Examining the Impact of Capital Structure on the Profitability of the Saudi Banking Sector: A Panel Least Squares (PLS) Approach

This study examines the influence of capital structure and other financial variables on the profitability of Saudi Arabia's banking sector during the period 2010 to 2021. The author used a panel least squares (PLS) model, utilizing 96 observations derived from eight banks. Debt to Asset Ratio (DAR), Debt to Equity Ratio (DER), Financial Leverage (FL), Net Income (NI), Interest Expended to Interest Earned (IEIE), and Interest Income to Total Fund (IITF) are some of the independent variables that affect Rate of Return on Assets (ROA). The findings reveal that DAR positively impacts profitability and reflects effective debt utilization within assets, while DER negatively affects profitability due to the risks of excessive reliance on equity-financed debt. FL also has a strong positive influence, emphasizing the importance of leverage, and NI, though marginally impactful, contributes positively. IEIE shows a slight positive effect, indicating the need for efficient cost management, whereas IITF exhibits a negative but insignificant relationship, suggesting inefficiencies in interest income during the period. The model explains 83.1% of the variation in ROA, emphasizing the collective relevance of these factors. The study underscores the importance of balanced debt and equity management, efficient use of financial instruments, and cost optimization to enhance profitability and sustain financial stability in Saudi banks.