Determinants of Commercial Bank performance in Zimbabwe OSWELL MAZADZI: 443130 JOAN.Y. MASEYA: 443131 Essay submitted partial fulfilment of the requirements MPF_AFIN Finance (Basics) FACULTY OF ECONOMICS AND ADMINISTRATION at the MASARYK UNIVERSITY Lecturer: L. Benada October 2015 TABLE OF CONTENT TABLE OF CONTENT. ii LIST OF TABLES. iii LIST OF FIGURES. iii 1.1 INTRODUCTION.. 1 1.2 OVERVIEW OF COMMERCIAL BANK IN ZIMBABWE. 1 1.3 COMMERCIAL BANKS PERFORMANC.. 2 1.4 FACTORS THAT AFFECT COMMERCIAL BANK PERFOMANCE. 2 1.5 RELATIONSHIP BETWEEN PERFOMANCE AND FACTORS. 3 1.6 SUMMARY.. 4 LIST OF REFERENCE. 5 APPENDICES. 6 LIST OF TABLES Table 1 Commercial Bank in Zimbabwe in 2015- 1 Table 2 External and internal determinants and proxy ratios 3 Table 3 Pooled OLS- 4 Table 4 Formula sheet 6 LIST OF FIGURES Figure 4:1 Commercial bank performance..................................................................................... 2 1.1 INTRODUCTION Commercial banks in Zimbabwe play a critical intermediation role of transferring funds from the surplus units to deficit units. Therefore monitoring their performance and factors that influence the performance of commercial banks is of paramount importance for policy formulation and thus to the economy of Zimbabwe. The purpose of this short essay is to determine the factors that affect commercial bank performance in Zimbabwe and to achieve this purpose, a short overview of commercial banks in Zimbabwe is given, then commercial bank performance was measured using three measures (return on asset, return on equity and net interest margin), and then factors that influence performance are elaborated. Lastly to determine the relationship between commercial bank performance and the factors, a pooled ordinary square regression model was done using GRETL. 1.2 OVERVIEW OF COMMERCIAL BANK IN ZIMBABWE They are thirteen (13) commercial banks in Zimbabwe which are governed by Companies Act [Chapter 24:03] and Banking Act of Zimbabwe [Chapter 24:20]. Table 1 shows the commercial banks in Zimbabwe as of 2015 and the year they were founded, whether listed or not listed on Zimbabwe Stock Exchange and their ownership structure. According to Reserve Bank Zimbabwe (2013), 54% of commercial banks are owned by foreigners, 31% are owned by locals and 15% are owned by the government. Out of 13 commercial banks in Zimbabwe, five (5) of them listed on Zimbabwe stock exchange. Table 1 Commercial Bank in Zimbabwe in 2015 Commercial Banks Founded ZSE Ownership structure 1 Agribank 1999 No Significant government shareholding 2 Banc ABC 1997 No Significant foreign shareholding 3 Barclays Bank of Zimbabwe 1912 Yes Significant foreign shareholding 4 CBZ Bank limited 1980 Yes Indigenous privately owned 5 Ecobank Ecobank 2002 No Significant foreign shareholding 6 FBC Bank Limited 1997 Yes Indigenous privately owned 7 MBCA Bank limited 1956 No Significant foreign shareholding 8 Metbank 1999 No Significant foreign shareholding 9 NMB Bank Limited 1992 Yes Indigenous privately owned 10 Stanbic Zimbabwe Limited 1992 No Significant foreign shareholding 11 Standard chartered bank 1892 No Significant foreign shareholding 12 Steward Bank (Previously TNB) 2009 No Indigenous privately owned 13 ZB Bank Limited 1951 Yes Significant government shareholding Source: Reserve Bank Zimbabwe (2013) 1.3 COMMERCIAL BANKS PERFORMANCE ‘To understand how well a bank is doing, there is a need to start by looking at a bank’s income statement, the description of the sources of income and expenses that affect the bank’s profitability’ (Mishkin & Eakins 2014, p.452). Therefore in order to determine commercial bank performance in Zimbabwe, statement of comprehensive income are used, but to enable comparability with other commercial banks in other countries, commercial banks performance are further measured by calculating return on asset(ROA), return on equity (ROE) and net interest margin. In addition, economic measures such economic value added (EVA) and risk adjusted return on capital (RAROC). Market based measures of performance also used by investors to evaluate performance of commercial bank and they are four market based measures of performance which include total share return (TSR), price/earnings ratio (P/E), price to book value (P/B) and Credit Default Swap. Because of the availability of data, return on asset (ROA), return on equity (ROE) and net interest margin are the popular measures which were used to measure commercial bank performance. Table 4 in appendices shows how these ratios are calculated. The return on asset (ROA), return on equity and net interest margin from 2009 to 2014 were calculated and graphically represented as shown in Figure 1. There was an increase in ROA, ROE and NIM from 2009 to 2012 and then ROA and ROE plummeted to 1.1% and 8.6% respectively in 2013. On the other hand net interest margin remained stable throughout the years under review. Figure 1: Commercial bank performance Source: Annual financial statements 1.4 FACTORS THAT AFFECT COMMERCIAL BANK PERFOMANCE According to Roman & Tomuleasa (2012); Ali et al. (2011); Kosmidou et al. (2005) and Tamimi, (2010) commercial bank performance is influenced by several factors which can be categorised as internal determinants and external determinants. Other researchers like Abdullah, Parvez and Ayreen,(2014) and Athanasoglou et al. (2005) prefer to categorise them into bank specific, industry specific and macroeconomics determinants. As shown in Table 2 bank specific factors include bank size, credit risk, diversification, management efficiency capital adequacy and liquidity. External factors can further be divided into gross domestic product (GDP), inflation and interest rates. As shown in the Table 2, these factors can have either positive or negative impact on commercial bank performance. In order to quantify these qualitative factors, financial ratios are used and 3 shows the ratios that can be used for different factors. Table 2 External and internal determinants and proxy ratios Factor Proxy measure Presumed relationship with bank profitability Bank size Natural logarithm of total asset Positive or negative Credit risk Loan loss provision/ total Loans Negative Diversification Non-interest income to total asset Positive Management efficiency Cost to income ratio Negative Capital adequacy Capital base/Total weighted assets Positive or negative Gross domestic product GDP growth rate Positive Inflation Inflation rate Positive or negative Interest fluctuations interest Positive or negative Source: Said & Tumin (2011) 1.5 RELATIONSHIP BETWEEN PERFOMANCE AND FACTORS In order determine the relationship between bank performance and its factors a pooled ordinary square regression model was done using GRETL. The dependent variable used was the return on asset and the factors listed on Table 1. After the pooled ordinary square regression model was run, it was found that management efficiency, credit risk, and deposit growth are negatively related to ROA. Looking at p-value, management efficiency, diversification, credit risk, capital and GDP growth rate are significantly related to ROA at 5% confidence interval and bank size, deposit growth and liquidity are not significantly related to ROA. Looking at the r squared, 63.73% of variation in the dependent variable is explained by the model. Table 3 Pooled OLS Coefficient Std. Error t-ratio p-value constant -9.77 8.63 -1.13 0.26 Management efficiency -0.04 0.01 -3.25 0.00 *** Diversification 0.25 0.06 3.87 0.00 *** Deposit growth -0.01 0.00 -1.65 0.10 Credit risk -0.32 0.12 -2.61 0.01 ** Capital adequacy 0.09 0.03 3.21 0.00 *** Liquidity 0.02 0.01 1.70 0.10 GDP growth rate 0.18 0.06 2.98 0.00 *** Bank size 0.45 0.36 1.25 0.22 R-squared 0.6373 Adjusted R-squared 0.5728 Source: Own source 1.6 SUMMARY They are several factors that influence commercial bank performance like management efficiency, diversification, deposit growth, credit risk, capital adequacy, liquidity, competition, inflation, GDP growth rate and bank size, but after the Pooled OLS it was found out that in Zimbabwe, commercial bank performance is significantly related to management efficiency, diversification, credit risk, capital and GDP growth rate. LIST OF REFERENCE ABDULLAH, M.N., PARVEZ, K., and AYREEN, S., 2014. Bank Specific, Industry Specific and Macroeconomic Determinants of Commercial Bank Profitability: A Case of Bangladesh. World [online]. 4 (3). Available from: http://wjsspapers.com/static/documents/October/2014/7.%20Nayeem%20and%20Kamruddin.pdf [Accessed 29 Sep. 2015]. ALI, K., AKHTAR, M.F., and AHMED, H.Z., 2011. Bank-Specific and Macroeconomic Indicators of Profitability-Empirical Evidence from the Commercial Banks of Pakistan. International Journal of Business and Social Science [online]. 2 (6), pp. 235–242. Available from: http://joc.hcc.edu.pk/faculty_publications/bankspecific.pdf [Accessed 30 Sep. 2015]. ATHANASOGLOU, P.P., BRISSIMIS, S.N., and DELIS, M.D., 2005. Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of international financial Markets, Institutions and Money [online]. 18 (2), pp. 121–136. Available from: http://www.sciencedirect.com/science/article/pii/S1042443106000473 [Accessed 28 Sep. 2015]. KOSMIDOU, K. and ZOPOUNIDIS, C., 2008. Measurement of bank performance in Greece. South Eastern Europe Journal of Economics [online]. 6 (1), pp. 79–95. Available from: http://www.asecu.gr/Seeje/issue10/kosmidou.pdf [30 Sep. 2015]. MISHKIN, F.S. and EAKINS, S., 2014. Financial Markets and Institutions. 8 edition. Prentice Hall. SAID, R.M. and TUMIN, M.H., 2011. Performance and financial ratios of commercial banks in Malaysia and China. International Review of Business Research Papers [online]. 7 (2), pp. 157–169. Available from: http://www.irbrp.com/static/documents/March/2011/11.%20Rasidah-FINAL.pdf [Accessed 30 Sep. 2015]. ROMAN, A. and TOMULEASA, I., 2012. Analysis of profitability determinants: Empirical evidence of commercial banks in new EU member states. Retrieved from icfb. rs. opf. slu. cz/sites/icfb. rs. opf. slu. cz/files/39_roman. pdf [online]. Available from: http://icfb.rs.opf.slu.cz/sites/icfb.rs.opf.slu.cz/files/39_roman.pdf [Accessed 30 Sep. 2015]. RESERVE BANK OF ZIMBABWE, 2013. Bank Licensing, Supervision and Surveillance 2013 annual report. Reserve Bank of Zimbabwe. TAMIMI, H.A.H. Al-, 2010. Factors influencing performance of the UAE Islamic and Conventional national banks. Global Journal of Business Research. 4 (2), pp. 1–9. APPENDICES Table 4 Formula sheet A Performance measurement 1 Return on asset(ROA) B Bank specific determinants 1 Net interest margin(NIM) 2. Capital adequacy 3 Management efficiency 4 Cost funds 5 Yield on earning asset (YOEA) 6 Diversification 7 Credit risk 8 Liquidity