Bank confidence rises despite weak investment climate

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A survey released by Ernst & Young today indicates that banking confidence improved in the third quarter of 2012, after sharp falls in the previous quarter. The survey found that confidence rose in both the retail and corporate segments of the market. Banking confidence increased from 78 index points in the second quarter to 90 points currently, its highest level since the fourth quarter of 2007.

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This is the 43rd 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 risen, particularly in the case of investment banks, which are now the most confident segment across the financial services market. This is despite the Eurozone crisis remaining largely unresolved, and very weak economic activity in the corporate segment locally throughout 2012.

He adds, ‘The recent reporting season illustrates just how well the retail segment of the market has fared in the first half of this year. Indeed, most of the local banks reported strong retail banking profits growth, but offset by weak corporate banking results. Despite this, investment banks remain strongly confident. We think that the strong confidence could be an indication that investment banks expect recovery from very weak activity levels, which have been prevalent over the last few years.’

Other survey findings include:

  • Continued rising credit losses in retail banks, with investment banks’ losses flat;
  • Tightening credit standards applied by retail banks;
  • Contracting investment banking volumes across most business lines;
  • Strong headcount growth at retail banks and investment banks;
  • Sustained stronger interest and non interest income growth for both retail and investment banks; and
  • Higher retail banking profits, despite slower income growth and higher cost growth.

Comments Pera, ‘ We noticed during the recent banking reporting cycle that retail banks reported a very sharp rise in credit impairments in the first half of 2012. It appears that this trend has continued into the third quarter of the year. Should this continue into the fourth quarter, it is likely to start impacting bottom-line profits, and coming so soon after recent mortgage losses in the banking market, is a concern.’

He adds, ‘As we observe higher impairments, retail banks are again tightening credit standards. This is no doubt in line with the regulatory authorities’ taking a very close look at credit growth, particularly in the unsecured segment of the market. Whilst individual banks are all emphasising that they are being prudent in their credit extension, there is nevertheless a strong concern at the macro level that consumers are becoming over-indebted, and that this may very likely result in a credit bubble. Regulators will want to ensure that such a scenario does not play out.’

For investment banks, activity levels remain weak, with private equity, project finance and stock-broking all contracting in the third quarter. Growth in Treasury and trading related activities also slowed very visibly. Pera points out that ‘The slower business volumes, despite impacting revenue streams and bottom-line profits negatively, did not lead to weaker confidence. This could be explained by the bankers’ outlook, which looks more promising in the fourth quarter.’

Pera concludes; ‘Confidence levels finally appear to be back at pre-crisis levels. Although there has been considerable stop-start in getting confidence levels back to above-average levels, this is the first quarter since the fourth quarter of 2007, that both retail and investment banks have recorded strong confidence. However, the volatile economic environment makes it difficult to say how sustained this might be. A lot depends on fourth quarter GDP growth, and currently labour markets make for a very uncertain outlook.’

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 43rd 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 third quarter survey results, please consult the reports that are posted on Ernst & Young's website at the following address: www.ey.com/za 

About Ernst & Young
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