A Financial Ratio Analysis of Commercial Bank Performance in South Africa
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
2
30
Caledonian Business School, Glasgow Caledonian University,
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
2
30
Caledonian Business School, Glasgow Caledonian University,