Macroeconomic Determinants of Bank Profitability in South Africa A Panel Analysis

Abstract

Using data on South Africa’s commercial banks in the period 1994-2023, this paper investigates the relationship between selected macroeconomic matrices, namely interest rates, exchange rates and gross domestic product (GDP) growth and the financial performance of commercial banks in South Africa. Additionally, the study seeks to determine the extent to which regulatory frameworks affect South African banks' performance, examining how regulations have contributed to stability, risk management and overall financial health within the sector. The study employs panel data regression techniques to quantitatively model the relationship between macroeconomic factors and bank profitability. We find macroeconomic variables (output growth and real interest rate) have a positive influence on bank profitability (real return of equity (ROE)) at a group level but not under returns on equity at a bank level. In the case of Net Interest Margin Ratio (NIM-Ratio), exchange rate and output growth influence it negatively. The exchange rate only influences NIM-Ratio negatively and none of the other measures of profitability. In terms of other control variables, Bank's total capital adequacy ratio is found to influence ROA, NIM-Ratio positively under both model specifications. When considered as a group, the results show that output growth significantly influences the group profitability positively for real return on assets (ROA) and ROE but not with NIM-Ratio. Real interest rate influences group profitability (ROE and NIM-ratio) under the random effect model. For other control variables, Common Equity Tier 1 capital (CET1) -group and total capital adequacy influence group profitability, however, the total capital adequacy only influences NIM-Ratio positively, while CET1 only drives real returns on equity. adequacy only influences NIM-Ratio positively, while CET1 only drives real returns on equity. Overall, the study suggests that macroeconomic drives play a significant role in role in bank and group profitability in a South African contex