The impact of risk factors on the commercial banking sector's financial performance in South Africa

Abstract

Banks face numerous financial and non-financial risks in their operations, and the banking sector plays a positive role in the country's economy. This study aims to find the impact of risk factors on the South African banking sector's financial performance. Fixed effects model was selected estimated together with Panel EGLS (cross-section SUR) to account for cross-sectional heteroscedasticity and correlation. Using annual frequency data from South Africa's systematic important financial institutions (SIFI's) banks, namely, ABSA, FirstRand Bank, Nedbank, Capitec, Investec, and Standard Bank. Return on capital employed (ROCE) and net interest margin (NIM) were bank performance measures. The study results showed that capital adequacy ratio, loan to deposit ratio, liquidity ratio, and unemployment are statistically significant determinants of bank performance measured by ROCE. Whereas GDP, nonperforming loans ratio and capital adequacy ratio are statistically significant to bank performance measured by net interest margin. The study concludes that credit risk, liquidity risk, solvency risk, and market risk factors are fundamental factors in determining South African commercial banks' profitability and financial performance. Therefore, banks have to present an appropriate sense of equilibrium when managing risk or to perform their risk management practices with financial performance. Because poor risk management policies can distress banks' performance badly as they influence asset quality and class, leading to increased advance losses