A Financial Ratio Analysis of Commercial Bank Performance in South Africa

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African Review of Economics and Finance, Vol . 2, No . 1, Dec 2010 ©The Author(s) Journal compilation ©2010 African Centre for Economics and Finance . Published by Print Services, Rhodes University, P .O .Box 94, Grahamstown, South Africa

A financial Ratio Analysis of Commercial Bank Performance in South Africa Mabwe Kumbirai2# and Robert Webb*

Abstract
This paper investigates the performance of South Africa’s commercial banking sector for the period 2005- 2009. Financial ratios are employed to measure the profitability, liquidity and credit quality performance of five large South African based commercial banks. The study found that overall bank performance increased considerably in the first two years of the analysis. A significant change in trend is noticed at the onset of the global financial crisis in 2007, reaching its peak during 2008-2009. This resulted in falling profitability, low liquidity and deteriorating credit quality in the South African Banking sector. 1. Introduction Commercial banks in South Africa have undergone immense regulatory and technological changes since the attainment of constitutional democracy in 1994 . South African banks are faced with increasing competition and rising costs as a result of regulatory requirements, financial and technological innovation, entry of large foreign banks in the retail banking environment and challenges of the recent financial crisis. These changes had a dramatic effect on the performance of the commercial banks . Most studies on bank performance in South Africa have focused on branch performance [see Oberholzer and Van der Westhuizen (2004); O’Donnell and Van der Westhuizen, (2002); Okeahalam (2006)] . More recently, Cronje (2007) and Ncube (2009) studied the efficiency of South African banks using Data Envelopment Analysis (hereafter DEA), studying the periods 1997-2007 and 2000-2005 respectively . This study evaluates bank

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Caledonian Business School, Glasgow Caledonian University, Cowcaddens Road G4 0BA, UK # Corresponding author: kumbirai.mabwe@gcu.ac.uk ©2010 The Author (s) Journal compilation ©2010 African Centre for Economics and Finance

performance for the period 2005-2009 using financial ratio analysis (hereafter FRA) . The present study is different from earlier studies in two ways: sample coverage and methodology . Covering South Africa’s big banks in the period both prior to, and after the 2007 subprime meltdown highlights important changes that have occurred in the banking industry and tease out appropriate policy for improving bank performance . Compared to extant literature we favour FRA because it is effective in distinguishing high performing banks from others, tends to compensates for disparities and controls for any size effect on the financial variables being studied (Samad, 2004). Additionally, financial ratios enable us to identify unique bank strengths and weaknesses, which in itself inform bank profitability, liquidity and credit quality. The rest of the paper is organised as follows: the next section offers background information on the financial system in South Africa . Section 3 outlines the past studies in bank performance . The methodology and data used are described in section 4 . Section 5 presents and analyses the results and section 6 concludes . 2. Banking in South Africa While ranked in the top 20 of world economies by size, the South African economy remain relatively small accounting for less than 1 per cent of global GDP (Baxter, 2008) . Despite being small by global standards, South Africa is the economic powerhouse of Africa, leading the continent in industrial output and mineral production and generating a large proportion of Africa’s electricity (Brand, 2009). South Africa’s economic performance during the first decade of freedom was impressive, with favourable external environment and strong domestic demand helping raise GDP growth to 5 % on average in 2004–2007 and lowering the unemployment rate by 5%...
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