4.1. Descriptive Statistics and Correlation Analysis
The descriptive statistics of the study in
Table 2 reveal that human capital efficiency (HCE) is the most significant component of intellectual capital (VAIC) in terms of its mean value, analysing the sustainable financial performance of Saudi banks. This finding indicates a broader trend observed in the literature where HCE is often highlighted as a critical driver of value-creation organisations. It aligns with the results of Pulic’s 2000 study. It is corroborated by research such as that by [
27,
28], which emphasises the pivotal role of human capital in enhancing firm performance.
The mean values of other components of VAIC, such as capital employed efficiency (CEE) and structural capital efficiency (SCE), are relatively lower. This distinction parallels studies like those by [
4,
38], which found that VAIC contributes more significantly to organisational performance than physical assets. The variance in the mean values of leverage, GDP, and size observed in the current study is consistent with the findings from [
39,
48], reflecting a nuanced understanding of how different dimensions of VAIC and various internal and external factors can influence the financial outcomes of firms.
The high standard deviation and coefficient of variation for the independent and dependent variables underscore high volatility in the VAIC components and profitability indicators. Such volatility is indicative of a dynamic business environment. Ref. [
11] explores this theme in the research on intellectual capital, also underscoring the complexities of VAIC components in contributing to financial performance.
The Jarque–Bera statistics from this study point to a non-normal distribution for most variables, a condition that resonates with findings from the broader VAIC literature, as seen in the work of [
29], where the distribution of VAIC indicators often deviates from normality.
The current study’s results on the disproportionate value added by HCE compared to other VAIC components add to the growing body of evidence, as seen in the works within the references, that human capital is a cornerstone of intellectual capital that can substantially affect organisation financial sustainability. Moreover, the impact of macroeconomic factors and internal controls like size and leverage mirrors the importance of such variables highlighted in the works of [
30,
42], suggesting that these factors play a crucial role in shaping the financial outcomes associated with intellectual capital investment.
The data summarized in
Table 2 provide foundational insights into the behaviour of intellectual capital components and their impact on financial performance metrics over the study period. The statistical measures reported here underpin our analysis and help to ensure the robustness and reliability of the subsequent inferential statistical assessments conducted in our study.
The correlation matrix presented in
Table 3 provides an insightful perspective on the relationships between various measures of financial performance and intellectual capital (VAIC) components within the Saudi banking sector. Notably, the strong positive correlation between net profit margin (NPM) and human capital efficiency (HCE) at 0.8602 suggests that HCE plays a critical role in the profitability of these banks, a finding that is consistent with the research by [
27], which showed a positive impact of intellectual capital on the financial performance of Indian banks.
Moreover, the value-added intellectual coefficient (VAIC) shows a strong correlation with NPM at 0.8616, underscoring the integral part that VAIC plays in the financial success of banks, as also noted in the study by [
38] within the Saudi context. The high correlation between HCE and VAIC at 0.99998 further reinforces the centrality of human capital in the constitution of overall VAIC, resonating with findings from [
48], which highlighted a significant association between VAIC and financial performance in the GCC Islamic banking industry.
The correlations involving leverage (LEV) show a more nuanced relationship with financial performance metrics. While a moderate positive correlation exists between LEV and return on equity (ROE) at 0.5071, indicating that leverage might play a role in equity returns, it is negatively correlated with NPM, albeit weakly. This might suggest that higher leverage does not necessarily contribute to profit margins, a result that echoes the study by [
4], emphasizing the complex effects of financial structure on performance.
The negative correlation between the impact of COVID-19 (COV) and both ROE (−0.3265) and NPM (−0.3856) suggests that the pandemic has had a detrimental effect on banks’ financial performance. This aligns with the broader impacts of COVID-19 on financial sectors globally, as illustrated in various studies by [
11]. Additionally, the negative correlation with CEE (−0.3884) might indicate that the pandemic has disrupted the efficient use of the capital employed within these banks.
Interestingly, SIZE shows a strong correlation with LSCE (0.8495). However, its correlation with ROE and NPM could be more robust, indicating that the size of the bank does not directly translate to higher profitability or returns on equity. This supports the findings by [
37], who investigated the sustainable financial performance of banks in India and suggested that larger size only sometimes leads to better financial outcomes.
Inflation (INF) shows a generally weak correlation with financial performance indicators, suggesting that it might not be a significant factor in banks’ short-term performance. This perspective can be paralleled with the research by [
50], which focuses on the internal factors of financial institutions rather than external economic conditions.
This comprehensive correlation analysis sheds light on the intricate relationships between VAIC and financial performance in Saudi banking. The study’s findings contribute to the growing body of literature that seeks to understand the multifaceted nature of VAIC’s influence on firm performance, particularly in the context of the financial sector.
The correlations depicted in
Table 3 highlight significant interactions between the components of intellectual capital and the financial metrics of Saudi banks. These relationships underscore the critical influence of intellectual capital management on achieving enhanced financial outcomes. Notably, the strong correlations between HCE and both ROE and NPM suggest that human capital efficiency plays a pivotal role in driving profitability and equity returns. This matrix serves as a foundational analysis that informs further investigation into the strategic management of intellectual resources within the banking sector, supporting broader economic sustainability and growth objectives in Saudi Arabia.
4.3. Panel Least Squares Estimation Results
The results from the panel least squares estimation as shown in
Table 6, significantly highlight the role of the value-added intellectual coefficient (VAIC) in enhancing the return on equity (ROE) across different modelling scenarios, strongly supporting Hypothesis 1 (H1). The robust positive coefficients of VAIC in all models underline the importance of intellectual capital as a determinant of financial performance, resonating with the findings from [
4], who identified similar impacts within Saudi Arabian banks.
The SIZE variable consistently demonstrates a negative relationship with ROE across all models, indicating the potential inefficiencies or challenges that larger banks face. This aligns with insights from international studies, such as [
37], which explored how scale impacts bank performance. They suggested that operational complexities increase with size, thereby diluting efficiency.
Leverage (LEV) exhibits a positive relationship with ROE, implying that Saudi banks effectively use debt to enhance equity returns. This finding aligns with broader financial theories and is corroborated by studies like those by [
11], which noted the strategic use of leverage to boost profitability in Islamic banks.
Interestingly, macroeconomic factors such as gross domestic product growth (GGDP) and inflation (INF) do not consistently impact ROE, suggesting that internal strategies and intellectual capital management more directly influence bank performance than external economic conditions. This observation is echoed in the literature, for instance, in the work of [
28], which suggests that the robust management of intellectual resources can shield banks from adverse economic conditions.
The relatively insignificant impact of COVID-19 (COV) on ROE suggests that either effective bank strategies mitigated the pandemic’s financial impacts or that the banks possessed inherent resilience, similar to observations in broader studies on pandemic resilience, such as those by [
50].
The high R-squared values, particularly in the fixed-effects model, indicate explanatory solid power, showing that the models effectively capture critical drivers of ROE.
Overall, the empirical evidence robustly affirms the significant role of intellectual capital in enhancing the financial performance of Saudi banks, reinforcing its strategic importance in achieving sustainable development goals related to innovation and efficient resource utilisation within the banking sector. This comprehensive analysis supports the formulated hypotheses and enriches the dialogue on optimal strategies for banking growth and efficiency in the context of global financial practices and sustainable development objectives.
The Hausman test, as shown in
Table 7, with a Chi-Square statistic of 0 and a probability of 1, supports using the random-effects model. This result suggests no correlation between the unique errors and the regressors in the fixed-effects model, making the random-effects model more appropriate and efficient for this analysis. This finding is crucial as it aligns with the recommendations in the systematic reviews of intellectual capital’s impact on firm performance, like those by [
52], emphasising the need for modelling choices that accurately reflect the underlying data structure.
The panel least squares estimation results from Model 2 (
Table 8) clearly illustrate how various components of intellectual capital, namely human capital efficiency (HCE), structural capital efficiency (SCE), and capital employed efficiency (CEE), impact return on equity (ROE) in Saudi banks. These components show differing degrees of influence across various models, offering a detailed perspective on intellectual capital’s contribution to bank performance.
Human capital efficiency (HCE) demonstrates a consistently positive effect on ROE in most models, supporting Hypothesis 1a (H1a) that HCE enhances bank profitability. This aligns with the findings from global research by [
27], emphasising the crucial role of human capital in banking sector profitability. Similarly, studies by [
28] have shown that the effective management of human resources is a key determinant of financial success, particularly in knowledge-intensive sectors like banking, confirming the importance of HCE in the Saudi context.
Structural capital efficiency (SCE) exhibits a complex relationship with ROE. While significantly positive in the model without fixed or random effects, it impacts ROE negatively under fixed and random-effect models. This variance might indicate that the utility of structural capital is not universalized in all banks, possibly due to differences in implementation utilisation. This complexity mirrors findings from [
49], which noted that structural capital could have diverse effects depending on organisational context. The mixed results suggest a need for banks to adapt their structural capital strategies to their specific operational frameworks.
Capital employed efficiency (CEE) consistently shows a strong positive impact across all models, confirming Hypothesis 1c (H1c) and underscoring the importance of efficiently managed capital in enhancing profitability. This observation is supported by the broader literature, as seen in studies by [
38], who highlight how well-managed capital resources significantly contribute to financial performance across various industries.
The effects observed with bank size (SIZE) and macroeconomic indicators like GDP growth (GGDP), inflation (INF) and COVID-19 (COV) indicate the complex interplay between internal bank characteristics and external economic conditions. The variable impacts observed align with studies by [
11], which explore how external economic environments and internal bank features can intricately affect bank profitability. They found that both internal bank characteristics and external economic conditions intricately affect bank profitability.
Leverage (LEV) has a consistently positive relationship with ROE across all models, suggesting the effective utilization of financial leverage to enhance profitability in Saudi banks. This mirrors findings in the literature, where leverage is often seen as a tool to amplify financial performance when used judiciously, as discussed in the work by [
48].
Overall, the empirical testing robustly supports the hypotheses regarding the positive impacts of VAIC and its components on ROE. The significant coefficients for intellectual capital variables across the models highlight these elements as vital for enhancing bank performance, directly contributing to sustainable financial success, and aligning with Sustainable Development Goals 8 and 9. This comprehensive analysis affirms the critical role of intellectual capital in Saudi banks and enriches the broader discourse, optimizing bank performance through the strategic management of intellectual resources.
These results provide valuable insights for bank managers and policymakers, highlighting the critical importance of optimizing intellectual capital to enhance financial performance and achieve strategic objectives within the banking sector.
The Hausman test results (
Table 9) suggest no significant difference between the fixed-effect and random-effect models. This result indicates that the unique errors are uncorrelated with the regressors, validating the use of random-effect models for this analysis. This finding is crucial as it supports the model selection, providing confidence in the robustness of the results.
Table 9 confirms that the random-effects model is suitable for our analysis, as indicated by a Chi-Square statistic of 0 and a probability of 1. This suggests that there are no significant differences between the fixed-effect and random-effect models in this context, validating the use of the random-effects model. This robustness check enhances the reliability of our findings regarding the influence of intellectual capital components on the financial performance of Saudi banks.
The panel least squares estimation results for Model 3 in
Table 10 provide a comprehensive assessment of the influence of the value-added intellectual coefficient (VAIC) and other variables on Saudi banks’ net profit margin (NPM). VAIC consistently demonstrates a strong positive impact on NPM across various models, with significant coefficients, indicating that effective intellectual capital management markedly enhances bank profitability. This finding aligns with the broader literature, such as the study by [
4]; we emphasize the significant role of intellectual capital in enhancing the financial performance of banks in Saudi Arabia, thus supporting Hypothesis 2 (H2) that VAIC positively impacts NPM.
The size of banks negatively affects NPM in all models, suggesting that larger banks may face challenges that hinder their efficiency and profitability. This observation is consistent with findings in other sectors, where larger size does not necessarily equate to increased efficiency or profitability, as shown in the research by [
53] on SMEs. The negative impact on NPM indicates that scaling up operations could introduce complexities that outweigh the benefits of increased capacity, supporting a nuanced view of bank scalability and operational efficiency.
Leverage shows a positive effect on NPM across the models, albeit with a diminishing impact on models without fixed effects compared to those with cross-section random effects. This suggests that while leverage can enhance profitability, its utility is context-dependent, possibly influenced by the bank’s overall strategy and market conditions. This finding resonates with the positive role of financial leverage in enhancing profitability in other contexts, such as in the work of [
11] on GCC banks, where the strategic use of debt is highlighted as a key factor in financial performance.
Macroeconomic factors like GGDP and inflation exhibit mixed effects on NPM. While GGDP can sometimes boost profitability, reflecting a favourable economic environment, as seen in broader economic studies like those by [
54], inflation generally deleteriously impacts bank profitability. This aligns with global financial trends where inflation often erodes real earnings and profitability, as evidenced in broader economic research, supporting a complex view of macroeconomic impacts on bank performance.
The influence of COVID-19 is mixed, with generally adverse but insignificant effects, suggesting that banks have varied in their resilience to the pandemic’s challenges. This reflects findings from other studies like those by [
50], which examine the differential impact of global crises on financial institutions, showing that the degree of impact can vary widely depending on specific institutional circumstances and responses.
In conclusion, these results not only confirm the significant role of intellectual capital in enhancing bank profitability and operational efficiency but also illustrate the complex interplay of bank size, leverage, and economic conditions in shaping financial outcomes.
The Hausman test results (
Table 11) suggest no significant difference between the fixed-effect and random-effect models. This result indicates that the unique errors are uncorrelated with the regressors, validating the use of random-effect models for this analysis. This finding is crucial as it supports the model selection, providing confidence in the robustness of the results.
As shown in
Table 12, the significant positive influence of human capital efficiency (HCE) on net profit margin (NPM) across all models confirms Hypothesis 2a. It illustrates the critical role of human capital in enhancing bank profitability. This aligns with findings from studies such as those by [
27], which emphasize the importance of human capital in driving financial outcomes in the banking sector. Such consistency across different geographical contexts highlights the universal value of investing in human resources as a key strategy for enhancing bank performance and supporting broader sustainability goals related to decent work and economic growth (Sustainable Development Goal 8).
The negative coefficient of structural capital efficiency (SCE) in some model’s challenges Hypothesis 2b, suggesting that investments in structural capital do not uniformly translate into immediate profit margins. This contrasts with the positive impacts noted in broader studies, such as [
4], which found structural capital to significantly contribute to bank performance. The divergence might be explained by regional differences in how structural capital is implemented or the types of structural capital investments made, suggesting a need for context-specific strategies that consider local operational realities.
Capital employed efficiency (CEE) showing a consistently positive and significant impact across models supports Hypothesis 2c, reinforcing that efficiently employed capital contributes significantly to profitability. This finding aligns with the work of [
11], who observed similar benefits in GCC banks, indicating that effective capital management is critical to financial success in banking. The consistent results across different studies affirm the importance of CEE in achieving operational efficiency and financial sustainability, directly contributing to the industry, innovation, and infrastructure goals (Sustainable Development Goal 9).
The negative impact of SIZE on NPM suggests that larger banks may struggle with inefficiencies, supporting the literature that sometimes questions the scalability benefits in the banking sector. For instance, studies by [
37] have also identified challenges associated with managing larger banks, where increased size can lead to diminishing returns. This observation is critical for policymakers and bank managers, emphasizing the need to carefully manage growth strategies to avoid efficiency losses, particularly in a sector where sustainable development is increasingly prioritized.
The varied impact of macroeconomic indicators like GGDP and INF on NPM underscores the complex interplay between economic conditions and bank performance. While GGDP’s inconsistent influence suggests that broader economic growth does not always directly correlate with bank profitability, the consistently negative impact of inflation aligns with global financial trends, where higher inflation typically increases operational costs and compresses margins. Studies such as those by [
51] also reflect these dynamics, showing how external economic conditions can significantly influence financial performance.
The influence of COVID-19 is generally adverse but not significant, suggesting that banks have varied in their resilience to the pandemic’s challenges. This reflects findings from other studies, like those by [
50], which examine the differential impact of global crises on financial institutions. These studies show that the degree of impact can vary widely depending on specific institutional circumstances and responses.
Overall, the analysis provides robust empirical support for the significant role of intellectual capital in enhancing the financial performance of banks in Saudi Arabia. The results contribute to a deeper understanding of how different components of intellectual capital influence profitability and operational efficiency, offering valuable insights for achieving sustainable development goals in the banking sector.
The Hausman test results (
Table 13) suggest no significant difference between the fixed-effect and random-effect models. This result indicates that the unique errors are uncorrelated with the regressors, validating the use of random-effect models for this analysis. This finding is crucial as it supports the model selection, providing confidence in the robustness of the results.
The analysis of the value-added intellectual coefficient (VAIC) and its components provides clear evidence of their impact on the financial performance metrics of return on equity (ROE) and net profit margin (NPM) in Saudi Arabian banks. VAIC significantly enhances ROE, affirming the pivotal role of intellectual capital in improving shareholder value. Human capital efficiency (HCE) positively influences both ROE and NPM, highlighting the crucial role of employee skills and knowledge in driving bank efficiency and profitability. Conversely, structural capital efficiency (SCE) has a mixed impact, suggesting that while important, the benefits might be offset by upfront costs or longer-term returns. Capital employed efficiency (CEE) strongly affects ROE and NPM, indicating that efficient asset management is key to enhancing profitability and operational efficiency. Collectively, these emphasize the importance of optimizing intellectual capital to achieve sustainable performance, aligning with Sustainable Development Goals 8 and 9 and ensuring competitive and sustainable growth in the banking sector.
In this analysis, the fixed-effects model was employed to control for both bank-specific and time-invariant characteristics, ensuring that our estimations of how intellectual capital influences bank performance were not confounded by unobserved heterogeneity. This model is particularly useful for understanding the role of varying intellectual capital components over time while controlling for constant characteristics across the banks, such as long-standing management practices or organizational culture.
Conversely, the random-effects model assumed that differences across banks were random and uncorrelated with the predictors in our study. This model provided insights into general trends across the banking sector, allowing us to draw inferences that extended beyond our sample of 10 major Saudi banks. It enabled us to explore how variations in intellectual capital across different banks influence financial outcomes like return on equity (ROE) and net profit margin (NPM).
By comparing these models, we aimed to robustly capture the dynamic interactions between intellectual capital and financial performance. The fixed-effects model highlighted the influence of time-varying intellectual capital on performance metrics, while the random-effects model helped to illustrate broader patterns that may not be specific to any single bank but are characteristic of the Saudi banking sector.