Non-Performing Loans and Operating Expenses Impact on Capital Adequacy Ratio

General Background: Banks are pivotal to economic development, serving
as financial intermediaries that facilitate capital flow between savers and
borrowers. Their financial health is often assessed using ratios like the Capital
Adequacy Ratio (CAR), Non-Performing Loans (NPL), and Operating
Expenses to Operating Income (OEOI). Specific Background: The CAR
indicates a bank's ability to withstand potential losses, making it a critical
measure of financial stability. The relationship between NPL, OEOI, and
CAR, with Return on Equity (ROE) as a moderating variable, remains
underexplored, particularly in the context of Indonesian commercial banks.
Knowledge Gap: Previous studies have inadequately addressed how ROE
moderates the effects of NPL and OEOI on CAR. Aims: This study aims to
examine the interactions between NPL and OEOI on CAR, moderated by
ROE, using data from 30 commercial banks listed on the Indonesian Stock
Exchange from 2018 to 2020. Results: The findings reveal that NPL
significantly negatively impacts CAR, while OEOI's effect is negative but
insignificant. ROE moderates the impact of OEOI on CAR significantly but
not NPL. Novelty: This study introduces ROE as a moderating variable,
providing a nuanced understanding of its differential effects on CAR in the
Indonesian banking sector. Implications: The results offer practical insights
for bank management to optimize financial performance and contribute
theoretically to the literature on banking stability and profitability. These
findings can inform future research and decision-making in the financial
industry.