the

increase in the capital base of banks, which led to the emergence of more robust and resilient institutions. Capital

adequacy, typically expressed as a percentage of a bank’s primary capital to its risk-weighted assets, is used to

evaluate financial strength and stability. Empirical evidence supports the importance of capital adequacy. Ejoh

and Iwara (2014) found it to be a significant determinant of return on assets in Nigerian banks. Similarly,

Ayaydin and Karakaya (2014) concluded that changes in capital levels can affect bank risk and profitability—

either positively or negatively.

The importance of capital adequacy has been further underscored by various banking reforms in Nigeria. The

2004 banking consolidation led by Soludo raised the minimum capital requirement for banks to ₦25 billion,

aiming to improve their ability to withstand financial shocks and boost profitability. To address recurring

challenges in deposit money banks, the Central Bank of Nigeria (CBN) implemented further reforms aligned

with Basel III standards. In 2019, the CBN raised the minimum capital requirement to ₦50 billion for banks

with international authorization and Domestic Systemically Important Banks (D-SIBs), effective from January

2020, to enhance resilience and protect against unforeseen losses (Ofeimun & Akpotor, 2020). A well-capitalized

bank is better equipped to protect depositors, expand operations, and pursue profitable opportunities. Studies by

Olalekan and Adeyinka (2013) suggest that banks with strong capital positions tend to perform better financially,

especially in volatile markets like Nigeria. However, the relationship between capital adequacy and profitability

isn’t always linear.

After the 2007–2009 global financial crisis, Nigeria adopted Basel II and III regulatory frameworks to bolster

capital adequacy, ensuring banks remain solvent during periods of stress (Sanusi, 2010). CBN’s capital adequacy

guidelines currently require a CAR of 15% for banks with international licenses, 16% for D-SIBs, and 10% for

banks with national licenses (CBN, 2019). These standards serve as critical benchmarks for assessing the

financial strength of Nigerian deposit money banks. While recapitalization efforts have helped stabilize the

system, some banks continue to struggle with capital erosion due to losses, as seen in 2017 (Ofeimun & Akpotor,

2020).

Maintaining adequate capital instills confidence in the banking system by assuring stakeholders of a bank’s

ability to meet its obligations. The Capital Adequacy Ratio, which reflects the ratio of a bank’s regulatory capital

to its risk-weighted assets, remains a key metric in evaluating financial soundness. Prudential guidelines also

focus on three main elements: credit risk, market risk, and the form and quality of capital held. These frameworks

reinforce the role of capital adequacy in ensuring long-term solvency and reducing systemic risk in the banking

sector.

Ultimately, profitability reflects a bank’s ability to efficiently generate returns, often measured using profitability

ratios (Ajayi, Enimola & Origin, 2019). These ratios serve as key indicators of how effectively banks utilize

their assets and manage capital to achieve sustainable growth.

Despite regulatory reforms and capital recapitalization efforts in Nigeria, several banks have struggled with

profitability challenges, with some experiencing capital erosion, operational inefficiencies, and distress. This

raises concerns about the effectiveness of capital adequacy in driving profitability in Nigeria's banking system.

The relationship between capital adequacy and profitability is complex, with some studies suggesting that higher

capital levels enhance profitability, while others argue that excessive capital may limit returns. This study aims

to examine the effect of capital adequacy on the performance of Deposit Money Banks (DMBs) in Nigeria

Research Objectives

1. To assess the effect of Capital Adequacy ratio on the profitability of deposit money Bank in Nigeria.

2. To ascertain the effect of loan to deposit ratio on the profitability of deposit money Bank in Nigeria.

3: To evaluate the effect of debt to equity ratio on the profitability of deposit money Bank in Nigeria.

4: To examine the effect of liquid asset ratio on the profitability of deposit money Bank in Nigeria.

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Theoretical Framework

This study is anchored on the Buffer Theory of Capital Adequacy, which suggests that banks maintain excess

capital as a buffer to mitigate the risk of falling below regulatory minimums. This theory implies a trade-off

between capital adequacy and risk-taking. The study's framework is supported by the Central Bank of Nigeria's

regulations on minimum capital adequacy ratios, which align with the Basel Capital Accord approach. Therefore,

the setting of minimum capital requirements and capital adequacy ratios for banks seem to be consistent with

the buffer theory of capital adequacy (Hunjra, Zureigat & Mehmood, 2020). The Buffer Theory provides a

suitable lens for examining capital adequacy in the context of Nigerian deposit money banks.

Empirical Review of Related Studies

John, Ibrahim, Tonga, and Chinyere (2025) analyzed how credit default influences the capital adequacy ratio of

Quoted Deposit Money Banks (QDMBs) in Nigeria. The study analyzed data from thirteen banks listed on the

Nigerian Stock Exchange between 2011 and 2023. Guided by Modern Portfolio Theory (MPT), the study

employed panel regression to explore the relationships between variables. Findings revealed that both credit

spread and non-performing loans positively and significantly affect Tier 1 capital ratios. Conversely, loan loss

provisions and regulatory capital showed minimal impact on Tier 1 capital ratios. The study concluded that non-

performing loans and credit spread—components of credit default—significantly shape banks’ capital adequacy.

Awwad (2023) examined the relationship between capital adequacy ratio and the profitability of Palestinian

banks using data from 2010 to 2019. Six local banks listed on the Palestinian Stock Exchange were sampled. ,

the study found a negative correlation between capital adequacy and bank performance, specifically in terms of

non-performing loans and return on assets.Hassan and Hassan (2023) analyzed the factors influencing the

profitability of Nigerian listed deposit money banks (DMBs) between 2013 and 2022. Using return on assets as

a proxy for profitability, they applied panel regression to data from twelve listed DMBs. The results indicated

that the capital adequacy ratio had a significant positive impact on profitability, while non-performing loans had

a significant negative effect. Ezu, Nwanna, and Eke-Jeff (2023) assessed how capital adequacy affects the

performance of Nigerian deposit money banks from 2000 to 2020. Using an ex-post facto design, Ordinary

Least Squares (OLS) multiple regression revealed that variables like total capital to risk-weighted assets, bank

capitalization to total credit, and debt to equity ratio significantly influenced return on assets. The study

concluded that capital adequacy has both direct and inverse linear effects on banks’ performance.

Abdulai and Umar (2022) studied the impact of capital adequacy ratio and bank size on the profitability of

Ghanaian banks from 2008 to 2017, while also incorporating inflation and monetary policy rate. Using return on

assets as the profitability measure and applying OLS analysis, findings showed that capital adequacy and bank

size positively influenced profitability. Inflation had a positive effect, whereas the monetary policy rate had a

negative impact.Sani and Muhammad (2021) used regression analysis on financial data from fourteen deposit

money banks in Nigeria (2011–2018) to examine the link between capital adequacy and bank performance.

Return on assets and return on equity served as performance indicators. Results demonstrated a significant

positive relationship between capital adequacy and both performance metrics.Aliyu, Abdullahi, and Bakare

(2020) explored the connection between capital adequacy and the financial performance of internationally

authorized DMBs in Nigeria, analyzing secondary data from 2012 to 2019. Panel regression analysis showed

that loans and advances had a significant positive effect on financial performance, and the study concluded that

capital adequacy positively correlates with DMBs’ financial outcomes. Agu and Nwankwo (2019) evaluated

how factors such as loans and advances, owners’ equity, and total deposits impact commercial bank performance

(2010–2017). Regression analysis revealed a positive, though statistically insignificant, impact of owners’ equity

on net interest income. Tochukwu (2016) utilized pooled least squares regression to evaluate the effect of risk

management variables on capital adequacy across twelve banks (2009–2015). The study found that only risk-

weighted asset ratio significantly affected capital adequacy. Ozurumba (2016) investigated the impact of non-

performing loans on commercial bank performance (2000–2013) using OLS and ratio analysis. Findings

revealed a negative relationship between non-performing loans and return on assets. Eyo and Offiong (2015),

focusing on Access Bank Plc (1999–2012), discovered a significant relationship between supplementary capital

and profitability, while no significant link was found for core capital.

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Agbeja, Adelakun, and Olufemi (2015) analyzed how capital adequacy influences profitability and credit risk

exposure in Nigerian banks using secondary data. Their results demonstrated a strong positive relationship

between capital adequacy and profitability.Akani and Lucky (2015) used time-series data and VECM to analyze

capital adequacy ratios and commercial bank profitability (1980–2013). They found a positive long-term

relationship, especially between capital to risk asset ratio and return on assets. Some variables, however, showed

negative correlations.Ejoh and Iwara (2014) assessed capital adequacy’s effect on five Nigerian banks (1981–

2011), finding a strong link between capital ratios and return on assets. The study noted that higher equity capital

enhances bank safety and profitability.Abba, Zachariah, and Inyang (2013) analyzed the relationship between

capital adequacy and banking risk (2007–2011). Regression analysis showed a significant negative

relationship—rising risk levels led to lower capital adequacy.Ezike and Oke (2013) examined how adopting

capital adequacy standards affected Nigerian bank performance. OLS regression showed that loans, deposits,

and total assets significantly influenced earnings per share and profit after tax. Olalekan and Adeyinka (2013)

and Asikhia and Sokefun (2013) found that secondary data supported a significant link between capital adequacy

and profitability, while primary data analysis suggested no significant relationship. Limitations included unclear

population parameters.

RESEARCH METHODOLOGY

Research design

The research design adopted in this study is the ex-post facto .

This research adopted a secondary method of data collection. The quantitative data from annually audited

financial reports of deposit money banks published in Nigeria Deposit Insurance Corporation (NDIC) and

Central Bank of Nigeria (CBN) annual reports and statistical bulletins which contains the independent variable

such as liquid asset ratio, debt to equity ratio ,capital adequacy ratio and loan to deposit ratio and the dependent

variable Return on assets. The data used for this study are time series ranging from 2010 to 2023.

Model Specifications

This study adopted the model of Ezu, Nwanna and Eke-Jeff (2023) with some modifications to suit this study.

The profitability indicator use for this particular study is Return on Assets (ROA) and the major determinants

(independent variables) are Capital Adequacy Ratio (CAR), Debt to equity(DER), Loan to Deposit Ratio(LDR)

and Liquid Asset ratio (LAR).

The regression model of the study is: ROA = ƒ (CAR, LDR, LAR, and DER).

Where: ROA = return on Asset

CAR = capital adequacy Ratio

DER = debt to equity ratio

LAR = liquid asset ratio

LDR = Loan to deposit ratio

The model is specified in econometric form as follows:

ROA= b₀ + b₁ CAR + b₂ LDR + b₃ DER + b4LAR + µt.

Rewritten we will have: Ỳ = ᾳ + b₁ X₁ + b₂ X₂ + b₃ X₃ + b4 X 4 + µt.

Where Ỳ = ROA, X₁ = CAR, X₂ = LDR, X₃ = DER, X4 = LAR

The a priori expectation is β1, β2, β3, β4> 0

ROA = Return on Asset

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CAR = Capital Adequacy Ratio

LDR = Loan to Deposit Ratio

DER = Debt to Equity Ratio

LAR = Liquid Asset Ratio

ε = Error Term

αi = Intercept / constant

β1 - β4 = Coefficient of the Independent Variables.

Capital Adequacy ratio: The Capital Adequacy Ratio (CAR), also known as the Capital-to-Risk-Weighted

Assets Ratio (CRAR), is a measure used by financial institutions, particularly banks, to determine their financial

strength and stability.

Loan to Deposit ratio:A loan ratio typically refers to the proportion of a loan in relation to an asset's value or

the borrower's financial situation. Loan-to-Deposit Ratio (LDR):

Debt to equity ratio: The Debt-to-Equity (D/E) Ratio is a financial metric that compares the total debt of a

company to its shareholders' equity. It indicates how much debt a company is using to finance its operations

relative to the equity invested by its shareholders.

Liquid asset ratio: The Liquid Asset Ratio is a financial metric used to assess a company's ability to meet its

short-term liabilities using its most liquid assets.

Return on Asset: Return on Assets (ROA) is a financial techniques that evaluates a company's ability to generate

profit relative to its total assets. It indicates how efficiently management utilizes assets to produce earnings.

Method of Data Analysis

The data gathered in this study was analyzed using a multiple linear regression model. The Ordinary Least Square

Regression Model predicts the relationships (whether positive or negative) between the dependent and the

independent variable as well as the extent of the relationship. The decision rule of testing of hypotheses in the

study, is as expressed: accept Alternate hypothesis (Ha) if cal p-value is less than 0.05 (p-value < 0.05); otherwise

accept the null hypothesis (Ho).

Data Analysis

Unit Root Test

Unit Root Result

Table 1

Variables

Level

Prob.

Result

CAR

1(0)

0.0003

Stationary

LDR

1(1)

0.0252

Stationary

DER

1(0)

0.0000

Stationary

LAR

1(2)

0.0016

Stationary

ROA

1(0)

0.0002

Stationary

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Source: Researchers computation from Eviews

The result shows the absence of unit root, as CAR and DER were stationary at level, LDR stationary at first

difference while LAR stationary at second difference.

Test of Hypotheses

Test of Hypothesis I

Capital Adequacy ratio has no significant effect on the profitability of deposit money Banks in Nigeria.

Capital Adequacy ratio has a significant effect on the profitability of deposit money Banks in Nigeria.

Table 2 Regression Result for Capital Adequacy Ratio and Return on Asset

Dependent Variable: ROA

Method: ARDL

Date: 05/23/25 Time: 18:35

Sample (adjusted): 2011 2023

Included observations: 13 after adjustments

Maximum dependent lags: 1 (Automatic selection)

Model selection method: Schwarz criterion (SIC)

Dynamic regressors (0 lag, automatic): CAR

Fixed regressors: C

Variable

Coefficient

Std. Error

t-Statistic

Prob.*

ROA(-1)

-0.455305

0.189260

-2.405709

0.0370

CAR

0.173376

0.087804

1.974586

0.0766

-0.082360

1.338551

-0.061529

0.9521

R-squared

0.448267

Mean dependent var

1.736923

Adjusted R-squared

0.337920

S.D. dependent var

0.766066

S.E. of regression

0.623334

Akaike info criterion

2.091707

Sum squared resid

3.885458

Schwarz criterion

2.222080

Log likelihood

-10.59610

Hannan-Quinn criter.

2.064910

F-statistic

4.062350

Durbin-Watson stat

1.015769

Prob(F-statistic)

0.051126

Source: Eviews Output

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Interpretation of Regression Result

The regressed coefficient correlation result in table 2 shows the existence of a positive effect of Capital adequacy

ratio (CAR) on Banks Return on Asset (ROA) (0.173376) at 5% significant level. The probability value for the

slope coefficient shows that P(x

=0.0766>0.05). This implies that Capital adequacy ratio (CAR) has no

statistically significant effect on return on asset at 5% significance level. The coefficient of determination

obtained is 0.44826 (44.826%), which is commonly referred to as the value of R

. The cumulative test of

hypothesis using R

to draw statistical inference about the explanatory variable employed in this regression

equation, shows that the R-Squared value tells that 44.826% of the systematic variations in the Banks return on

asset is predicted by the Capital adequacy ratio (CAR) while 55.174% was explained by unknown variables that

were not included in the model. The Durbin-Watson statistic of 1.0157 indicates that there is no auto-correlation

problem.

Consequently, since the P-value of Capital adequacy ratio (CAR) is greater than the critical value of 0.05, thus

we accept the null hypothesis that Capital Adequacy ratio has no significant effect on the profitability of deposit

money Banks in Nigeria.

Test of Hypothesis II

Loan to Deposit ratio has no significant effect on the profitability of deposit money Banks in Nigeria.

Loan to Deposit ratio has a significant effect on the profitability of deposit money Banks in Nigeria.

Table 3: Regression Result for Loan to Deposit ratio and Return on Asset

Dependent Variable: ROA

Method: ARDL

Date: 05/23/25 Time: 18:36

Sample (adjusted): 2011 2023

Included observations: 13 after adjustments

Maximum dependent lags: 1 (Automatic selection)

Model selection method: Schwarz criterion (SIC)

Dynamic regressors (0 lag, automatic): LDR

Fixed regressors: C

Variable

Coefficient

Std. Error

t-Statistic

Prob.*

ROA(-1)

-0.384754

0.219562

-1.752375

0.1103

LDR

0.003570

0.023159

0.154147

0.8806

2.221485

1.538510

1.443920

0.1794

R-squared

0.234964

Mean dependent var

1.736923

Adjusted R-squared

0.081957

S.D. dependent var

0.766066

S.E. of regression

0.734002

Akaike info criterion

2.418565

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Sum squared resid

5.387593

Schwarz criterion

2.548938

Log likelihood

-12.72067

Hannan-Quinn criter.

2.391767

F-statistic

1.535643

Durbin-Watson stat

1.194323

Prob(F-statistic)

0.262065

Source: Eviews Output

Interpretation of Regression Result

The regressed coefficient correlation result in table 3 shows the existence of a positive effect of Loan to Deposit

ratio (LDR) on Banks Return on Asset (ROA) (0.003570) at 5% significant level. The probability value for the

slope coefficient shows that P(x

=0.8806>0.05). This implies that Loan to Deposit ratio (LDR) has no

statistically significant effect on return on asset at 5% significance level. The coefficient of determination

obtained is 0.2349 (23.49%), which is commonly referred to as the value of R

. The cumulative test of hypothesis

using R

to draw statistical inference about the explanatory variable employed in this regression equation, shows

that the R-Squared value tells that 23.49% of the systematic variations in the Banks return on asset is predicted

by the Loan to Deposit ratio (LDR) while 76.51% was explained by unknown variables that were not included

in the model. The Durbin-Watson statistic of 1.1943 indicates that there is no auto-correlation problem.

Consequently, since the P-value of Loan to Deposit ratio (LDR) is greater than the critical value of 0.05, thus

we accept the null hypothesis that Loan to Deposit ratio has no significant effect on the profitability of deposit

money Banks in Nigeria.

Test of Hypothesis III

Debt to Equity ratio has no significant effect on the profitability of deposit money Banks in Nigeria.

Debt to Equity ratio has a significant effect on the profitability of deposit money Banks in Nigeria.

Table 4: Regression Result for Debt to Equity Ratio and Return on Asset

Dependent Variable: ROA

Method: ARDL

Date: 05/23/25 Time: 18:37

Sample (adjusted): 2011 2023

Included observations: 13 after adjustments

Maximum dependent lags: 1 (Automatic selection)

Model selection method: Schwarz criterion (SIC)

Dynamic regressors (0 lag, automatic): DER

Fixed regressors: C

Variable

Coefficient

Std. Error

t-Statistic

Prob.*

ROA(-1)

-0.414574

0.180405

-2.298017

0.0444

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DER

-0.143832

0.065633

-2.191472

0.0532

4.140005

0.858211

4.823993

0.0007

R-squared

0.481945

Mean dependent var

1.736923

Adjusted R-squared

0.378334

S.D. dependent var

0.766066

S.E. of regression

0.604011

Akaike info criterion

2.028724

Sum squared resid

3.648287

Schwarz criterion

2.159097

Log likelihood

-10.18671

Hannan-Quinn criter.

2.001926

F-statistic

4.651484

Durbin-Watson stat

1.051862

Prob(F-statistic)

0.037315

Interpretation of Regression Result

The regressed coefficient correlation result in table 4 shows the existence of a negative effect of Debt to Equity

ratio (DER) on Banks Return on Asset (ROA) (-0.1438) at 5% significant level. The probability value for the

slope coefficient shows that P(x

=0.0532>0.05). This implies that Debt to Equity ratio (DER) has no statistically

significant effect on return on asset at 5% significance level. The coefficient of determination obtained is 0.4819

(48.19%), which is commonly referred to as the value of R

. The cumulative test of hypothesis using R

to draw

statistical inference about the explanatory variable employed in this regression equation, shows that the R-

Squared value tells that 48.19% of the systematic variations in the Banks return on asset is predicted by the Debt

to Equity ratio (DER) while 51.81% was explained by unknown variables that were not included in the model.

The Durbin-Watson statistic of 1.0518 indicates that there is no auto-correlation problem.

Consequently, since the P-value of Debt to Equity ratio is greater than the critical value of 0.05, thus we accept

the null hypothesis that Debt to Equity ratio has no significant effect on the profitability of deposit money Banks

in Nigeria.

Test of Hypothesis IV

Liquid Asset ratio has no significant effect on the profitability of deposit money Banks in Nigeria.

Liquid Asset ratio has a significant effect on the profitability of deposit money Banks in Nigeria.

Table 5: Regression Result for Liquid Asset Ratio and Return on Asset

Dependent Variable: ROA

Method: ARDL

Date: 05/23/25 Time: 18:38

Sample (adjusted): 2011 2023

Included observations: 13 after adjustments

Maximum dependent lags: 1 (Automatic selection)

Model selection method: Schwarz criterion (SIC)

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Dynamic regressors (0 lag, automatic): LAR

Fixed regressors: C

Variable

Coefficient

Std. Error

t-Statistic

Prob.*

ROA(-1)

-0.372870

0.222478

-1.675983

0.1247

LAR

0.002418

0.012235

0.197623

0.8473

2.327219

0.762021

3.054011

0.0122

R-squared

0.236130

Mean dependent var

1.736923

Adjusted R-squared

0.083356

S.D. dependent var

0.766066

S.E. of regression

0.733443

Akaike info criterion

2.417040

Sum squared resid

5.379385

Schwarz criterion

2.547413

Log likelihood

-12.71076

Hannan-Quinn criter.

2.390243

F-statistic

1.545615

Durbin-Watson stat

1.219757

Prob(F-statistic)

0.260075

Source: Eviews Output

Interpretation of Regression Result

The regressed coefficient correlation result in table 5 shows the existence of a negative effect of Liquid Asset

ratio (LAR) on Banks Return on Asset (ROA) (0.0024) at 5% significant level. The probability value for the

slope coefficient shows that P(x

=0.8473>0.05). This implies that Liquid Asset ratio (LAR) has no statistically

significant effect on return on asset at 5% significance level. The coefficient of determination obtained is 0.2361

(23.61%), which is commonly referred to as the value of R

. The cumulative test of hypothesis using R

to draw

statistical inference about the explanatory variable employed in this regression equation, shows that the R-

Squared value tells that 23.61% of the systematic variations in the Banks return on asset is predicted by the

Liquid Asset ratio (LAR) while 76.39% was explained by unknown variables that were not included in the model.

The Durbin-Watson statistic of 1.0518 indicates that there is no auto-correlation problem.

Consequently, since the P-value of Liquid Asset ratio is greater than the critical value of 0.05, thus we accept

the null hypothesis that Liquid Asset ratio has no significant effect on the profitability of deposit money Banks

in Nigeria.

DISCUSSION OF FINDINGS

The result of our first hypothesis shows that Capital adequacy ratio has positive and insignificant effect on

profitability of deposit money banks in Nigeria. The positive effects suggest that while capital adequacy may

contribute to profitability, it is not a dominant factor alone. This may indicate that while capital strength matters,

factors like operational efficiency, asset quality and macroeconomic factors may be more critical drivers of

profitability. Research by Agbeja, O., Adelakun, O.J., & Olufemi, F. I. (2015) showed a positive and significant

relationship between capital adequacy and profitability of bank which differs from our findings.The result of our

second hypothesis shows that the weak correlation and high p-value indicates that loan to deposit ratio does not

significantly influence profitability of deposit money banks. Even though LDR is often used to access a banks

liquidity and risk exposure, In this case, it does not appear to directly affect profitability of deposit money banks.

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This suggest that banks’ ability to generate returns on their asset may rely more on factors like interest margins,

operational efficiency, or asset quality rather than the mere proportion of loans to deposit.

The result of our third hypothesis indicates a negative correlation between debt to equity and return on asset.

This means that as DER increases, ROA tends to decrease slightly. The P-value is above the 5% threshold,

indicating no statistical significance. The negative correlation suggest that increasing financial leverage could

reduce profitability in deposit money banks. This aligns with conventional financial theory that excessive debt

raises financial risk, which can reduce investor confidence and increase interest expenses thereby lowering

returns.

The result of our final hypothesis indicates a positive correlation between liquid asset ratio and return on asset.

This shows practically no relationship exist between liquid asset ratio and return on asset; changes in liquidity

levels have almost no linear effect on profitability. The p-value is very high, indicating that the effect is not

statistically significant.

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

Summary of Findings

1. Capital Adequacy ratio has a positive and insignificant effect on the profitability of deposit money Bank

in Nigeria.

2. Loan to deposit ratio has a positive and insignificant effect on the profitability of deposit money Bank in

Nigeria.

3. Debt to equity ratio has a negative and insignificant effect on the profitability of deposit money Bank in

Nigeria.

4. Liquid Asset ratio has a positive and insignificant effect on the profitability of deposit money Bank in

Nigeria.

Conclusion

This study examined the effect of Capital Adequacy Ratio (CAR), profitability of deposit money banks in

Nigeria. Using regression analysis, the findings provide insights into how selected capital adequacy indicators

influence bank profitability. The analysis revealed that Capital Adequacy Ratio has a positive but weak and

marginally significant impact on profitability, suggesting that well-capitalized banks are slightly more capable

of generating returns on their assets. Similarly, the Debt to Equity Ratio exhibited a weak negative relationship

with ROA, indicating that excessive reliance on debt financing may reduce profitability, the Loan to Deposit

Ratio and Liquid Asset Ratio showed no significant effect on ROA, suggesting that variations in lending

behavior or liquidity holdings do not directly translate to changes in profitability during the study period.

Overall, the study concludes that while capital structure and adequacy play a modest role in influencing bank

profitability in Nigeria, liquidity and lending ratios do not significantly affect ROA. Policymakers and bank

managers should therefore focus on maintaining optimal capital levels and prudent debt management, while not

overemphasizing liquidity levels unless they compromise operational efficiency.

Recommendations for Regulatory Authorities and Banks

1. Enforce Capital Adequacy Requirements: Regulatory authorities should continue to enforce capital adequacy

requirements and encourage banks to maintain higher capital buffers. Banks should focus on improving their

capital structure through retained earnings and equity financing to enhance resilience and profitability.

2. Focus on Credit Quality and Risk Management: Banks should prioritize credit quality, interest margin, and

risk management over aggressive lending strategies, as the Loan to Deposit Ratio has no significant impact on

profitability.

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3. Optimize Capital Structure: Banks should adopt a balanced capital structure, combining equity and debt to

minimize risk and maximize returns. They should avoid over-reliance on debt financing, which can have a

negative impact on profitability.

4. Manage Liquidity Effectively: While maintaining adequate liquidity is crucial for operational stability, banks

should invest excess liquid assets in productive, interest-generating opportunities to maximize returns.

These recommendations aim to promote financial stability, resilience, and profitability in the banking sector.

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