SUMMARY
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 Africas four largest banks, namely, ABSA, First National Bank, Nedbank, and Standard Bank. These banks account for over 70% of South Africas 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.