Bank confidence falls in line with economic uncertainty
A survey released by Ernst & Young today indicates that banking confidence fell back in the second quarter of 2012, following gains in the previous two quarters. The survey found that confidence fell in both the retail and corporate segments of the market. Banking confidence fell overall from 89 in the first quarter, to 78 in the second quarter.
This is the 42nd quarterly survey conducted to measure confidence in the banking industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.
Comments Emilio Pera, lead Financial Services Director at Ernst & Young, ‘Confidence levels have fallen in line with considerable economic anxiety across the globe. The Eurozone crisis is far from resolved, and had considerable impact on capital markets globally, hurting investment banking revenues particularly harshly. In addition, internationally, a number of banks saw their credit ratings down-graded through the quarter, and this is symptomatic of a far more uncertain business environment. South African banks were also impacted by rating outlook downgrades, and whilst there is no immediate impact on earnings, it does provide an indication of a weaker outlook.’
He continues, ‘Although confidence levels have fallen in the second quarter, they remain nevertheless well above the levels they have been at more recently. Since the global financial crisis, South African banks seldom saw confidence levels above the 50 level, and where it happened, it proved to be short-lived, prior to the start of 2012. Currently, banking confidence remains only marginally below long-term average levels.’
Pera adds, ‘It is somewhat ironic that retail banking confidence lags that of investment banks, given the steadier profits that retail banking survey respondents have reported, and their expectations for the quarter ahead. Investment banking respondents reported a sharp fall in profits during the second quarter, and the subdued global outlook is likely to make their revenue streams more volatile going into the second half of 2012.’
Other survey findings include:
- Rising credit losses in retail banks, with investment banks’ losses shrinking;
- Significantly weaker investment income for all banks alike;
- Flat headcount at retail banks; with rising headcount for investment banks;
- Stronger interest income growth for both retail and investment banks.
Comments Pera, ‘The latest available credit data indicates that credit growth is steadily rising, from low single digits in early 2011, to low double digit territory more recently. This supports the higher interest revenue growth that the survey results make reference to. Recent comments from some of the banking institutions indicate a mixed picture emerging. Whilst credit growth is supportive of earnings growth, retail banking respondents report that credit impairment costs started ticking upwards again in the second quarter.’ He continues, ‘In addition, we have seen a strong focus on unsecured lending in the last while. There are many questioning whether a bubble is arising in this segment of the market.
Pera also comments on the employment trends, noting that whilst overall, headcount growth in the retail banking sector was flat in the second quarter, this shelters the trends at an individual bank level. ‘Some banks are undoubtedly in hire mode, whilst others are very much moving in the opposite direction, restructuring and re-sizing their organisations. Overall, retail banks have been gearing up for a more growth oriented outlook in the first half of 2012, and expect to continue doing so at least into the next quarter.’
Pera concludes; ‘Retail banking fundamentals remain sound, despite the continued uncertain global outlook. Investment banks on the other hand, continue to feel the impact of uncertainty more directly, with respondents reporting shrinking profits in the second quarter. Looking ahead, the question is how banks will manage a cycle of rising interest rates. Retail banks still see strong growth opportunities in unsecured lending. Investment banking fortunes will be dependent on stronger corporate sentiment, both in global markets, and of course, closer to home.’
About the Ernst & Young Financial Services Index
The Ernst & Young Financial Services Index Survey measures the performance of the banking; investment management and life assurance sectors on a quarterly and consistent basis and releases the information timeously. The survey is designed to assist in analysing trends in the banking sector over the short run. Results reveal current and expected changes in banks' income, expenses, profitability, credit standards and investment.
This is the 42nd survey of banks conducted in South Africa. The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis. For a more detailed discussion of the second quarter survey results, please consult the reports that are posted on Ernst & Young's website at the following address: www.ey.com/za
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