Capital Adequacy and Firm Performance of Listed Money Deposit Banks in Nigeria

Abstract

This study investigates the effect of capital adequacy ratio (CAR), Tier 1 leverage ratio (TLR), and equity-to-assets ratio (EAR), on the financial performance of listed deposit money banks in Nigeria. Using return on assets (ROA) as the measure of financial performance, panel data from audited financial reports of the banks for the period 2014 to 2023 was analyzed through a fixed effects model. The findings reveal that CAR has a strong, positive, and statistically significant effect on financial performance, underscoring the importance of maintaining adequate capital levels for financial stability and profitability. HoSwever, the results indicate that both TLR and EAR do not have significant effects on the financial performance of the banks. Bank size, included as a control variable, also does not significantly affect ROA. The study concludes that capital adequacy is crucial for the financial performance of deposit money banks in Nigeria, while leverage and equity ratios require careful monitoring, though their impact may be less direct. Based on the findings, it is recommended that banks strengthen their capital base, and regulatory authorities maintain stringent capital requirements to promote a resilient banking sector.