Impact of Capital Adequancy Ratio on Return on Equity

This study investigated the effect of the Capital Adequacy Ratio (CAR) on the Return on Equity (ROE) of quoted deposit money banks in Nigeria, while controlling for firm size and leverage. A quantitative research design was employed using secondary panel data obtained from the audited financial statements and annual reports of 10 quoted Nigerian deposit money banks covering the period from 2014 to 2024. The study applied panel regression analysis using the Random Effects model, with the Hausman test employed to guide the choice between fixed-effects and random-effects estimators. Descriptive statistics, correlation analysis, and diagnostic tests were also conducted to assess the reliability and robustness of the estimated models. The findings indicate that CAR has a positive but statistically insignificant effect on ROE (β = 0.0283, p = 0.853 > 0.05). Accordingly, the null hypothesis that CAR has no significant effect on the ROE of quoted deposit money banks in Nigeria was not rejected, suggesting that although adequate capital strengthens regulatory compliance and financial stability, it does not necessarily translate directly into improved profitability. Firm size, however, exerted a positive and statistically significant effect on ROE (β = 6.6821, p = 0.000 < 0.05), indicating that larger banks may achieve superior financial performance through economies of scale and greater operational efficiency. Leverage had a negative but statistically insignificant effect on ROE (β = -5.9450, p = 0.642 > 0.05), implying that variations in debt levels did not significantly affect profitability within the sampled banks. The overall model explained approximately 42% of the variation in ROE, demonstrating the combined explanatory contribution of the variables. The study concludes that while CAR is important for maintaining regulatory stability and financial soundness, bank profitability is more strongly associated with institutional size and operational capacity. It therefore recommends that quoted deposit money banks prioritise efficient capital utilisation, sustainable expansion, and improved operational efficiency as strategies for enhancing profitability.