Impact of Capital Adequacy Ratio of Quoted Deposit Money Banks in Nigeria

This study investigated the effect of the Capital Adequacy Ratio (CAR) on the financial performance of quoted deposit money banks in Nigeria, specifically examining its influence on Return on Assets (ROA) and Return on Equity (ROE) while controlling for firm size and leverage. The study was motivated by the importance of adequate capitalization in maintaining banking-sector stability, regulatory compliance, and profitability, particularly in emerging economies where financial-sector resilience is essential. 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 2014–2024. Panel regression techniques, including Pooled Ordinary Least Squares, Fixed Effects, and Random Effects models, were employed, with the Hausman test guiding the selection between the Fixed Effects and Random Effects models. Descriptive statistics, correlation analysis, and diagnostic tests were also conducted to establish the robustness of the results. The findings revealed that CAR had a positive but statistically insignificant effect on ROA (β = 0.0434, p = 0.196 > 0.05) and ROE (β = 0.0283, p = 0.853 > 0.05). Consequently, the null hypotheses (H01 and H02), which stated that CAR has no significant effect on ROA and ROE, were not rejected, suggesting that although capital adequacy strengthens regulatory stability, it does not directly translate into improved profitability. Firm size, however, exerted a positive and statistically significant effect on ROA (β = 0.5809, p = 0.001 < 0.05) and ROE (β = 6.6821, p = 0.000 < 0.05), indicating that larger banks may benefit from economies of scale and greater operational efficiency. Leverage recorded a negative but statistically insignificant effect on ROA (β = −7.5411, p = 0.219 > 0.05) and ROE (β = −5.9450, p = 0.642 > 0.05), indicating that debt levels did not significantly influence profitability among the sampled banks. The overall models explained approximately 48% of the variation in ROA and 42% of the variation in ROE, confirming the joint explanatory contribution of the variables. The study concludes that although CAR remains important for regulatory compliance and financial stability, profitability among quoted Nigerian deposit money banks is more strongly associated with firm size and operational capacity. It therefore recommends that banks prioritize efficient capital utilization, sustainable growth strategies, and operational efficiency to improve financial performance.