Determinants of Saudi Banks’ Performance

Abstract

The study investigated determinants of accounting-based and Value-Based Performance Indicators for the Saudi banks listed in the Saudi capital market for 2013-2022. The study used the panel data methodology for least-squared and fixed-effect regression models to test the study’s hypotheses. The study used return on assets, equity, and earnings per share as proxies for accounting-based profit indicators as dependent variables. On the other hand, the study used the market value added, economic value added, and Tobin’s Q as proxies for value-based performance indicators as dependent variables. The study used bank-specific, industry-specific, and macroeconomic–specific as independent variables. The results were mixed and more sensitive to model choices. The least-squared regression models worked better than fixed effect regression models regarding explanatory power and capturing several determinants for value-based performance indicators.  However, fixed effect regression models worked better than least squared regression models in capturing the relationship between the risk measured by the Z score as a proxy for forward-looking risk and performance, as banks with greater stability had better profits and vice versa. These results contradict the theory of risk, return, and performance. All independent variables were statistically significant and good determinants except for the capital adequacy ratio and market share, as the capital adequacy ratio was a statistically insignificant proxy for risk. Therefore, the Z score is better than the capital adequacy ratio as a proxy for risk in capturing risk impacts on banks’ performance. The study revealed Weak correlations between accounting–based and value-based indicators. Therefore, they are complementary, not alternatives.  The study results advanced the theory and the practice in the field of performance.