The Influence of Capital Adequacy, Cost-to-Income Ratio, Debt-to-Equity Ratio, Loan-to-Deposit Ratio, and Bank Size on the Performance of Jordanian Banks

Abstract

The study aims to examine the impact of key financial factors, including capital adequacy, cost-to-income ratio, loans compared to deposits ratio, debt-to-equity ratio, and bank size, on the performance of banks in Jordan during the period from 2006 to 2023. Upon determining that all variables in the study were binary, either zero or one, through the Im, Pesaran, Shin, and Philip-Perron tests, we analyzed the banks' annual data utilizing autoregressive distributed lag (ARDL) methodology. The study's findings indicated that capital sufficiency and cost-to-income ratios adversely affect Jordanian banks' short- and long-term profitability. The loan-to-deposit ratio positively impacted the long-term performance of Jordanian banks while leaving their short-term performance unaffected. The size of the bank positively influenced both its long-term and short-term success. The debt-to-equity ratio did not influence their performance in the long term versus the short term. According to the authors, investors should consider capital adequacy, loan-to-deposit ratio, cost of capital, and bank size when making investment selections. The management of Jordanian banks should not retain excessive capital. The administration of Jordanian banks must achieve an equilibrium between profitability and liquidity goals by implementing appropriate lending policies.