1.1. Research Background
Banking plays a crucial role in the economy as it functions as a financial intermediary that channels funds from surplus units (society) to deficit units (productive sectors) while also maintaining financial system stability. Through this intermediation function, banks contribute significantly to economic growth, capital formation, and financial inclusion. However, in carrying out these functions, banks are increasingly confronted with complex challenges, particularly in balancing financial performance with sustainable development goals and social-environmental responsibilities.
In recent years, the global financial sector has experienced a paradigm shift toward sustainability driven by environmental concerns, regulatory pressures, and stakeholder expectations. This has led to the emergence of the Green Banking concept, which emphasizes the integration of environmental sustainability into banking activities, including financing decisions, investment policies, and internal operations. Green banking focuses on reducing the environmental footprint of banking operations and promotes financing for environmentally friendly and sustainable projects.
The implementation of green banking practices has the potential to enhance bank profitability, particularly through improved operational efficiency and better risk management in credit portfolios. Environmentally responsible lending tends to reduce long-term risks, especially those associated with environmentally harmful projects, which, in turn, contributes to financial stability and profitability.
In addition to sustainability practices, bank performance is determined by internal financial fundamentals, particularly the capital adequacy and loan-to-deposit ratios. The Capital Adequacy Ratio reflects a bank’s ability to absorb potential losses and maintain solvency under risk exposure. A higher capital adequacy ratio indicates stronger capital resilience, which can enhance public confidence and support long-term profitability.
In contrast, the Deposit Ratio measures the extent to which a bank utilizes its deposits to provide loans. An optimal loan to deposit ratio indicates effective intermediation and income generation through lending activities. However, excessively high loan-to-deposit ratios were utilized. According to Batten and Vo (2019), liquidity management is a key determinant of bank performance, as it directly influences both risk exposure and profitability.
Furthermore, profitability, measured by Return on Assets (ROA), reflects how efficiently a bank uses its assets to generate earnings. ROA is widely used by regulators, investors, and analysts as a key indicator of performance. Saeed and Izzeldin (2016) highlight that profitability is influenced by a combination of factors such as capital, liquidity, macroeconomic conditions, and regulatory frameworks.
Empirical findings regarding the relationship between the capital adequacy ratio, loan-to-deposit ratio, and return on assets remain inconsistent. Some studies have found that the capital adequacy ratio has both positive and negative effects on profitability, depending on how effectively banks manage credit risk and liquidity. Ozili (2018) emphasizes that excessive lending without proper risk assessment can reduce profitability despite higher income from loans.
In the Indonesian context, Mustika et al. (2025) confirm that variations in research results are influenced by differences in bank characteristics, time periods, and the adoption of sustainability practices such as green banking. Therefore, further empirical investigation is necessary, particularly focusing on banks that implement green banking principles and are listed on the Indonesia Stock Exchange.
Based on the above explanation, it is important to examine the effect of the capital adequacy ratio and loan-to-deposit ratio on return on Assets: Banking companies implementing Green Banking. This Study is expected to provide a deeper understanding of how financial fundamentals interact with sustainability practices in influencing bank profitability and contribute to the development of sustainable financial strategies in the banking sector.

1.2. Research Objectives
The goals of this research are to examine real evidence. First, find out how the capital adequacy ratio affects the return on assets of green banking companies that are listed on the Indonesia Stock Exchange. Second, look into how the loan to deposit ratio affects the return on assets of green banking companies that are listed on the Indonesia Stock Exchange. Third, look at how the capital adequacy ratio and loan to deposit ratio affects the return on assets of green banking companies that are listed on the Indonesia Stock Exchange at the same time.

2.1. Legitimacy Theory 
Legitimacy theory holds that organizations, as part of society, can only survive if their operations are perceived to be in line with the value system and norms upheld by the society in which they operate. This theory emphasizes that companies must continuously ensure that their activities, policies, and products are socially acceptable to maintain legitimacy. One of the main ways Companies achieve this through transparent disclosures in corporate reports, such as annual and sustainability reports (Suchman, 1995; Deegan, 2002).
According to legitimacy theory, organizations actively seek to justify their existence by aligning their operations with the expectations of society. When there is a gap between corporate actions and public expectations, companies may use disclosure strategies to reduce this gap and maintain their legitimacy (Dowling & Pfeffer, 1975). Furthermore, disclosing financial performance, including profitability and risk management indicators, can function as a legitimizing tool used by companies to influence public perception and meet stakeholder expectations regarding corporate performance. Companies with better financial ratios and transparent reporting practices are more likely to gain public trust and sustain their legitimacy in the long term.

2.2. Hypothesis Development

2.2.1. The Relationship Between Capital Adequacy Ratio and Return on Assets
The capital adequacy ratio indicates the extent to which a bank’s assets, including loans, securities, and interbank placements, are financed by its capital in addition to funds obtained from external sources such as public deposits, borrowings, and other liabilities. The capital adequacy ratio serves as a key indicator of a bank’s financial strength and ability to absorb potential losses arising from operational and credit risks.
Banks that maintain an adequate capital adequacy ratio are better positioned to ensure customer protection and sustain overall financial stability. A strong capital adequacy ratio indicates that a bank has sufficient capital reserves to withstand unexpected losses, thereby enhancing public confidence and supporting long-term operational continuity. Furthermore, regulators often impose minimum capital adequacy ratio requirements to ensure that banks operate within a safe risk threshold and maintain systemic stability.
The higher a bank’s capital adequacy ratio, the greater its capacity to manage and mitigate the risk of financial loss. However, excessively high capital levels may also indicate that the bank is not optimal. Utilizing its funds to generate income could potentially reduce profitability. Therefore, maintaining an optimal capital adequacy ratio level is essential to balance risk management and profit generation (Astuti, 2022). 
H1: Capital Adequacy ratio has a positive effect on Return on Assets

2.2.2. The Relationship between Loan to Deposit Ratio and Return on Assets
The loan to Deposit Ratio is the ratio between the total loans disbursed by a bank and the total funds collected from third-party deposits. This ratio reflects the bank’s liquidity condition as well as its efficiency in channeling funds into productive lending activities. The loan to deposit ratio is an important indicator used to assess how effectively a bank performs its intermediation function, namely transforming public deposits into credit that generates income.
A higher loan-to-deposit ratio indicates that a larger proportion of deposited funds has been allocated to loans, which can potentially increase the bank’s interest income and profitability. May face difficulties in meeting short term withdraw demands from depositors, conversely, a low loan to deposit ratio suggest that the bank is being more conservative in lending, which may reduce risk but can also indicate inefficiency in utilizing available funds to generate income.
Therefore, maintaining an optimal level of loan to deposit ratio is crucial for balancing liquidity risk and profitability. An appropriate loan to deposit ratio level enables banks to maximize returns while still maintaining sufficient liquidity to meet their obligations. In this context, the higher the loan-to-deposit ratio, the greater the potential for profit generation, provided that credit risk is properly managed and lending activities are conducted prudently. 
H2: Loan to Deposit Ratio has a positive effect on Return on Assets

The conceptual framework of this study is as follows (see Figure 1):

Figure 1. Model Framework

3.1. Sources of Data 
This study employed a quantitative approach. As stated by Sugiyono (2019), a quantitative approach is a systematic and structured scientific method used to examine phenomena through numerical data and statistical analysis. This approach emphasizes objectivity, measurement, and the use of statistical tools. According to Creswell (2018), quantitative research is widely used to test theories by examining the relationships among variables using measurable data and, statistical procedures. 
The population consists of banking companies listed on the Indonesia Stock Exchange (IDX) during the 2022-2024 period, with a total of 47 banks. From this population, a sample of 12 banks was selected, resulting in 36 observations over a three-year period. The sampling technique used was purposive sampling, a non-probability sampling method that selects samples based on specific criteria relevant to the research objectives. This method ensured that the selected samples met the requirements necessary for an accurate analysis. According to Sekaran and Bougie (2020), purposive sampling allows researchers to obtain more relevant and reliable data by focusing on samples that meet predefined criteria. The criteria used for selecting the sample were as follows:

Table 1. Sample Selection Criteria

Source: Data Processed, 2026

Based on the above criteria, the list of sample companies is as follows (see Table 2):

Table 2. List of Sample Companies

Source: Data Processed, 2026

The type of data used is secondary data, which includes financial statements and sustainability reports of banks. Secondary data were chosen because they are readily available, reliable, and audited, making them suitable for quantitative analysis. The data were obtained from the official website of the IDX, namely www.idx.co.id as well as from the respective company website. The use of secondary data is consistent with quantitative research practices, as it enables efficient data collection and supports large-scale analysis across multiple periods. 

3.2. Variable Definition and Measurement

3.2.1. Capital Adequacy Ratio 
The capital adequacy ratio is the ratio between a bank’s capital and its total risk-weighted assets. This ratio measures the extent to which a bank has sufficient capital to absorb potential losses arising from its exposure and to fulfil both its short- and long-term obligations. The capital adequacy ratio is widely recognized as a key indicator of the soundness and stability of a bank’s capital.
A higher capital adequacy ratio indicates that the bank has a stronger capital base to withstand financial shocks, thereby enhancing its ability to manage risks and maintain operational sustainability. Safeguard depositor funds and comply with the regulatory requirements. Conversely, a low capital adequacy ratio may signal vulnerability to financial distress, as banks may not have sufficient capital to cover unexpected losses.
In the banking industry, regulators establish minimum capital adequacy ratio requirements to ensure that financial institutions operate at a safe level of risk. Therefore, maintaining an optimal level of capital adequacy ratio is essential not only for regulatory compliance but also for supporting profitability and long-term growth. However, high capital levels may indicate inefficiency in capital utilization, as funds that could otherwise be invested in income-generating assets remain idle.
The formula used to measure the capital adequacy ratio is as follows:

Capital Adequacy Ratio=(Total Capital)/(Risk Weighted Assets)  x 100%

3.2.2. Loan to Deposit Ratio 
The loan-to-deposit ratio is the ratio between the total loans granted by a bank and the total third-party funds collected from deposits. This ratio is used to measure a bank’s ability to channel funds effectively while maintaining adequate liquidity. Loan to deposit ratio reflects both the bank’s liquidity position and its efficiency in performing its intermediation function, namely transforming public deposits into productive loans that generate income. 
A higher loan-to-deposit ratio indicates that a larger portion of the bank’s funds has been allocated to lending activities, which can potentially increase interest income and overall profitability. However, a high loan-to-deposit ratio may signal that the bank is too aggressive in lending. This could lead to liquidity constraints and increased risk if many depositors withdraw their funds at the same time. Conversely, a low loan-to-deposit ratio suggests that the bank is more conservative in its lending strategy, which may reduce risk but also indicates less optimal utilization of available funds.
According to research by Rahayu (2020), a higher loan-to-deposit ratio reflects a bank’s aggressive credit distribution strategy, but if it exceeds a certain threshold. This can expose banks to liquidity risks and reduce their financial stability. Therefore, maintaining an optimal level of loan to deposit ratio is crucial to balance profitability and risk management. The formula used to measure the loan-to-deposit ratio is as follows:

Loan to Deposit Ratio=(Total Loans)/(The Third Party Funds)  x 100%

where total loans represent the total credit disbursed by the bank, and total third-party funds include savings, demand deposits, and time deposits collected from customers. 

3.2.3. Return On Assets
Return on assets is a measure of a bank’s profitability that indicates how effectively the bank can generate profits from its total assets. This ratio reflects the efficiency of management in utilizing bank resources to produce earnings. Return on assets is considered one of the most important indicators of financial performance, as it provides a comprehensive picture of how well a bank manages its assets to generate net income.
A higher return on assets value indicates that the bank is more efficient in converting its assets into profit, which reflects strong operational performance and effective utilization of its assets, which may be caused by high operational costs, poor credit management, or suboptimal asset allocation. The higher the return on assets, the greater the bank’s ability to generate profits from its assets, which also enhances investor confidence and financial performance. 
Return on assets is widely used by regulators, investors, and financial analysts as a key indicator to assess a bank’s operational efficiency and overall performance. It is also an important benchmark for comparing the profitability of different banks within the industry. Therefore, maintaining a stable and increasing return on assets is essential for ensuring the sustainability and competitiveness of banks in the financial market. The formula used to measure the return on assets ratio is as follows:

Return On Assets=(Net Income)/(Total Assets)  x 100%

where net income represents the bank’s profit after tax, and total assets represent all resources owned and controlled by the bank during a specific period (see Table 3).

Table 3. Operational Definition of Variables

Source: Data Processed, 2026

4.1. Descriptive statistics
The sample of the research consists of 12 banks, and the research period is 2022-2024, with 36 observations. Table 4 is a descriptive statistic of the variables used in this study.

Table 4. Descriptive Statistical Test Results

Source: Data Processed by E-views 13, 2026

In Table 1, the dependent variable used in this study is return on assets. Return on assets variable has a minimum value of 292.611, a maximum value of 1143.000, and an average return on assets of the 36 observations is 271.500 with a standard deviation of 209.553. The independent variable in this study is the capital adequacy ratio, which has a minimum value of 0.456, a maximum value of 1.0528, an average of 0.853 from 36 observations, and a standard deviation of 0.0937. the return on assets variable is the second independent variable in this study. Descriptive statistical information is presented in Table 4. The processed results show that out of a total of 36 samples, the minimum value is 1819.0, with a maximum value of 5370.0, an average of 2566.0, and a standard deviation of 1005.8. 

4.2. Regression Model Suitability Test Results
For more details, see Table 5, Table 6, and Table 7.

Table 5. Chow Test (Fixed Effect Model)

Source: Data Processed by E-views 13, 2026

Table 6. Haussman Test (Random Effect Model)

Source: Data Processed by E-views 13, 2026

Table 7. Langrange Multiplier Test (Common Effect Model)

Source: Data Processed by E-views 13, 2026

The Random Effects Model was used in this study, as it passed the model suitability tests, including the Chow Test, which was 0.0000, which is less than 0.05. Therefore, we used the Hausman Test to proceed with further analysis. The Hausman Test shows a probability value of 0.8606, which is higher than 0.05; therefore, it satisfies the conditions needed for using the Random Effects Model. The last step was to check the Breusch-Pagan value and compare it with the general effects model value using the Lagrange Multiplier Test. The Breusch-Pagan test showed a score of 0.000, which is less than 0.05; therefore, the Random Effects Model was the best choice for this study. According to Valdiansyah and Murwaningsari (2022), classical assumption tests are not required if the Random Effects Model is chosen as the best model. 

4.3. Correlation Test 

Table 8. Correlation Test Result

Source: Data Processed by E-views 13, 2026

Based on the Table 8, the capital adequacy ratio variable has a probability of 0.2104 > 0.05, which means that H1 is rejected, indicating that capital adequacy ratio has no effect on ROA, the capital adequacy ratio regression coefficient value of 481.6877 indicates that the capital adequacy ratio variable has a positive effect on return on assets as a proxy for bank profitability. It can be concluded that the capital adequacy ratio has no effect on ROA. The loan to deposit ratio regression coefficient value of 0.067419 indicates that the loan to deposit ratio variable has a positive effect on ROA as a proxy for the bank’s profitability. It can be concluded that the loan to deposit ratio has no effect on ROA. 

4.4. Hypothesis Results

Table 9. Regression Result (Random Effect Model)

Source: Data Processed by E-views 13, 2026

Based on the results of the research model regression in the Table 9, the following multiple linear regression equation was obtained: 

Return On Assets it = -314.6 + 481.7*Capital Adequacy Ratio + 0.067*Loan to Deposit Ratio

The explanations are as follows. First, the constant value of -314.6 indicates a negative relationship between the capital adequacy ratio and loan to deposit ratio variables and the return on assets of banking companies that implement green banking. Second, the capital adequacy ratio (X1) was 481.7. This parameter or regression coefficient value indicates that if the capital adequacy ratio variable increases, the return on assets of banking companies that implement green banking will increase by 481.7 times, assuming other variables remain constant. Third, the loan-to-deposit ratio (X2) is 0.067. This parameter or regression coefficient value indicates that if the loan to deposit ratio variable increases, the return on assets of banking companies that implement green banking will increase by 0.067 times, assuming other variables remain constant. 

4.4.1. Capital Adequacy Ratio has a negative influence on Return on Assets 
With a p-value of 0.2104, which is higher than the significance level of 0.05 (5%), the results of the first hypothesis test indicate that the Capital Adequacy Ratio has a negative but not statistically significant effect on return on assets. This finding suggests that although the regression coefficient shows a negative relationship, the effect cannot be considered statistically meaningful because the significance value exceeds the predetermined threshold. Therefore, the hypothesis that the Capital Adequacy Ratio has a significant effect on the Capital Adequacy Ratio is not supported. They also reported that Capital Adequacy does not significantly impact bank profitability. One possible explanation is that a higher Capital Adequacy Ratio reflects a more conservative capital structure. Banks tend to hold excess capital to meet regulatory requirements and mitigate risks rather than actively utilizing those funds for income-generating activities. Consequently, the potential for profit generation from available assets may not be fully optimized. 
Furthermore, this finding indicates that the level of capital adequacy owned by banks does not necessarily have a direct influence on their ability to generate profits through asset utilization. This may be because profitability is influenced by various other factors. Such as operational efficiency, credit risk management, interest rate policies, and macroeconomic conditions. In the context of green banking, banks may also prioritize sustainability and risk mitigation over short-term profitability, which could further weaken the direct relationship between the Capital Adequacy Ratio and ROA.
It can be concluded that while the Capital Adequacy Ratio is important for maintaining financial stability and meeting regulatory standards, it is not a dominant factor in determining bank profitability, particularly when not supported by efficient asset management and effective operational strategies. 

4.4.2. Loan to Deposit Ratio has a negative influence on Return on Assets 
The results of the second hypothesis test indicate that the loan to deposit ratio has a negative but not statistically significant effect on ROA, as evidenced by a p-value of 0.0638, which is greater than the significance level of 0.05 (5%). This means that although the regression coefficient shows a negative relationship between loan to deposit ratio and return on assets, the effect is not strong enough to be considered statistically significant. Therefore, the hypothesis that loan to deposit ratio has a significant effect on ROA is not supported. 
This finding is not consistent with the research conducted by Wangarry et al. (2023). They found that the loan-to-deposit ratio has a significant effect on bank profitability. The difference in results may be caused by variations in the research periods, sample characteristics, or differences in banking conditions, particularly in the implementation of green banking practices. Banks that adopt sustainable finance principles may prioritize risk management and long-term stability over aggressive lending, which can influence the liquidity-profitability relationship. 
The results of this study indicate that although an increase in the loan to deposit ratio reflects a higher level of credit distribution relative to third-party funds, it does not necessarily lead to an increase in profitability. This may occur because higher lending activity is often accompanied by increased credit risk, which can reduce net income if not managed properly. In addition, inefficient loan allocation, rising non-performing loans, and operational costs may weaken the potentially positive impact of lending on profits.
It can be concluded that a bank’s ability to generate profits from its assets is not determined by the level of loan to deposit ratio, but also depends on the quality of credit management, risk control, and overall operational efficiency. In the context of green banking, banks may adopt more cautious lending policies focused on sustainable and low-risk sectors, which could further explain the insignificant relationship between loan to deposit ratio and return on assets. 

5.1. Conclusion 
This study leads to two main conclusions based on the results of the data analysis and hypothesis testing conducted. First, capitalization, as measured by the capital adequacy ratio, has no significant effect on return on assets. This finding indicates that the level of capital adequacy owned by banks is not a determining factor in influencing profitability. Although the capital adequacy ratio plays an important role in maintaining financial stability and meeting regulatory requirements, it does not directly contribute to the bank’s ability to generate profits from its assets. This suggests that the effectiveness of asset utilization and operational efficiency may play a more dominant role in determining profitability than capital strength alone.
Second, liquidity risk, as proxied by the loan-to-deposit ratio in banks implementing green banking practices, also does not have a significant effect on ROA. This result implies that the level of credit distribution relative to third-party funds does not necessarily determine a bank’s profitability. Although loan to deposit ratio reflects the bank’s intermediation function, its impact on profitability depends on the quality of credit management, risk control, and the bank’s ability to maintain liquidity balance. In the context of green banking, banks may adopt more prudent and sustainability-oriented lending strategies, which can reduce the direct impact of loan to deposit ratio on return on ROA. 
The findings of this study indicate that both capitalization and liquidity, as represented by the capital adequacy ratio and loan-to-deposit ratio, are not the main determinants of profitability in banking companies implementing green banking. This suggests that other factors, such as operational efficiency, credit risk, macroeconomic conditions, and sustainability practices, may have a more significant influence on ROA. Therefore, banks must focus not only on maintaining capital adequacy and liquidity levels but also on improving overall performance and efficiency to enhance profitability.

5.2. Limitations
This study has several limitations that need to be acknowledged, which also provide opportunities for future research. Therefore, future researchers are encouraged to consider the following suggestions. First, the independent variables used in this study are limited to the internal factors of the company, namely, the capital adequacy ratio and loan-to-deposit ratio. As a result, this study did not fully capture other potential factors that may influence bank profitability. Future research is expected to include additional variables, particularly from external or macroeconomic perspectives, such as credit risk (non-performing loans), interest rates, inflation, exchange rates, and other financial performance indicators. Including these variables may provide a more comprehensive understanding of the determinants of return on assets. 
Second, the observation period in this study was relatively short, covering only three years from 2022 to 2024. A limited time frame may be insufficient to capture long-term trends and fluctuations in banking performance, especially in the context of economic changes and the implementation of green banking practices. Therefore, future research should use a longer observation period to obtain more robust, stable, and generalizable results. A longer time horizon would also allow researchers to better analyze the consistency of the relationships between variables over time. 
Third, in addition, this study focuses only on banking companies listed on the Indonesia Exchange, which may limit the generalizability of the findings to other types of financial institutions and banks operating in different regulatory environments. Future studies should expand the sample by including non-listed banks or conducting comparative studies across countries to enrich the analysis and strengthen external validity.
Fourth, the measurement of green banking in this study relies on disclosures in annual and sustainability reports, which may be subject to reporting and differences in disclosure quality across banks. Future research is suggested to develop more comprehensive and standardized measurement approaches, such as using sustainability indices or third party ESG ratings, to improve the accuracy and consistency of the analysis.
By addressing these limitations, future research is expected to provide deeper insights and more comprehensive findings regarding the factors influencing bank profitability, particularly in the context of sustainable and green banking. 

5.3. Suggestions
Future researchers should incorporate additional variables derived from external factors that may significantly influence banking profitability. The inclusion of external variables is important for providing a more comprehensive understanding of the determinants of bank performance, particularly in the context of dynamic economic conditions. These external variables may include credit risk, interest rates, inflation rates, exchange rates, and overall macroeconomic stability.
Credit risk, which is commonly measured using the non-performing loan ratio, plays a crucial role in determining bank profitability. A high level of non-performing loans indicates that a significant portion of the bank’s credit portfolio is experiencing repayment problems, which can reduce interest income and increase the need for loss provisioning. The results show that higher credit risk negatively affects bank profitability. Therefore, incorporating non-performing loans as a variable in future studies can provide deeper insights into how management influences financial performance.
In addition, interest rates are a key macroeconomic factor that directly affects banking operations, and changes in interest rates can influence both the income and expenses of banks. This is particularly evident through lending rates and the cost of funds. An increase in interest rates may raise lending income but can also increase borrowing costs and reduce the credit demand. Conversely, lower interest rates may stimulate lending but reduce the interest margins. Interest rate fluctuations have a complex and significant impact on bank profitability.
The inflation rate is another important macroeconomic indicator that reflects the overall economic environment. High inflation can reduce purchasing power and weaken borrowers’ financial capacity, potentially increasing credit risk. In contrast, moderate inflation may support economic growth and improve lending opportunities. Therefore, including inflation as a variable can help explain how macroeconomic conditions affect banks’ performance and profitability.
Furthermore, future research should extend the observation period to cover a longer timeframe. A longer observation period allows researchers to capture long-term trends, cyclical patterns, and structural changes in the banking industry. This is particularly important for understanding the impact of economic fluctuations and policy changes over time. Using a more extended period, the results of the analysis are expected to be more robust, reliable, and generalizable. By incorporating additional external variables and extending the research period, future studies are expected to provide more comprehensive and in-depth findings regarding the factors that influence bank profitability, especially in the context of sustainability practices.