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Assessing the Efficiency of South African Medium-Sized Banks MM

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Assessing the Efficiency of South African Medium-Sized Banks MM Assessing the efficiency of South African medium-sized banks MM Branken orcid.org/0000-0001-5818-2319 Dissertation submitted in fulfilment for the degree Master of Commerce in Risk Management at the North-West University Supervisor: Prof A Saayman Co-supervisor: Prof PMS van Heerden Graduation: May 2019 Student number: 20553927 Declaration I, Magdalena Maria Branken, hereby declare that this dissertation, submitted in fulfilment of the requirements for the degree Master of Commerce in Risk Management to the North-West University is my own work, except where acknowledged in the text. It has not been submitted to any other tertiary institution as a whole or in part. Magdalena Maria Branken Date: 18/11/2018 i | Page Acknowledgements I thank the Lord almighty for the intellectual capacity He has bestowed upon me, without which I could not have completed this dissertation. Throughout this demanding journey, I know He was always by my side and carried me through the difficult times. I herein express my sincerest gratitude towards: My husband, Dawie Branken, for all his love, support and his insightful advice and help to complete my studies successfully, I love you and I will always be very grateful for all your support during this challenge. My parents, Lousea and Pieter Meintjies, for this wonderful opportunity to pursue my M.com degree as well as your love and support throughout all my studies and time at University. My parents-in-law, Hermine and Dawid Branken, for your devoted support during my studies that were also very important for successfully completing my dissertation. My supervisor, Prof. Saayman, for her exceptional advice and support throughout my study. Prof. Saayman is a true mentor, and I deeply appreciated her guidance. My co-supervisor, Prof. van Heerden, who has proved to be a true expert in this particular field of study. I am grateful for his insightful advice and proficient input that greatly assisted me in completing this dissertation. My sister, Jacomi Schoeman, for your continuing support and your positivity. My dearest friends, Elda Rossouw and Melissa Fick for their understanding and for their words of encouragement during difficult times. Thank you, dear friends, I will always value your friendships. Ek is tot alles in staat deur Hom wat my krag gee. Fillipense 4:13. ii | Page Abstract The economic growth and stability of any country is strongly dependent of the performance and efficiency of its financial sector, of which the banking industry forms an integral part. South Africa’s financial sector is one of the most developed on the African continent, especially the banking industry in which advanced credit and management systems have been implemented. However, as is expected of a developing economy, the country’s banking industry is highly concentrated, due to the dominance of the five major banks. Many authors argue that a concentrated banking industry contributes to greater financial instability, which raises concerns regarding the performance and efficiency of the smaller banks. While the efficiency of the large banks in South Africa has been analysed, little is known about the efficiency of the of the medium and small-sized banks in the country. The focus of this study was to estimate the technical and scale efficiency of the medium-sized banks of South Africa over a 13-year period from January 2004 until December 2017, which consisted of four different business cycle phases. A multi-stage Data Envelopment Analysis (DEA) model was applied using the intermediation approach with an input-oriented measure under the constant returns to scale and variable returns to scale model specifications to determine the efficiency levels of the medium-sized banks. Total deposits, central bank and money, total equity, and South Africa (SA) group and finance were used as inputs, while other liabilities, deposits, loans and advances, and investments and bills were used as the outputs in the analysis. The hierarchal cluster analysis, using the single linkage method was applied to identify the medium-sized banks, which were namely: African Bank Ltd. (AB), Capitec Bank (CB), Deutsche Bank AG (DB), Investec South Africa (IB), JP Morgan Chase Bank (JPM), and The Hongkong and Shanghai Banking Corporation Ltd.-Johannesburg Branch (HSBC). IB was identified as the most technical efficient bank, followed by JPM and DB as the 2nd and 3rd-most technical efficient banks. AB was ranked 4th, followed by HSBC and CB that were ranked 5th and 6th respectively. In contrast, JPM was identified as the medium-sized bank that generally exhibited the highest scale efficiency, followed by DB as the 2nd-most scale efficient, and AB and HSBC collectively 3rd. CB was ranked 4th, followed by IB which exhibited the highest level of inefficiency. It is concluded that the medium-sized banks show some signs of iii | Page technical and scale inefficiency, especially in terms of central bank and money, and SA group and finance as inputs. This is somewhat concerning, since inefficient banks are more likely to experience higher levels of exposure to risks. Various recommendations are therefore made that can be considered by the banks to improve their respective efficiencies. It was also found that the technical and scale efficiency scores did not display a clear correlation with the upward and downward business cycle phase. Often, upward phases correlated with suppressed efficiency scores, while increased efficiency scores were noted for the downward phases, especially during Phase 2 in which the global financial crisis occurred. This behaviour, especially during Phase 2, was also found in other studies on the efficiency levels of the major South African banks and is thought to be due to conservative banking practises that are supported by strict regulatory frameworks that limits foreign risk. Keywords: Medium-sized banks of South Africa; efficiency measures; technical and scale efficiency, cluster analysis, single linkage method, Data Envelopment analysis (DEA); multi- stage DEA model; input-oriented DEA approach; constant returns to scale; variable returns to scale. iv | Page Table of Contents Declaration .................................................................................................................................. i Acknowledgements .................................................................................................................... ii Abstract .................................................................................................................................... iii Table of Contents ....................................................................................................................... v List of Figures ........................................................................................................................... xi List of Tables ........................................................................................................................... xv Abbreviations ......................................................................................................................... xvii Chapter 1: Introduction .............................................................................................................. 1 1.1. Introduction ................................................................................................................. 1 1.2. Problem statement ....................................................................................................... 5 1.3. Research Objectives .................................................................................................... 5 1.3.1. Aim ...................................................................................................................... 5 1.3.2. Specific objectives ............................................................................................... 6 1.3.3. Research Method ................................................................................................. 6 1.3.3.1. Phase 1: Literature review ............................................................................ 6 1.3.3.2. Phase 2: Empirical study .............................................................................. 7 1.3.3.2.1. The data ..................................................................................................... 7 1.3.3.2.2. The method ................................................................................................ 8 1.4. Dissertation outline ..................................................................................................... 9 Chapter 2: The financial sector of South Africa ...................................................................... 13 2.1. Introduction ............................................................................................................... 13 2.2. The link between the financial sector and the economy ........................................... 14 2.2.1. The importance of South Africa’s financial sector ............................................ 15 v | Page 2.2.2. The banking industry’s contribution to South Africa’s financial sector and the gross domestic product .................................................................................................... 17 2.3. The main players in South Africa’s financial sector and their role in the financial sector ..................................................................................................................................
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