Assessing the Relationship between Capital Structure and Financial Performance of Commercial Banks in Bhutan

Abstract

This study examines the relationship between capital structure and the financial performance of Bhutan’s five commercial banks - Bank of Bhutan Limited (BOBL), Bhutan national Bank Limited (BNBL), Bhutan Developmental Bank Limited (BDBL), Druk Punjab Bank Limited (DPBL) and T Bank Limited from 2014 to 2023. Using audited annual reports, the study applied descriptive statistics and regression analysis to evaluate how debt ratio, equity ratio, and debt-to-equity ratio influence bank profitability measured through Return on Assets (ROA) and Return on Equity (ROE).

Results show that debt financing and debt-to0equity mix have a statistically significant negative effect on ROA, while equity ratio demonstrates a statistically significant positive effect on ROA. In contrast, none of the capital structure variables exhibit a significant impact on ROE, suggesting that capital structure decisions affect asset efficiency more than shareholder returns for Bhutanese banks. The study concludes that reducing reliance on debt and improving equity-based financing may enhance asset profitability. Future research should incorporate boarder financial indicators and panel regression techniques to deepen understanding of capital structure dynamics within Bhutan’s financial sector.