Relationship Between Efficiency, Management Risk, and Profitability

This paper examines the relationship between efficiency and management risks and profitability ratios in eight of the thirteen Saudi banks listed on the Saudi Capital Market Authority over the period 2005 to 2019. This study employs panel data and two specific Estimation Methods were adopted: Panel ordinary least square (POLS), and panel feasible generalized least square (PFGLS). These two methods were used to identify the imbalances represented by autocorrelation and heteroscedasticity coming from fixed and random effects related to cross-section and periods data set. The results show that the profitability of Saudi banks is negatively affected by increasing the capital adequacy ratio and current ratio and positively affected by the employment ratios. It also found that managing banking risks represented by bad debts and credit risk was a significant negative effect on the profitability of banks. These results clearly show that Saudi banks have an excess of liquidity and an increase in the capital adequacy ratio that sometimes exceeds international standards (Basel III), positively affects the investment of funds and thus the profitability of banks. Hence, managers of Saudi Arabia’s publicly listed banks must formulate prudent monetary policies to solve the liquidity crisis and increase profitability.