This study investigates the impact of bank-specific variables and selected macroeconomic
variables on the South African banking sector for the period 1994-2011 using the capital
adequacy, asset quality, management, earnings, and liquidity (CAMEL) model of bank
performance evaluation. The study employs data in annual frequency from South Africa’s four
largest banks, namely, ABSA, First National Bank, Nedbank, and Standard Bank. These banks
account for over 70% of South Africa’s banking assets. Using return on assets (ROA) and return
on equity (ROE) as measures of bank performance, the study finds that all bank-specific variables
are statistically significant determinants of bank performance. Specifically, the study shows that
asset quality, management quality, and liquidity have a positive effect on both measures of bank
performance, which is consistent with a priori theoretical expectations. Capital adequacy,
however, exhibits a surprising significant negative relationship with ROA, while its relationship
with ROE is significant and positive as expected. Except for interest rates (in the ROA model),
unemployment rate (in the ROA model), and the rate of inflation (in the ROE model), the rest of
the macroeconomic variables are statistically insignificant. The study reveals that bank
performance is positively related to interest rates and negatively related to unemployment rates
and interest rates.