KAZAKHSTAN'S COMMERCIAL BANKS' RETURNS ON ASSETS: THE IMPACT OF CAPITAL ADEQUACY, OPERATIONAL REVENUE, AND CASH ASSET RATIO

РЕНТАБЕЛЬНОСТЬ АКТИВОВ КАЗАХСТАНСКИХ КОММЕРЧЕСКИХ БАНКОВ: ВЛИЯНИЕ ДОСТАТОЧНОСТИ КАПИТАЛА, ОПЕРАЦИОННЫХ ДОХОДОВ И СООТНОШЕНИЯ ДЕНЕЖНЫХ СРЕДСТВ

Абилкасымов Нуржан Сайдуллаевич

магистрант, Кафедра Бизнес-школа, Университет имени Сулеймана Демиреля,

Казахстан, г.Каскелен.

ABSTRACT

This study investigates how the level of capital adequacy, operating cost, interest rate and cash asset ratio of a banking business influences the return of assets to that industry. Secondary data from the National Bank of Kazakhstan and audited reports of domestic banks will be used in this research. The results show that capital adequacy, operating costs have a positive impact on asset returns, while interest rates and cash asset ratio have a negative impact on ROA. Banks should maintain the results found for the stability between income and fees, reduce operating costs, manage capital, and investors should consider ROA when investing.

Keywords: return on Assets. Capital Adequacy. Operating Costs. Interest rates. Cash Asset ratio.

Introduction

Banks are financial institutions that receive current account, savings and deposits, borrow money (credit) for people who need it, exchange money, move money or receive all forms of payment. Bank is a business entity that collects funds from the public in the form of savings and distributes it to the community in the form of credit. Banks provide stimulus in the form of remuneration to the depositors, such as interest, profit sharing, prize, service or other remuneration. To assess a bank's health, various aspects must be taken into account. This assessment aims to determine if a bank is in healthy or unhealthy condition.

It is based on the financial statements of the bank concerned and a number of financial ratios. Financial ratios are used to measure the financial condition of a company in a certain period or business results of a company at a certain period by comparing two variables taken from the financial statements. Profitability ratio is one of the financial ratios that can be used to measure the effectiveness of the company in obtaining profit.

The banking and financial industry has become a reality in today's economy, with a growing number of institutions and diversity activities. However, there are still challenges that require further intensive efforts on the part of these institutions to enhance the quality of their products and services and diversity, and to keep pace with the rapid developments taking place in the world in this field. To understand the superior performance and struggle for it, managers and policy makers stated the major question is "What drives performance?" To answer this question, researchers have focused their efforts on the operational details. Over the past several years, an increased attention has been received by financial institutions (particularly commercial banks) on performance analysis, which has shifted from characterizing performance in simple ratios to a multidimensional systems perspective. Assessing the relationship among many factors related to bank performance can assist in improving bank productivity.

Capital adequacy, measured by the capital adequacy ratio (CAR), is a key factor influencing bank profitability. Commercial banks with higher capital adequacy ratios have more significant returns on assets, with a positive correlation between these variables. This shows that commercial banks that hold more capital are more capable of taking risks and therefore able to generate higher profits.

Operational revenue is another crucial factor affecting the profitability of commercial banks. The study reveals that operational revenue has a positive correlation with returns on assets. Banks with more operational revenues had higher returns on assets, indicating that higher revenues generated by the bank are positively associated with higher profits.

Cash asset ratio, measured by the ratio of cash assets to total assets, is an important determinant of bank profitability. The results show that higher cash asset ratios lead to higher returns on assets. The study indicates that commercial banks in Kazakhstan that hold more cash assets are more profitable than those with lower levels of cash assets.

  The very rapid development in the banking world and the high level of complexity can affect a bank's performance. The high complexity of banking businesses can increase banks' risks in Indonesia. Banks are financial institutions whose main activity is to collect funds from the public and channel these funds back to the public (Acerete et al., 2015; Wahyudi, 2016). One of the indicators to assess banking financial performance is Return on Assets (ROA). The greater the ROA, the better the financial performance because the return rate (Return) is getting bigger (Faisal et al., 2018). Another indicator in assessing financial performance is comparing operating costs and operating Income (Burkhardt & Wheeler, 2013). This ratio measures the level of efficiency and ability of the Bank to carry out its operational activities in one current period. Operational efficiency is primarily a metric that measures the efficiency of profit earned as a function of operating costs. The greater the operational efficiency, the more profitable a firm or investment is. The entity can generate higher income or returns for the same or lower cost than an alternative. In financial markets, operational efficiency occurs when transaction costs, and reducing fees are. Bank carries out operational efficiency to find out whether the Bank in its operations related to the main business of the Bank are carried out correctly (following the expectations of management and shareholders). It shows whether the Bank has used all its production factors appropriately and effectively. The smaller the total operational costs of the Bank compared to the entire operating income obtained indicates that the Bank can manage its operations well. The more efficient the Bank runs its operations, the more it will positively affect the profits that the Bank gets. It is supported by Wiwoho, J. (2014), who concluded that a higher ratio of Operating Costs to Operational Income decreases ROA.

On the contrary, a lower ratio of Operational Costs to Operating Income impacts increases ROA. Thus, the relationship between Operational Cost Per Operating Income and ROA is negative; the smaller the Operating Cost Per Operating Income, the ROA will increase because the Bank can reduce its operational costs (Wiwoho, J.  et al., 2014).

Literature review

Banks play an essential role in the economic development of a country, as they are intermediaries between depositors and borrowers. They provide specialized financial services, reduce the cost of obtaining information about savings and borrowing opportunities, and help the economy exchange goods and services for money or other financial assets. Financial statements are written records that convey a company's business activities and financial performance. The purpose of a bank's financial statements is to provide financial information about the number and types of assets owned, liabilities, bank capital, business results, costs incurred, and changes that occur in the assets, liabilities, and capital of a bank. Financial performance could be defined as the monetary measurement of a company's policies and operations, and the income statement and balance sheet are essential reports in evaluating the overall financial condition of a company.

This study will evaluate the performance of commercial banks in the Kazakhstan using ROA as a profitability indicator influenced by a set of financial factors (capital adequacy, operating cost, interest rates and liquidity). Financial ratios are used for several important purposes, such as comparing a company's ratios to an average for the sector or to another company's ratios. Financial analysis is assessing the profitability and riskiness of a company and then contrasting those results with industry norms. Financial ratios are used in business education as a second normative application, and are a crucial teaching tool for business courses. According to Huefner (2002), the production and analysis of financial ratios should be a significant component of the introductory accounting course.

This paper examines how ROE is effected by factors such as operating cost, capital adequacy, interest rates and cash asset ratio. Capital adequacy has been the focus of several theories and studies, as it is considered one of the main drivers of the profitability of any financial institution. According to Al-Sabbagh (2004), capital adequacy measures exposure to the bank's risk, which is classified as credit, market, and operational. Kishore (2005) states that capital adequacy is the minimum fund that a financial institution should have to run its business more economically and prudently in order to meet depositors' demands for their money. Pandey (2005) states that adequate capital is a regulated amount of the capital base used by the banking industries to effectively perform the primary function by preventing failure through absorbing losses.

On the contrary, some theories argue that in a world of perfect financial markets, the capital structure and, consequently, capital regulation are insignificant. In 1999, Demirguc-Kunt and Huizinga analyzed the effects of capital adequacy on banking sector performance in 80 countries from 1988 to 1995. Kaya (2002) found that the ratio of capital adequacy had a positive impact on ROA and a negative impact on ROE. Abreu and Mendes (2002) analyzed the banks of Spain, France, Portugal, and Germany for the period 1986-1999. Haslem (1969) collected the balance and income statements of all banks that were members of the US Federal Reserve System.

Research Methods and Materials

This study examined the impact of capital adequacy ratio (CAR) on return on assets (ROA) in seven commercial banks operating in the Kazakhstan banking system. Data was collected over eleven years, from 2009 to 2020, through audited reports from each bank and the Central Bank of Kazakhstan. The GMM model was used to test the impact of CAR, or the capital adequacy ratio, on ROA in the Kazakhstan banking sector. ROA is an indicator that expresses how profitable a company is relative to its total assets. Several studies have demonstrated that CAR, or the capital adequacy ratio, has a significant negative relationship and directly affects ROA.

As a second independent variable, loans positively impact ROA. However, if bank loans are low, more deposits may decrease profits and result in low profitability for banks. The impact of interest rates (Capital adequacy) on ROA is mainly negative. Capital adequacy, in almost every country, have an average of 11%–15%. This study examines the impact of interest rates on the return on assets (ROA) of the banking sector in Kazakhstan.

The hypotheses set out in the study are that capital adequacy has a positive impact on the ROA, loans positively affect ROA, deposits negatively affect ROA, capital adequacy on loans positively affect ROA, and interest rates negatively affect ROA.

Table 1.

Regression model outcomes

Source: Compiled by the author.

This study examines how capital adequacy (CAR) affects return on assets (ROA). The results show that CAR positively influences the return on assets for banks. Liquidity have a negative effect, with a 1% increase in liquidity resulting in a -9.2% loss in asset returns. Capital adequacy on loans has a significant relationship with ROA, with an increase of 1% having an impact on a decrease in ROA of 0.8 percent. This report serves to safeguard depositors and promote the stability and effectiveness of the financial system.

CAR's minimum ratios are designed to ensure that banks have adequate mitigation to sustain losses before becoming insolvent and lose depositors' money. The results of econometric models show that capital adequacy has a positive impact on asset return. Loans have a favorable impact on asset returns, while deposits have a negative impact. Loan capital adequacy have a favorable impact on asset returns. The study found that non-performing loans had a negative impact on the performance of Kazakhstan's commercial banks from 2009 to 2020.

Conclusion

It concluded that Kazakhstan banks should adopt a risk-based approach to capital management and adopt practical strategies to ensure the safety of depositors' money. Additionally, the apex regulatory financial institution should take the level of deposits into consideration when determining the minimum needed capital adequacy ratio for banks.

This study concludes that all the variables of free operating expenses, operating income, and the loan to deposit ratio simultaneously and significantly affect the ROA variable in Private Banks listed on the our data by National Bank of Kazakhstan. The t-test calculation results show that the variable operating expenses to operating income partially have a significant and adverse effect on the ROA variable in Private Banks listed on the our data by National Bank of Kazakhstan. The independent variable capital adequacy partially has a positive and insignificant effect on the ROA variable. Recommendations for banking companies include maintaining the stability between income and fees, reducing operating costs, managing funds originating from loans in the form of debt (liabilities), and expanding the distribution of customer funds in the form of credit. Investors should consider companies that can generate a high ROA when carrying out their activities. According to the study's conclusions, commercial banks should seek to maintain acceptable capital adequacy ratios in order to earn higher returns on assets. Furthermore, in order to boost profitability, commercial banks should focus on increasing operational revenues. Finally, commercial banks should have adequate cash assets to remain competitive in the market.

Finally, this study gives vital insights into the factors that influence commercial banks' returns on assets in Kazakhstan. As such, the study adds significantly to the literature and can be used as a reference for policymakers, bank management, and investors to make educated decisions about commercial bank profitability in Kazakhstan.

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