RESEARCH METHODOLOGY Method design and sample

This research was descriptive-quantitative in nature, using a population of five major retail banks in South Africa (FNB, Capitec, Standard Bank, Nedbank and Absa) and contained an analysis of existing public financial data (Annual Financial Reports). However, FNB is a subsidiary of FirstRand Limited and does not release its own annual financial data as an independent entity. Therefore, the results for FirstRand will be used to represent FNB.

Data collection

Financial data was collected from INET BFA (from 2007 to 2014) for comparison purposes. INET BFA provides real-time information and historical financial and company information on South African listed companies. To ensure that the financial statement results were comparable, standardised financial statements were used rather than normal financial statements as published. Statements used were income statements, balance sheets and market-related data such as share prices and EPS that were required for calculating P/E.

Measurement instruments

Following from previous studies (Fang et al., 2011; Likar et al., 2014; Yu-Fang, 2013), the two most popular accounting-based measures (ROE and ROA) and market-based measures (P/E), were used as a proxy for organisational performance.

The ROE ratio is defined as profit after taxation divided by shareholder equity. ROE = !"#$%& ($&)" *(+(&%#,_-./%&0 * 100

The primary aim of ROE is to measure the benefits to shareholders according to their investment in a firm (Marx, 2004). ROE is thus a useful instrument for assessing financial performance, but it should be used together with other instruments.

The ROA ratio is defined as the profit after taxation divided by total assets.

ROA = 1)& !"#$%&_233)&3 * 100

Where Net profit = Profit before interest and tax (EBIT) – Total profit extraordinary nature – Taxation

ROA is an accounting measure of a firm’s financial performance based on income before tax and interest, and is an indicator of how profitable a firm is in relation to its assets (Marx, 2004). It shows how effective the managers are at generating revenue from the invested assets.

Price-earnings (P/E) is calculated by dividing share price by EPS. As a result, EPS has a direct influence on the P/E ratio, which in turn is used by the investment community as a measure of expected future returns.

P/E ratio = 4("5)& 67(") !"%8)

-(",%,93 !)" 67(") * 100

The P/E ratio measures how much investors are willing to pay per rand of current earnings (Firer, Roos, Westerfield & Jordan, 2008). In other words, the higher the P/E is, is often taken to mean the firm has significant prospects for future growth.

Ethical considerations

The study used secondary data which is publicly available and as such confidentiality was not deemed necessary.

RESULTS

Descriptive and inferential statistics are presented in this section. A descriptive analysis was conducted as part of the exploratory approach to analyse the data. In order to analyse the financial performance of the five banks, the non-parametric Kruskal-Wallis and Mann-Whitney U tests were used. Figure 1 showed FNB (a subsidiary of FirstRand Limited) and Capitec as the most innovative banks in South Africa and as such they were classified as first movers, while the fast-followers are Standard Bank, Nedbank and Absa. Three instruments were selected for determining the financial performance of banks, namely P/E, ROA and ROE.

Descriptive statistics

A summary of financial performance data for all the banks is shown in Table 1 below, using overall mean, standard deviation, minimum and maximum values.

Table 1: Descriptive statistics (2007-2014)

Variable Group Mean

Standard

deviation Minimum Maximum

Price-earnings ratio FirstRand 10.41 1.49 7.13 11.89

Capitec 14.30 3.96 8.39 21.47

Standard 11.53 1.82 8.23 14.04

Nedbank 10.32 1.75 6.55 11.80

Absa 10.38 1.90 7.34 12.76

Return on assets FirstRand -0.85 0.75 -2.50 -.08

Capitec -11.46 7.85 -30.52 -6.67

Standard -1.20 0.45 -1.79 -0.20

Nedbank -1.42 0.22 -1.72 -1.14

Absa -1.32 0.32 -1.61 -0.77

Return on equity FirstRand 23.39 6.61 14.29 35.43

Capitec 21.25 3.34 16.55 27.65

Standard 15.20 4.35 12.37 25.43

Nedbank 14.60 3.10 10.91 19.96

Absa 16.93 4.57 12.55 25.54

Source: Authors

Table 1 shows that Capitec has the highest P/E ratio mean of 14.30, suggesting that investors are willing to pay a premium for Capitec stock, mainly because the bank is expected to have a higher than average future earnings growth. In contrast, Capitec exhibits the lowest mean for ROA of -11.46, which suggests poor management of assets. However, the standard deviation for Capitec is the highest for both P/E and ROA ratios (3.96 and 7.85 respectively), suggesting there might be a possible outlier. Interestingly, Table 1 reveals that FirstRand has the highest ROE of 23.39, followed by Capitec with ROE of 21.39. These results suggest a possible correlation between the innovation strategy adopted by the bank (see Figure 1) and shareholder returns. Kruskal-Wallis results

In this section the aim is to determine whether the innovation strategy adopted by banks is significantly associated with certain variables that form part of organisational performance. In order to test this relationship, the non-parametric Kruskal-Wallis test

was used to test if significant differences exist between banks when measured by P/E, ROA and ROE. The results are presented in Table 2 below. The analysis of the data is divided into two parts, namely, results for 2007 to 2010 and for 2011 to 2014. Table 2: Kruskal-Wallis

Period

Financial Performance

Indicator chi-square df p-value Decision

2007-2010 Price Earning (P/E) 4.62 4 0.33 Retail H0

Return on assets (ROA) 9.69 4 0.04* Reject

H0

Return on equity (ROE) 4.58 4 0.33 Retail H0

2011-2014 Price Earning (P/E) 5.42 4 0.27 Retail H0

Return on assets (ROA) 16.54 4 0.00* Reject

H0

Return on equity (ROE) 14.81 4 0.00* Reject

H0

* p-value < 0.05 Source: Authors

Results for the period 2007-2010

The Statistical Package for Social Science (SPSS) output shows that the Kruskal- Wallis statistics (chi-square) for ROA is equal to 9.69 with a p-value equal to 0.04. Therefore, the null hypothesis (H1B0), that there is no statistically significant difference

between first-movers and fast-followers in terms of ROA, is rejected. Hence, it can be concluded that differences between ROA could be attributed to the innovation strategy adopted. For the same period (2007-2010), the Kruskal-Wallis statistics (chi-square) for P/E and ROE are 4.62 and 4.58 respectively with p-values of 0.33. Therefore, the null hypotheses (H1A0 and H1C0), that there is no statistically significant difference

between first-movers and fast-followers when measured in P/E and ROE, are retained. Results for the period 2011-2014

The SPSS output shows that the Kruskal-Wallis statistics (chi-square) for ROA and ROE are equal to 16.54 and 14.81 respectively, with a p-value equal to 0.00. Therefore, the null hypotheses (H2B0 and H2C0), that there is no significant difference

between first-movers and fast-followers when measured in ROA and ROE, are rejected. Hence, it can be concluded that the differences between ROA and ROE could be attributed to the innovation strategy adopted. Similarly, it can be observed from Table 2 that the results of the Kruskal-Wallis statistics for the P/E ratio are not

statistically significant, with the p-value equal to 0.27 for period between 2011 and 2014. Therefore the null hypothesis H2A0 is retained.

Mann-Whitney U test results

To test the differences between the respective banks identified by the Kruskal-Wallis test, the Mann-Whitney U test was used and the results are presented in Table 3 below. Similarly, the analysis of the data is divided into two parts, namely, the results for 2007 to 2010 and 2011 to 2014.

Table 3: Mann-Whitney (M-W) U test

Period 2007-2010 2011-2014

Group

ROA ROA ROE

Mean Rank M-W U-value p- value Mean Rank M-W U-value p- valu e Mean Rank M-W U-value p- value FirstRand 6.50 0.00 0.02* 6.50 0.00 0.02* 5.75 3.00 0.14 Capitec 2.50 2.50 3.25 FirstRand 4.25 9.00 0.77 6.50 0.00 0.02* 6.50 0.00 0.02* Std. Bank 4.75 2.50 2.50 FirstRand 6.00 6.00 0.56 6.50 0.00 0.02* 6.50 0.00 0.02* Nedbank 4.00 2.50 2.50 FirstRand 5.00 6.00 0.56 6.50 0.00 0.02* 6.50 0.00 0.02* Absa 4.00 2.50 2.50 Capitec 2.50 16.00 0.02* 2.50 16.00 0.02* 6.50 0.00 0.02* Std. Bank 6.50 6.50 2.50 Capitec 2.50 16.00 0.02* 2.50 16.00 0.02* 6.50 0.00 0.02* * Nedbank 6.50 6.50 2.50 Capitec 2.50 16.00 0.02* 2.50 16.00 0.02* 6.50 0.00 0.02* Absa 6.50 6.50 2.50 Std. Bank 4.88 6.50 0.66 5.88 2.500 0.10 4.00 10.00 0.56 Nedbank 4.12 3.12 5.00 Std. Bank 4.50 8.00 1.00 6.25 1.00 0.06 5.50 12.00 0.24 Absa 4.50 2.75 5.50 Nedbank 3.50 12.00 0.24 5.25 5.00 0.38 3.50 12.00 0.25 Absa 5.50 3.75 5.50

Note: Std. Bank: Standard Bank; * p-value < 0.05

Source: Authors

Results for the period 2007-2010

The results of Table 3 indicate that there is a statistically significant difference between FirstRand and Capitec when measured using ROA with p-value = 0.02, U = 0.00 at a significance level of 5%, with FirstRand outperforming Capitec. Furthermore, Table 3

shows that there is a statistically significance difference between Capitec and the other three banks, namely, Standard Bank, Nedbank and Absa when measured using ROA with the p-values = 0.02 and U values = 16, indicating that Standard Bank, Nedbank and Absa outperformed Capitec. The results are in line with the findings of the study conducted by the Innovation Agency (2014), which showed Capitec trailing behind the other four banks in terms of innovativeness (see Figure 1).

Results for the period 2011-2014

When ROA was analysed, the results of Table 3 indicate a statistically significant difference between FirstRand and Capitec with the p-value = 0.02, U = 0.00 at a significance level of 5%. Furthermore, there a statistically significance difference between Capitec and the other three banks, namely, Standard Bank, Nedbank and Absa with the p-values = 0.02, U values = 16.00 when measured in ROA, with Capitec outperformed by all three banks. This finding is in sharp contrast to the findings of the study conducted by Innovation Agency (2014), which showed Capitec leading the other three banks (Standard Bank, Nedbank and Absa) in terms of innovativeness (see Figure 1). These results indicate that there is no conclusive evidence that an increase in innovativeness will lead to superior financial performance when measured in ROA.

When ROE was analysed, the results (Table 3) showed no statistically significant difference between FirstRand and Capitec with the p-value = 0.14, U = 3.00. However, the results further showed that there a statistically significance difference between FirstRand and the other three banks, namely, Standard Bank, Nedbank and Absa with the p-values = 0.02, U values = 0.00, with FirstRand outperforming all three banks. Similarly, the results further showed that there is a statistically significance difference between Capitec and the other three banks, namely, Standard Bank, Nedbank and Absa with the p-values = 0.02, U values = 0.00, with Capitec outperforming all three banks. These results are in line with the findings of the study conducted by Innovation Agency (2014), which showed Capitec was second after FirstRand in terms of innovativeness (see Figure 1). In other words, the results indicate that generally first movers exhibit superior ROE than fast-followers.

Results for the period 2007-2014

The overall results for period between 2007 and 2014 are also presented in Table 3. The results of Table 3 reveal no statistically significance differences between banks when measured in P/E. Therefore, the null hypothesis H3A0, that there are no

statistical significant differences between first movers and followers when measured in P/E, is retained. The results in Table 3 further show that although there was no statistically significance difference between banks when measured in ROE between 2007 and 2010, there was a statistically significance difference between banks between 2011 and 2014. Furthermore, the results in Table 3 reveal a statistically significance difference between banks when measured in ROA for the two periods under investigation. Therefore, the null hypotheses HBA0 and H3C0, that there are no

statistically significant difference between first-movers and fast-followers when measured in P/E and ROA, are rejected.