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Bank confidence weakens, driven by weak retail prospects

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survey (pdf, 449.9kb) released by EY today indicates that banking confidence weakened considerably in the second quarter of 2013. The survey found that confidence was sharply lower in the retail segment, although investment banking confidence remains strong.

Overall banking confidence fell from 82 index points in the first quarter, to 62 points currently, significantly lower than 2012 levels.

Bank Confidence Index Levels

Bank confidence levels Q2 13 

This is the 46th 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, Financial Services Sector Leader: Africa at EY, ‘Confidence levels have weakened in retail banking, in line with weaker economic growth and general uncertainty across emerging markets, which South Africa is caught up in. The second quarter provided strong evidence that general economic conditions remain tough, given weak employment growth and a challenging labour environment.’ 

The survey indicates that retail banking confidence fell back to its weakest level in over a year. Retail bank confidence declined from a buoyant 80 index points in the first quarter of the year to 46, its lowest reading in almost two years. This is considerably below the retail banking long term average confidence reading (73).
Investment banking confidence, by contrast, remained above its long-term average level, falling only marginally from first quarter levels (from 83 to 78 index points).
 
The lower retail banking confidence is not driven by lower earnings, but rather by anxiety about the financial state of the consumer, particularly in lower market segments, where rising impairments have been visible recently.  Survey results indicate that profits, although marginally weaker than first quarter levels, remain strong by recent measures.

On the other hand, investment banking confidence has not increased, despite a significant uptick in profits growth during the quarter. The survey indicates that investment bank profits grew at a pace not seen since prior to the global financial crisis broke in 2008.

Emilio Pera points out that retail banks have provided the bulk of bank earnings growth since the global financial crisis unfolded. ‘This is true both at a global and local level. Investment banks had to substantially change their business models to fall in line with more onerous regulatory requirements. That meant exiting some markets and scaling back on others. Investment bank earnings were difficult to grow in that environment, although more recently, there is evidence that earnings are once again growing, albeit off a low base.’

‘In South Africa’, he continues, ‘the scaling down in investment banking activity was less pronounced, but nevertheless something that all banks in one way or another have dealt with. Through this period, corporate banking earnings have struggled to grow, and retail bank earnings provided the growth spurt that was lacking in the corporate space. ‘

‘On the back of this, the sharp fall in retail banking confidence is concerning, as this suggests that earnings growth is likely to be much more difficult to achieve for the remainder of 2013.’

Other survey findings include:

  • Retail bank’s credit impairments are growing more strongly than they were in 2011.
  • As a result of higher impairments, retail banks continue to keep credit standards tight.
  • Investment banks faced much stronger activity levels in the second quarter.
  • Retail profits growth remains pressured, given the gap between revenue and cost growth.

Pera concludes, ‘Lending growth remains in single digit territory, and neither the corporate nor the retail segments look well placed to grow advances significantly. Slower GDP growth is likely to slow lending growth for at the least the rest of 2013. The unsecured lending market, which has, until recently, provided promising returns for retail banks, is looking more vulnerable, and banks are cautious in this environment. However, our banking sector is well positioned to avoid a crisis, and should remain profitable. Where they will be challenged is finding profit growth in this very uncertain climate. On the plus side, corporate earnings growth is looking stronger than it has been for a long while.’

About the EY Financial Services Index

The EY Financial Services Index Survey measures the performance of the banking; asset 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 46th 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 EY's website at the following address: www.ey.com/za

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.

Following on from EY’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 33 countries across Africa.

Web: www.ey.com/za