An empirical analysis of South African bank profitability

Abstract: The banking sector fulfils a fundamental role within the economy of a country. In South Africa, this sector contributes in excess of 20 percent toward GDP, and is responsible for more than 10 percent of overall employment in the country. This study empirically investigates the most significant determinants of South African bank profitability by examining bank-specific internal and macroeconomic external factors under a panel regression framework. The four largest commercial banks in South Africa as well as South Africa’s largest alternative banking institution were examined between 2006 and 2015. Based on the results obtained, this study concludes that both bank-specific internal as well as macroeconomic external variables are statistically significant determinants of South African bank profitability. The variables of asset quality, capital strength, operational efficiency, economic activity (GDP), annual inflation and the real interest rate were found to be statistically significant. Capital strength, economic activity (GDP), annual inflation and the real interest rate respectively displayed positive relationships to bank profitability, whereas asset quality and operational efficiency displayed inverse relationships to bank profitability