IMPACT OF CAPITAL ADEQUACY RATIO (CAR), LOAN-TO-DEPOSIT RATIO (LDR) AND BANK SIZE ON PROFITABILITY OF COMMERCIAL BANKS LISTED ON THE PAKISTAN STOCK EXCHANGE (2011–2020)

Abstract

This study investigates the influence of the (CAR) Capital Adequacy Ratio, (LDR) Loan-to- Deposit ratio, and Bank Size on the profitability measured by (ROA) Return on Assets of commercial banks listed on the Pakistan Stock Exchange (PSX) for the period 2011–2020. By utilizing a quantitative research design and a stratified panel data approach, this study categorizes banks into three distinct groups on their total asset size: Small, Medium, and Large. The main purpose of this division is to examine how the size of a bank changes the effect of financial ratios on its performance. This study explores that profitability of banks cans not be measured by the same factors. Different banks have different reason for achieving higher profitability. For medium- sized banks, CAR emerged as a highly significant driver of profitability. Which indicates that strong capital buffers are essential for banks having high CAR to maintain depositor trust and operational stability. However, this study also found that large banks although having assets but profitability ratio is low. In contrast, small banks indicate that profitability remains relatively independent of traditional LDR and CAR fluctuation. Infact it prioritize niche efficiency and lean operations. For large banks, traditional financial ratios were found to be less significant. Profitability is driven by complex variables like digital transformation, market share, and non- interest income in large banks. The findings of this study suggest that same model of regulatory or management approach for all size banks is ineffective. The study concludes that medium size banks should focus on maintaining capital solvency. While Larger banks to achieving higher financial performance should observe beyond traditional ratios toward revenue diversification.