Does Capital Structure Affect Banks’ Profitability? Evidence from Nordic Commercial Banks

Abstract

This study uses panel data analysis with profitability variables measured by return on assets, return on equity and net interest margin to examine the relationship between capital structure and profitability in 19 Nordic commercial banks from the year 2015 to 2024. This study concludes that the leverage or the ratio of liabilities to total assets is found to have a significant and inverse relationship with bank profitability through random effect regression model. Whereas higher equity values tends to improve performance on asset returns and interest margins, higher leverage results in lower profitability. Bank size promotes profitability through economies of scale whereas inflation has a positive effect on banks capacity to negotiate higher pricing. GDP growth shows no relevant influence on bank performance. These findings are in favor of the tradeoff theory of capital structure and indicate that maintaining an optimal debt and equity balance is vital for profitability and financial stability throughout the Nordic bank scenario, providing invaluable lessons for bank managers, regulators, and investors in the developed market setting.