The Relationship between Macroeconomic Variables and South African Commercial Bank Performance
DOI:
https://doi.org/10.37075/FABA.2024.2.02Keywords:
South Africa, Banking sector, Performance, Commercial banks, ARDLAbstract
Purpose: The study examined the short-run and long-run relationship between South African commercial bank performance and macroeconomic variables.
Design/Methodology/Approach: Six South African commercial banks (ABSA, Standard bank, Nedbank, Capitec Bank, Investec Bank and FirstRand Bank), two macroeconomic variables (money supply and policy uncertainty) and two control variables (debt-to-equity ratio and the South African volatility index) were administered for the sample period, 2006-2022, using a panel autoregressive distributed lag (ARDL) model.
Findings: The findings show that money supply and the debt-to-equity ratio has a positive long-run relationship with commercial bank performance. However, policy uncertainty and the South African volatility index has a negative long-run relationship with commercial bank performance. It is further evident that the error correction term exhibited negative and significant coefficients, which indicates a 76.08% imbalance between bank performance and independent variables.
Practical Implications: Firstly, when the South African Reserve Bank (SARB) conducts policy adjustments, such policy changes should be in line with the findings of the study as it poses a significant effect on short-run and long-run commercial bank performance. Secondly, the Asset-Liability Committees (ALCO) of banks should consider the allocation of debt and the leverage position of their banks. That being, although debt increases bank performance, as found in the study, it also poses a significant effect on the liquidity position of banks. Hence, there should be added control of the banks’ liabilities as it will hamper the short-run and long-run performance of banks.
Originality/Value: This study is the first to consider macroeconomic variables as a determinant of commercial bank performance in South Africa. Hence, the study provides insight into the relationship between macroeconomic variables and commercial bank performance. Moreover, the study focused on commercial banks that are part of emerging markets, where the performance of these banks differs from that of developed markets’ commercial banks. Lastly, the study considered the short-run/long-run relationship between macroeconomic variables and commercial bank performance, while the majority of studies consider current effects.
Paper Type: Research Paper.
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