Balancing Liquidity and Profitability: An Empirical Analysis of Saudi Commercial Banks (2020–2024)
Balancing Liquidity and Profitability: An Empirical Analysis of Saudi Commercial Banks (2020–2024)

Summary/Abstract: This study investigates the impact of liquidity risk on the financial performance of 10 Saudi banks over the period 2020 to 2024 using dynamic Generalized Method of Moments (GMM) models. Liquidity risk is primarily measured by the Loan-to-Deposit Ratio (LDR), while additional liquidity indicators include Liquid Assets to Total Assets (LATA) and Cash and Cash Equivalents (CCE). Firm performance is assessed through Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q, capturing both accounting profitability and market valuation. The results indicate that higher LDR significantly diminishes bank profitability and market value. In contrast, greater liquid assets relative to total assets (LATA) positively affect performance across all measures. Cash and cash equivalents (CCE) do not show a significant impact. Model diagnostics confirm the validity of instruments and the absence of secondorder autocorrelation, supporting the robustness of the findings. These insights emphasize the critical importance of liquidity management for banking performance in Saudi Arabia, offering valuable guidance for regulators and bank managers.

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