Abstract
The banking sector plays a paramount role in the economic activities of a country. In South Africa, this sector employs more than 153 846 employees, which account for more than 3% of all personal income taxpayers and also makes a significant contribution to corporate income tax. Given the fundamental role of this sector, the current study investigates the profitability-structure phenomenon within the South African banking industry by examining the bank-specific internal variables which affect banks’ profitability following a panel regression model. The five largest South African banks—First National Bank, Capitec Bank, Absa, Nedbank, and Standard Bank— were examined from 2002 to 2020.
The results indicated that liquidity, efficiency, asset quality and capital adequacy are the most significant bank-specific internal variables that affect the profitability of South African banks as measured by return on assets (ROA). Liquidity, efficiency and capital adequacy exhibited a significant positive impact on bank profitability in South Africa, while asset quality exhibited a significant negative impact on ROA. Furthermore, the empirical results indicate some limited support for the X-efficiency theory of the profitability structure phenomenon in the South African banking sector.
In light of these results, the current study suggests that South African banks should implement superior management practices in their daily operations and reduce their input usage, therefore improving their profitability. On the other side, asset quality should be closely monitored by banks’ strategic management to ensure that non-performing loans are reduced and profitability is increased. More emphasis should be placed on the identified bank-specific internal variables to avoid poor financial performance and limit the chances of future bank failures. The banks should also ensure that they are well-capitalised to minimise chances of bankruptcy and to reduce operational costs.
Key words Profitability-structure phenomenon, bank-specific internal variables, efficiency structure theory, market power theory.