oa Journal of Economic and Financial Sciences - On the determinants of return on equity in South Africa's financial services industry
|Article Title||On the determinants of return on equity in South Africa's financial services industry|
|© Publisher:||University of Johannesburg|
|Journal||Journal of Economic and Financial Sciences|
|Affiliations||1 University of Witwatersrand and 2 University of Witwatersrand|
|Publication Date||Jul 2015|
|Pages||550 - 566|
|Keyword(s)||DuPont Model, Johannesburg Securities Exchange, Multifactor Arbitrage Pricing Theory (APT), Return on Equity (ROE) and South Africa|
This study examines the factors that determine the return on equity (ROE) of financial companies listed on the Johannesburg Securities Exchange (JSE). Two empirical strategies were adopted : the DuPont model and a multifactor Arbitrage Pricing Theory (APT). Using the financial data of 73 companies and macro-economic indicators from 2002 to 2012, the study found that there was a positive relationship between profit margin and ROE, which can be enhanced if managers employ cost leadership strategies. Companies with predictable cash flows can afford high levels of debt and therefore high ROE, while companies characterised by unpredictable market conditions should use debt with caution. We found a positive relationship between interest rates and ROE for banks, insurance and real estate companies, which may suggest that managers employ short-term duration gap strategies in managing assets and liabilities mismatch rather than relying on long-term strategies. Inflation for banks, insurance and real estate companies is inversely related to ROE, and financial firms are better off immunising their portfolios against revenue erosion.
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