MSc International Banking: Basel III Impact on Namibian Banks

This report, prepared for the University of Salford's MSc International Banking and Finance program, assesses the impact of Basel III implementation on the profitability of the top 4 banks in Namibia. The research employs a positivism philosophy, utilizing annual and integrated reports from the banks to collect quantitative data. A fixed assets model is used, analyzing variables such as Return on Assets (ROA), lagged ROA, bank size, and bank capital. The study addresses research questions regarding the impact of Basel III, the influence of returns on equity, the consistency of profits, and the role of bank size. Data collection involved panel longitudinal surveys and secondary sources, focusing on profitability ratios like Return on Equity, Cost to Income Ratio, and Net Interest Margin. The report emphasizes ethical considerations, reliability, and validity. Findings reveal the trends in Return on Equity, providing insights into how the banks have adapted to the new regulations and maintained their profitability. The report concludes with recommendations for the banks to improve their profitability after Basel III implementation.

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Research Methodology
Introduction
This section of the research paper explains methods that the researcher used during the study.
Research philosophy, research design, research questions, data collection methods, analysis of
ethical issues, reliability and validity as well as the conclusion are the components that make up
this chapter. Most significantly, all descriptions that were made basing on the aforementioned
elements prioritized achievement of the research objectives. The study was focused on meeting
the general research objective of analyzing the impact of implementation of Basel III of
profitability of the top 4 banks of Namibia.
Research philosophy
The researcher adopted a positivism philosophy in describing the manner in which data about the
research problem was gathered, analyzed and used to deliver meaningful interpretations.
Positivism philosophy was selected by the researcher because it made it possible to make
description about reality in an objective point of view without distorting the phenomenon under
study (John 2012 p.11). In addition, data for the study was gathered through making use of the
annual reports and integrated reports of the selected top 4 banks of Namibia. The above sources
offered significantly huge volume of data and descriptions that eased the processes of collecting
appropriate and reliable data for the study (Macro Assessment Group 2010). Data was
quantitatively analyzed by making use of descriptive statistics and variables that included; the
mean, maximum values, minimum values, variance and standard deviation. Most importantly,
quantitative approach of analyzing the collected data was preferred because it eased the process
of making inferences, interpretation and deductions. As a result, the researcher based the analysis

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on the figures that were identical to all profitability ratios to deliver meaningful inferences,
interpretations and deductions (Oura et al., 2013). After the above processes of data gathering
and analysis, data was used to make a number of recommendations on the ways that each of the
top 4 banks should utilize to realize profitability after Basel III implementation. Most
significantly, all the top 4 banks of Namibia had the potential to realize improvements in their
profitability levels after Basel III implementation. The above claim is attributed to the fact that
they have been able to maintain significantly high levels of capital adequacy after Basel III
implementation. (Said &Tumin 2011 p.159).
Research design
The researcher utilized a fixed assets model plus dependent and independent variables to ensure
that the research objectives were met during the study. The above model was utilized to
determine relationships that exist between market share prices and profitability ratios of financial
institutions in Ghana (Issah 2015 p.35). Below is the fixed assets model that the researcher used
for this study.
ROAit = α+ λROAit, t-1 + βXit + ρMacFinit + εit
Where,
ROAit is the returns earned by the bank on its assets for at a given time period, t
α is the constant coefficient
λROA it, t-1 is the return on equity that is lagged
λ, β, ρ are factors that are to be calculated to exhibit the degree of variation in the independent
variable arising from the influence of a dependent variable

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Xit is the vector of particular traits of the banks like bank size
MacFinit is the vector of macro financial forces like bank capital
εit is the idiosyncratic error term
Description of variables
ROA as a dependent variable represented in the model above
Return on Equity (ROE) and Return on Assets (ROA) are the two main ratios that are
utilized to determine the profitability of the firm (Issah 2015 p.35). The researcher considered the
return on assets from the model will aim at fulfilling the objective of finding out how returns on
assets are able to enhance the profitability of banks. In order to meet the above objective, below
is the corresponding hypothesis that was utilized by the researcher
Ha: Returns on assets are able to enhance the profitability of banks
Independent Variables plus their corresponding hypotheses
i) ROA it, t-1 (Lagged dependent variable)
Under this variable, profits of banks are assumed to be persistent over periods of time arising
from imperfections in the market structure (Vong& Chan 2009 p.33). The above element of the
model aimed to fulfill the objective of finding out whether banks consistently earn high profits
over time in spite of the regulations in form of Basel III. The researcher utilized the following
hypothesis to achieve the objective above
Hb: Profits of Bank are consistently high over a period of time in spite of the regulations
like Basel III

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ii) Size of the bank
Modern theory of financial intermediation indicates that efficiency merits are directly related to
the size of an entity due to economies of scale (Vong& Chan 2009 p.33). The above variable
aimed at fulfilling the objective of finding out whether the size of a bank determines its
profitability over a long time period. Below is the corresponding hypothesis that was utilized by
the researcher to achieve the objective above
Hc: Profitability of banks has a direct proportion with the size of the bank
iii) Bank Capital
In a perfect capital market, earning power of a firm is the element that determines its value rather
than its capital structure (Vong& Chan 2009 p.33). The above variable aimed at fulfilling the
study objecting of finding out how bank capital boosts profitability of a banking entity over a
period of time. The researcher utilized the following hypothesis to achieve the above objective
Hd: Improvements in equity capital offers a positive contribution to profitability of banks
Research questions
i. What is the impact of implementation of Basel III on the profitability of top 4 banks in
Namibia?
ii. How do returns on equity enhance the profitability of banks?
iii. Do banks consistently earn high profits over time in spite of the regulations such as Basel
III?
iv. Does size of a bank determine its profitability over a long time period?
Data collection methods

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The study used panel longitudinal survey and secondary sources to collect data for the study.
Internet, reports and journals were utilized by the research to collect reliable data for the study.
More so, data collection was on the five profitability ratios that were utilized to determine the
impact of implementation of Basel III. Return on equity, cost to income ratio, operating profit to
total assets ratio, net interest margin and net profit ratio were the profitability ratios that data
collection process was based on. These ratios were selected because their magnitudes act as a
indicators on profitability of a banking institution. Ned bank, Standard Bank Namibia, First
National Bank Namibia and Bank Windhoek Limited are the top 4 banks of Namibia that formed
the sample size of the study. The above banks were selected because they had introduced an
element of Basel III capital in their undertaking since 1 September 2018 and have the plan of
phasing it over a period of 5 years. Financial stability and efficiency has been boosted in the
banking sector through Namibia's Reserve Bank that has made use of Basel III implementation to
boost the profitability potentials of the above big four banks (Ongena& Jimenez 2010).
Furthermore, data concerning individual banks was obtained from the Bankscope of Namibia
whereby data concerning the income statements and balance sheets of selected banks was
collected for this study. The above approach was preferred because it offered detailed and
standardized formats of financial data which eased data interpretation. Most significantly, the
researcher obtained financial information concerning individual selected banks from their
websites to eliminate incidences of missing data (Oura et al., 2013)
Analysis of ethical issues
The researcher prioritized objectivity, carefulness, legality and respect for intellectual property as
a way of depicting prioritization of ethical issues during the study. Objectivity was exhibited in
form avoiding bias during data interpretation, analysis and making the research design. The

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above practice ensured that all data processing and management procedures were effectively
handled without affecting interests of any third parties. Additionally, carefulness was executed
through critical reviewing of the collected data given that the study was mainly quantitative in
nature. In addition, the researcher prioritized conformity to all legal procedures and regulations
whilst collecting data that ensured that the study did not violate the interests of the general
public. Furthermore, researcher did not engage in plagiarism and copying other people’s research
as a way of respecting intellectual property as an ethical issue. Elements such as copy rights and
patent rights were prioritized given that data collection mainly involved use of secondary sources
(Oura et al., 2013).
Analysis of reliability
In order to ensure that findings of the study were reliable, the researcher prioritize data
management that involving filling in missing values on the various profitability ratios. The above
approach made it possible to derive reliable interpretations and deductions about the study with
high level of confidence (Oura et al., 2013).
Analysis of Validity
The researcher selected data for a period between 2011 and 2017 as a way of ensuring that the
findings from the research were valid. The above period was chosen because it provided
historical data on various profitable ratios of the top 4 banks of Namibia as a way of determining
the impact that Basel III implementation in 2018 has impacted their profitability. The decision to
select the above period was based on the concept of events study that is mainly focused on
analyzing likely reactions of share prices of banks to the yet to be announced liquidity
requirements under Basel III (Schwaiger 2009)

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Conclusion
All parts of the methodology section were executed with prior knowledge and interest of meeting
the research objectives. The research philosophy helped to ensure that data was appropriately
gathered, analyzed and used by the researcher to deliver meaningful interpretations and
deductions. In addition, the research design helped to ensure that the variable for the study were
appropriately identified and described through the empirical model to achieve objectives and
hypotheses of the research. In addition, research questions were essential in guiding the
researcher to meet the research objectives. Also, data collection was effectively done by utilizing
a variety of secondary sources that offered reliable and accurate data. Secondary sources ensured
that less time was used to collect data for the study. Most significantly, the researcher also
prioritized ethical issues, reliability and validity as a way of ensuring that interests of the third
parties and society were not violated by the study

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Findings and Analysis
Return on equity, net interest margin, net profit ratio, operating profit to total assets ratio and
cost to income ratio are the profitability ratios that were studied. Below is the analysis of each of
the above profitability ratios.
How returns on equity enhance the profitability of banks
Table 1: Return on Equity (%)
Bank 2011 2012 2013 2014 2015 2016 2017 Average
of 7
years
Ned Bank 15.6 15.3 15.8 16.1 16.5 16.8 17.3 16.2
Standard
Bank
Namibia
16.9 17.6 17.2 18.0 18.8 23.4 24.0 19.4
FNB
Namibia
29.3 29.9 30.3 30.9 32.2 32.7 33.1 31.2
Bank
Windhoek
Limited
20.8 21.1 21.4 21.9 22.4 22.9 23.2 22.0
Source: PSG, Annual Reports
The table above shows the average returns on equity of the top 4 banks of Namibia after Basel III
had been implementation. From the table, return on equity for Ned Bank decreased from 15.6%
in FY 2010/11 to 15.3% in FY 2011/12. The drop in equity was attributed to inappropriate

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decisions on reinvestment of the profits that were earned by the entity on its assets
(Nedbank.co.za 2018). However, the entity was able to revive its undertakings whereby a
consistent increase in its returns on equity continued to increase over the preceding years.
Evidentially, the highest return on equity is 17.3% that was realized in 2017. More so, the
tremendous increases on the return on equity after 2012 are attributed to the fact that Ned Bank
opted to utilize more of financial leverages. In such a case, the entity has been financing itself
with equity capital and debts as a way of boosting its return on equity (Afi-global.org 2018). In
regards to Standard Bank Namibia, return on equity increased from 16.9% in the FY of 2010/11
to 17.6% in the FY 2011/12. The above increase is attributed to the significant increases in
profits that the entity was able to realize over the two FYs. However, a decline in return on
equity decreased after FY of 2011/12 from 17.6% to 17.2%. The decline was due to failure to
generate sufficient income from its undertakings due to high overhead costs. Most significantly,
the entity was able to revise its undertakings in the preceding years by overhead costs have been
significantly reduced. As such, the return on equity was able to be rejuvenated from 17.2%
realized in FY 2012/13 to 24.0% in the FY 2016/17. The persistent increases in returns on equity
have been due to the fact that Standard Bank Namibia has been earning consistently high profits
arising from lowered overhead costs (Bis.org 2013).
Additionally, FNB Namibia has been able to record consistent increase in the returns on
equity over the past 7 year. 29.3% was the lowest return on equity that was realized in FY of
2010/11 and the highest returns on equity were realized in the FY of 2016/17. FNB Namibia has
been consistently enhancing asset turnover which is an efficiency indicator (Sherman 2018).
FNB Namibia has been producing more sales as compared to its assets which has not only
increased its profit margin but also return on equity. As a result, it can be implied that the entity

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has effectively utilized its investment ventures to realize consistent growth in its earnings (Huw
2011). On the other hand, Bank Windhoek Limited has been able to realize consistent increases
in its return on equity. More so, it is in the FY of 2010/11 that the entity earned 20.8% as its
lowest returns on equity and 23.2% are the highest returns on equity earned in the FY of
2016/17. The consistent increases in its returns on investment are attributed to the fact that the
entity has always been distributing its idle cash which has widened its profitability margins
(David 2013). This is because the entity has been focusing on increasing its profitability by
reducing on idle cash that is excess of quantity needs to conduct its day to day operations. Most
significantly, the entity has been distributing its idle cash to a multiple of shareholders as an
approach for leveraging and boosting its returns on equity (Popper 2015).
In order to determine the performance the level of mean return on equity that was
realized by these banks after Basel III implementation in 2018 was utilized by the researcher. As
such, the impact on profitability of these banks after implementation of Basel III was based on
their historical performance. From the above analysis, Ned Bank realized a mean return on
equity of 16.2%, Standard Bank Namibia had a mean return on equity of 19.4%. Also, FNB
Namibia had a mean return on equity of 31.2% and Bank Windhoek Limited had a mean return
on equity of 22.0%. From the above statistics, it can be implied that FNB Namibia was the best
performing entity after Basel III implementation given that it had the highest average returns on
equity (Tabart 2012). It can also be implied that Ned Bank was the worst performing entity after
Basel III implementation due to the fact that it recorded lowest average returns on equity. In
addition, Standard Bank Namibia and Bank Windhoek Limited recorded a fair performance after
Basel III implementation (Lall 2012 p.612). As a result, shareholders in FNB Namibia earned

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significantly higher profits as compared to other top 4 banking institutions after the
implementation of Basel III in the banking sector of Namibia.
Do banks consistently earn high profits over time in spite of the regulations such as Basel
III?
Table 2: Operating profit to total assets ratio
Bank 2011 2012 2013 2014 2015 2016 2017 Average
of 7
years
Ned Bank 0.73 0.93 1.23 1.3 1.45 1.58 1.98 1.3
Standard
Bank
Namibia
1.22 1.5 1.52 1.56 1.58 1.60 1.63 1.5
FNB
Namibia
2.75 2.59 2.54 2.43 2.66 2.78 2.98 2.7
Bank
Windhoek
Limited
2.82 2.93 3.02 2.46 2.17 2.22 2.42 2.6
Source: PSG, Annual Reports
The table above shows the average of operating profit to total assets ratio for top 4 banks
of Namibia over the period of 7 FYs. In the FY of 2010/11, Bank Windhoek Limited recorded
the highest operating profit to total assets ratio of 2.82, followed by FNB Namibia with an