The impact of Basel III higher capital and liquidity requirements on the profitability of South African banks
- Authors: Mdandalaza, Zuko Ludwig
- Date: 2024-04
- Subjects: Corporations -- Finance -- South Africa , Corporate governance -- Law and legislation -- South Africa , Banks and banking -- South Africa
- Language: English
- Type: Doctorate , text
- Identifier: http://hdl.handle.net/10948/62355 , vital:72614
- Description: This study employs a robust quantitative research design meticulously tailored to investigate the nuanced impact of Basel III capital and liquidity requirements on the profitability of South African banks. The data collection process is anchored in a rigorous approach, driven by the acquisition and meticulous review of financial statements sourced from a carefully curated sample of South Africa’s banks. Ensuring the sample’s representativeness is of paramount importance for bolstering the study’s findings. To this end, a purposive sampling technique, distinguished for its deliberate selection methodology, was applied judiciously. This method yielded the selection of 10 banks, chosen carefully to encapsulate a cross-section of the South African banking landscape, so enhancing the research’s validity and robustness. The analysis of this intricate dataset is underpinned by advanced statistical techniques, with regression analysis the principal analytical tool. Specifically, the study harnesses the Arellano-Bond generalised method of moments (GMM), a sophisticated yet versatile statistical methodology appropriate for disentangling complex relationships in longitudinal data. This analytical approach is perfectly suited to trace the nuanced interactions between Basel III’s capital and liquidity requirements and the profitability trajectories of South African banks. Spanning a 12- year timeframe, 2010 to 2022, this study attempts to encapsulate the evolution of the banking landscape in the wake of Basel III’s implementation. This extensive temporal scope enables the research to capture both short-term fluctuations and long-term trends, enriching its insights and lending depth to the analysis. The first objective of this study was to unravel the intricate web of macro-specific and bank-specific factors influencing the profitability of banks in South Africa. Net interest margin (NIM), a pivotal metric reflecting bank profitability and efficiency, was central to the investigation. Empirical insights gleaned from the analysis revealed several key determinants of NIM for South African banks. Notably, NIM displayed a high degree of persistence over time. This suggests that South African banks do not adjust swiftly to changes in market conditions, emphasising the importance for bank managers of considering the long-term repercussions of their decisions on interest, income and expenses. The results also illuminated a set of critical variables closely linked to NIM. These include credit loss, non-interest income, market concentration, stability (Z-score) and inflation. These variables collectively underscored the banks’ ability to navigate the multi-faceted landscape of risks and uncertainties in the banking sector, including credit risk, operational risk, market risk and inflationrisk. The positive relationship between these variables and NIM indicated the banks’ adeptness at passing on costs and risks to customers through higher interest rates or fees, all while leveraging their market power and diversification strategies. Conversely, a negative and significant association emerged between NIM and bank size, GDP per capita, private credit and the repo rate. These variables underscored the competitive pressure and macroeconomic dynamics influencing the demand for and supply of credit in the banking sector. In this context, the negative relationship suggested that larger banks, those operating in more developed and competitive markets, and those encountering lower policy rates, tend to exhibit lower NIM. These banks, due to heightened competition and lower demand for credit, face diminished interest income and narrower margins. Notably, variables like cost-to-income ratio, funding structure and loan-to-deposit ratio did not emerge as significant in explaining NIM for South African banks. This implies that these variables exert a relatively weaker influence on the profitability and efficiency of South African banks, or that their effects are subsumed by other variables in the model. The second objective examined the effect of higher capital buffers on bank profitability. Empirical findings revealed a negative yet statistically insignificant co-efficient for the CET1 variable in the regression analysis. This observation indicated that there is no substantial relationship between Basel III Tier 1 capital ratio (CET1) and bank profitability, as measured by NIM, among South African banks. This suggests that Basel III capital requirements do not have a significant influence on the profitability and efficiency of these banks, or their effect varies depending on other bank-specific or macroeconomic variables. The third objective focused on the effect of Basel III liquidity regulations, epitomised by the liquidity coverage ratio (LCR), on bank profitability in South Africa. Empirical results revealed a negative but statistically insignificant relationship between LCR and NIM. This observation indicates that Basel III liquidity regulations exert no discernible effect on the net interest income of South African banks. This finding could be attributed to the fact that South African banks had already fortified their liquidity positions prior to Basel III implementation, adhering to stringent regulatory requirements and prudent liquidity management practices. As a result, the introduction of LCR did not pose a significant alteration or constraint on the liquidity standing and profitability of South African banks. It also implies that other factors, like market conditions, funding structures or asset compositions, play more pivotal roles than the LCR in shaping the profitability of South African banks. These factors may influence the net interest spread, cost of funds or risk-adjusted returns of these banks. , Thesis (PhD) -- Faculty of Economics and Management Sciences, School of Economics, 2024
- Full Text:
- Date Issued: 2024-04
- Authors: Mdandalaza, Zuko Ludwig
- Date: 2024-04
- Subjects: Corporations -- Finance -- South Africa , Corporate governance -- Law and legislation -- South Africa , Banks and banking -- South Africa
- Language: English
- Type: Doctorate , text
- Identifier: http://hdl.handle.net/10948/62355 , vital:72614
- Description: This study employs a robust quantitative research design meticulously tailored to investigate the nuanced impact of Basel III capital and liquidity requirements on the profitability of South African banks. The data collection process is anchored in a rigorous approach, driven by the acquisition and meticulous review of financial statements sourced from a carefully curated sample of South Africa’s banks. Ensuring the sample’s representativeness is of paramount importance for bolstering the study’s findings. To this end, a purposive sampling technique, distinguished for its deliberate selection methodology, was applied judiciously. This method yielded the selection of 10 banks, chosen carefully to encapsulate a cross-section of the South African banking landscape, so enhancing the research’s validity and robustness. The analysis of this intricate dataset is underpinned by advanced statistical techniques, with regression analysis the principal analytical tool. Specifically, the study harnesses the Arellano-Bond generalised method of moments (GMM), a sophisticated yet versatile statistical methodology appropriate for disentangling complex relationships in longitudinal data. This analytical approach is perfectly suited to trace the nuanced interactions between Basel III’s capital and liquidity requirements and the profitability trajectories of South African banks. Spanning a 12- year timeframe, 2010 to 2022, this study attempts to encapsulate the evolution of the banking landscape in the wake of Basel III’s implementation. This extensive temporal scope enables the research to capture both short-term fluctuations and long-term trends, enriching its insights and lending depth to the analysis. The first objective of this study was to unravel the intricate web of macro-specific and bank-specific factors influencing the profitability of banks in South Africa. Net interest margin (NIM), a pivotal metric reflecting bank profitability and efficiency, was central to the investigation. Empirical insights gleaned from the analysis revealed several key determinants of NIM for South African banks. Notably, NIM displayed a high degree of persistence over time. This suggests that South African banks do not adjust swiftly to changes in market conditions, emphasising the importance for bank managers of considering the long-term repercussions of their decisions on interest, income and expenses. The results also illuminated a set of critical variables closely linked to NIM. These include credit loss, non-interest income, market concentration, stability (Z-score) and inflation. These variables collectively underscored the banks’ ability to navigate the multi-faceted landscape of risks and uncertainties in the banking sector, including credit risk, operational risk, market risk and inflationrisk. The positive relationship between these variables and NIM indicated the banks’ adeptness at passing on costs and risks to customers through higher interest rates or fees, all while leveraging their market power and diversification strategies. Conversely, a negative and significant association emerged between NIM and bank size, GDP per capita, private credit and the repo rate. These variables underscored the competitive pressure and macroeconomic dynamics influencing the demand for and supply of credit in the banking sector. In this context, the negative relationship suggested that larger banks, those operating in more developed and competitive markets, and those encountering lower policy rates, tend to exhibit lower NIM. These banks, due to heightened competition and lower demand for credit, face diminished interest income and narrower margins. Notably, variables like cost-to-income ratio, funding structure and loan-to-deposit ratio did not emerge as significant in explaining NIM for South African banks. This implies that these variables exert a relatively weaker influence on the profitability and efficiency of South African banks, or that their effects are subsumed by other variables in the model. The second objective examined the effect of higher capital buffers on bank profitability. Empirical findings revealed a negative yet statistically insignificant co-efficient for the CET1 variable in the regression analysis. This observation indicated that there is no substantial relationship between Basel III Tier 1 capital ratio (CET1) and bank profitability, as measured by NIM, among South African banks. This suggests that Basel III capital requirements do not have a significant influence on the profitability and efficiency of these banks, or their effect varies depending on other bank-specific or macroeconomic variables. The third objective focused on the effect of Basel III liquidity regulations, epitomised by the liquidity coverage ratio (LCR), on bank profitability in South Africa. Empirical results revealed a negative but statistically insignificant relationship between LCR and NIM. This observation indicates that Basel III liquidity regulations exert no discernible effect on the net interest income of South African banks. This finding could be attributed to the fact that South African banks had already fortified their liquidity positions prior to Basel III implementation, adhering to stringent regulatory requirements and prudent liquidity management practices. As a result, the introduction of LCR did not pose a significant alteration or constraint on the liquidity standing and profitability of South African banks. It also implies that other factors, like market conditions, funding structures or asset compositions, play more pivotal roles than the LCR in shaping the profitability of South African banks. These factors may influence the net interest spread, cost of funds or risk-adjusted returns of these banks. , Thesis (PhD) -- Faculty of Economics and Management Sciences, School of Economics, 2024
- Full Text:
- Date Issued: 2024-04
A framework for capital structure decision-making in South African businesses
- Authors: Du Toit, Jan Lodewicus
- Date: 2019
- Subjects: Corporations -- Finance -- South Africa , Business enterprises -- South Africa Decision making
- Language: English
- Type: Thesis , Masters , MBA
- Identifier: http://hdl.handle.net/10948/39567 , vital:35291
- Description: The research is undertaken to understand how businesses make their capital structure decisions by identifying and evaluating the factors to be considered in making capital structure decisions in South African businesses. Qualitative research methods are used in two phases. In phase one, a literature review is conducted to create a framework of strategic aspects to consider when making capital structure decisions. In phase two the framework is evaluated by conducting in-depth interviews. The purpose of phase two is to identify the strategic aspects that are considered in the South African business context. The literature overview identified twelve strategic aspects for consideration when making capital structure decisions, namely business risk, control, flexibility, growth rate, long-run viability, management constraints, management conservatism, market conditions, rating agencies, size, taxation and transactional cost. The framework of twelve strategic aspects to be considered when making capital structure decisions was empirically evaluated by means of interviews. The interview responses regarding the initial twelve strategic aspects were coded and three themes emerged, namely critical strategic decision-making factors (business risk, financial flexibility, tax advantage, and volatility of earnings cash flows); factors relating specifically to markets in South Africa (growth rate, long-term viability, market conditions, credit rating, and transaction costs) and autonomy of the decision-making process (control, management constraints, managerial conservatism, and size). During the interview process, it was indicated that the autonomy of the decision-making process theme (control structure, management constraints, managerial conservatism and business size) do not form part of the strategic capital structure decision-making process in their companies and should be omitted. The interviewees highlighted four additional themes that may affect their capital structure decisions, namely government interference in the market and in the local business; Black Economic Empowerment (BEE) rating; political stability, and state capture. The study suggests a proposed framework consisting of six themes that can be used to guide capital structure decisions in South Africa businesses.
- Full Text:
- Date Issued: 2019
- Authors: Du Toit, Jan Lodewicus
- Date: 2019
- Subjects: Corporations -- Finance -- South Africa , Business enterprises -- South Africa Decision making
- Language: English
- Type: Thesis , Masters , MBA
- Identifier: http://hdl.handle.net/10948/39567 , vital:35291
- Description: The research is undertaken to understand how businesses make their capital structure decisions by identifying and evaluating the factors to be considered in making capital structure decisions in South African businesses. Qualitative research methods are used in two phases. In phase one, a literature review is conducted to create a framework of strategic aspects to consider when making capital structure decisions. In phase two the framework is evaluated by conducting in-depth interviews. The purpose of phase two is to identify the strategic aspects that are considered in the South African business context. The literature overview identified twelve strategic aspects for consideration when making capital structure decisions, namely business risk, control, flexibility, growth rate, long-run viability, management constraints, management conservatism, market conditions, rating agencies, size, taxation and transactional cost. The framework of twelve strategic aspects to be considered when making capital structure decisions was empirically evaluated by means of interviews. The interview responses regarding the initial twelve strategic aspects were coded and three themes emerged, namely critical strategic decision-making factors (business risk, financial flexibility, tax advantage, and volatility of earnings cash flows); factors relating specifically to markets in South Africa (growth rate, long-term viability, market conditions, credit rating, and transaction costs) and autonomy of the decision-making process (control, management constraints, managerial conservatism, and size). During the interview process, it was indicated that the autonomy of the decision-making process theme (control structure, management constraints, managerial conservatism and business size) do not form part of the strategic capital structure decision-making process in their companies and should be omitted. The interviewees highlighted four additional themes that may affect their capital structure decisions, namely government interference in the market and in the local business; Black Economic Empowerment (BEE) rating; political stability, and state capture. The study suggests a proposed framework consisting of six themes that can be used to guide capital structure decisions in South Africa businesses.
- Full Text:
- Date Issued: 2019
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