Profitability of Banking Companies Based on The Influence of Non-Performing Loans And Capital Structure

Abstract

This study examines the profitability of banking companies by analyzing the influence of non-performing loans (NPLs) and capital structure. Non-performing loans, indicative of the quality of a bank's loan portfolio, directly impact profitability by affecting the bank’s revenue generation and risk management. The capital structure, which reflects the proportion of debt and equity financing, plays a critical role in determining the bank’s financial stability and capacity for growth. This research utilizes a quantitative approach, analyzing financial data from a sample of banking institutions over a specified period. The results reveal a significant negative relationship between NPLs and profitability, indicating that higher levels of non-performing loans reduce bank profitability. Conversely, the study finds that a well-optimized capital structure positively influences profitability, with banks maintaining a balanced mix of debt and equity demonstrating better financial performance. These findings highlight the importance for banking companies to manage their loan portfolios effectively and optimize their capital structures to enhance profitability. The study contributes to the existing literature by providing empirical evidence on the dual impact of NPLs and capital structure on the financial performance of banks, offering valuable insights for bank management and policy makers.