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