Capital structure and profitability of selected universal banks in the Philippines

• Main Author: Lim, Edralin C.
• Format: text
• Published: Animo Repository 2015
• Subjects: Bank capital—Philippines; Bank profits—Philippines; Universal banks—Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/6722
• Institution: De La Salle University

The banking industry has a significant part in the economy of either a developing or a fully developed country. Banking systems promote a country’s growth. In turn, this growth can be attained by turning savings into sound investment. This is why the researcher wants to examine the relationship between capital structure and profitability of the banking industry, specifically the universal banks. The researcher based his sample on eleven universal banks in the Philippines from 2006 to 2013. The study used correlation analysis to determine the relationship between capital structure and profitability. To assess the bank’s profitability, return on equity was used. On the other hand, debt to equity ratio and debt to asset ratio were used to measure capital structure. The study showed that debt to equity ratio and debt to asset ratio have a significant positive relationship with return on equity. Evidently, higher leverage profoundly leads to higher profitability – which is encompassed by the concept of moderate view. Moreover, as tax savings are taken advantage by banks, the concept of static trade-off was actually validated. Hence, increasing the net income. Furthermore, it connoted that profitable banks depend severely on debt rather than equity to finance their assets. Overall, the study confirmed that the decisions on how banks manage their resources and capital structure will always be significantly related to profitability.