Internal determinants of return on equity: case of the UAE commercial banks

The purpose of this study is to examine the association between Return on Equity, a common measure of return to shareholders and long-term solvency, liquidity, efficiency, and risk in the United Arab Emirates (UAE) commercial banks. The sample comprises of twelve publically listed commercial banks and the data analysis period extends from 2008 to 2015. Panel data regression techniques are employed to estimate the association between the dependent variable, Return on Equity (ROE), and independent variables, Capital Adequacy Ratio (CAR), Assets Quality (AQ), Earnings Ability (EA) and Liquidity Ratio (LR). The findings of the study highlight a statistically significant positive relationship between ROE and AQ as well as between ROE and EA, indicating that riskier assets returned higher profitability. Interestingly, insignificant relationships are observed between ROE and CAR and ROE and LR. The results indicate that the returns to shareholders are highly dependent on the efficient and effective use of resources by the management and the quality of assets that the banks carry on their balance sheets.

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