Abstract
The paper seeks to find the interrelationship between internal and external factors of future returns in the banking business. A multivariate time series regression models are fitted for the dependent variable: return on equity (ROE) against the lag one independent variables, namely: deposit, size, loan, capital, inflation, gross domestic product (GDP) and stock market capitalization (SMC), for ABSA bank; using secondary data, which span from 1998 to 2014 fiscal years. Logarithm transformation of the absolute value of the de-trended data and first differencing at lag one were the smoothing techniques applied to the data. Multivariate time series regression by the least square approach with special consideration of the stepwise method was used in fitting the models to the data. Results indicated that first, there is a positive linear relationship between ROE and loans, a negative linear relationship between ROE and inflation from the differencing techniques; and equally a negative log-linear relationship between ROE and capital as well as a positive log-linear relationship between ROE and ROA for the logarithm de-trend technique.
Highlights
The banking sector of South Africa is one of the various sectors in the economy whose core objective is to maximise future returns while controlling expenses under constrained resources and varied kinds of risks
The Models Specifications: Empirical evidence from preliminary analysis of the data and a look at the scatter plots in Figures 1 and 2 suggest that the following models were appropriately fitted onto the data: Differenced Data Models dfROEt is differenced return on equity at time t ; dfCPIt 1 and dfCPIt 2 are differenced inflation at time lags one and two respectively; dfLoant 1 and dfLoant 2 are differenced loan at time lags one and two respectively; α, β and γ are the parameters to be estimated;
Higher loans are not risky to return on equity component of future returns while higher inflationary rate is very risky to return on equity and aggregate profitability
Summary
The banking sector of South Africa is one of the various sectors in the economy whose core objective is to maximise future returns while controlling expenses under constrained resources and varied kinds of risks. The banking industry is part of the world’s economy and it is controlled and affected by several interwoven processes and factors. These factors and processes have either positive or negative impact on the operations of the industry, the need to study how these factors affect future returns of the industry. The profit of any bank is controlled by several variables, which can be classified into internal and external factors. Internal factors are those factors that management policies and decisions have effect on, e.g. size, capital, deposits and loans.
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