Cost and profit efficiency of South African banks

ABSTRACTThe purpose of this study is to analyse the cost and profit efficiency of banksin South Africa. The cost-to-income ratio has always been used in the SouthAfrican banking sector in measuring efficiency. However this approach is verysimplistic and does not provide enough insight on real profit efficiency.This research uses a stochastic frontier model to determine both cost andprofit efficiency of four large and four small, South African-based banks. Theresults of the study show that South African banks have significantly improvedtheir cost efficiencies between 2000 and 2005. However efficiency gains onprofitability, over the same time period, have not been significant. No bankwas found to be superior to another in terms of achieving efficiency gains incost reduction and profitability.A weak positive correlation was found to exist between the cost and profitefficiencies, with the most cost efficient banks also being most profit efficient.With regard to bank size, cost efficiency declined with increasing bank size.