Capital Adequacy, Cost Income Ratio and the Performance of Saudi Banks (2007-2011)

Abstract This paper examines the relationship between Capital adequacy and profitability. Necessary data were gathered from the financial statements of nine Saudi banks listed in the stock exchange market over the period of 2007-2011. The results of analyzing the data based on the implementation of linear regression technique reveals that there is a meaningful relationship between capital adequacy, cost-income ratio and bank size with profitability. Profitability represented in this study by the return on assets and return on equity has a negative relationship with capital adequacy. It was also found that Saudi banks efficiency as measured by the cost-income ratio is negatively related to bank profitability. The essence of capital adequacy enhances bank profitability and help in reducing the expected costs of financial distress, including bankruptcy.