Assessing the relationship between bank capital adequacy and profitability: the example of BIST deposit banks

Abstract

Purpose-Considering that banks play a major role in the financial system, it is clear that banks need to have a strong capital structure in order for a country to grow and develop sustainably. This makes it all the more important for the banking sector to ensure continued profitability, especially for developing countries like Turkey. From this perspective, the factors that affect banks' profitability and capital adequacy ratios have been studied by many researchers both now and in the past. From these perspectives, the factors affecting the profitability and capital adequacy of banks today and in the past have been the subject of investigation by many researchers. The purpose of this study is to examine the existence of a significant relationship between the capital adequacy ratio and their profitability, which are the two important variables of banks, which are the most important actors of the financial system. Methodology- Annual data 2009-2021 were used from 9 custodians traded in Borsa Istanbul and with continuous data available. Correlation analysis methods were used to determine relationships. Findings- While no significant relationship could be observed between return on assets, taken as profitability variable, and capital adequacy ratio, it was concluded that there was a significant negative relationship between net interest margin and capital adequacy ratio. Conclusion- The insights obtained from the research are expected to contribute to Turkish banking literature and sector managers. Keywords: Deposit banks, profitability, capital adequacy, correlation analysis JEL Codes: G18, G21, O16