Assessing the impact of bank-specific bad debts determinants on the profitability of South Africa’s medium and large-sized banks

The connection between bad debts and bank profitability is vital for ensuring financial stability. However, while lending is a key source of banks’ revenue, rising bad debts can weaken their financial health, limit new credit issuance, and increase systemic risk. Therefore, understanding how bank-specific factors drive bad debts and affect profitability is crucial, particularly in distinguishing their impact on large and medium-sized banks. The purpose of this study is to assess the impact of bank-specific bad debts determinants on the profitability of South African banks. To achieve this objective, the study employs a Panel Autoregressive Distributed Lag (PARDL) model and an Error Correction Model (ECM) using bank data spanning the period from 2013 to 2023. The sample selection was informed by the data availability. The findings indicate that both the loan-to-deposit ratio and the capital adequacy ratio exert a positive impact on bank profitability, with large banks benefiting from stronger capital positions. The results further indicated that rising non-performing loan ratios correspond with decreased profitability in banks, particularly within medium-sized banks with limited risk absorption capacity. This research contributes to banking literature by offering a comparative perspective on the linkage between loans and both large and medium-sized banks in South Africa. The study suggests that, to mitigate potential defaults, medium-sized banks should exercise caution when issuing loans.