Abstract
This study investigates the determinants of bank profitability in South Africa. The impact of bank-specific factors and macroeconomic determinants on the financial performance of the five major banks was investigated. The main objective of this study is to identify statistically significant determinants that influence return on assets as a key measure of bank profitability. A thorough analysis is conducted using panel data techniques to investigate the impact of the selected bank-specific factors: asset quality, operational efficiency, capitalisation, and liquidity rates, as well as the following macroeconomic determinants: GDP, inflation rates, exchange rates, and lending interest rates. The study used data from 2006 to 2023. The research employs a robust methodology, including descriptive statistics, trend analysis, correlation analysis, and panel regression methods, to analyse the correlation and relationship of the identified factors to ROA.
The results show that the key factors influencing bank profitability are asset quality, GDP, capitalisation, liquidity ratio, and lending interest rates. ROA is negatively correlated with asset quality and liquidity ratio, meaning higher levels of non-performing loans and liquidity buffers lower profitability. Capitalisation, GDP, and lending interest rates all positively impact profitability, implying that well-capitalised banks, healthy economic growth, and higher interest rates improve bank performance.
This study adds to the current body of literature by giving empirical insights into the factors influencing bank profitability in the South African banking sector. The findings can be useful to stakeholders, such as bank management, policymakers, and investors, as they navigate the intricacies of the banking ecosystem. The paper concludes by recommending more research to investigate additional drivers and the changing dynamics of bank profitability in South Africa.