Banking confidence remains weak due to softer growth prospects

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survey (pdf, 258.1kb) released by EY today indicates that banking confidence has marginally improved but remains weak in the retail segment, with investment banking confidence much stronger.

Overall banking confidence fell marginally, from 58 index points in the third quarter, to 56 points in the last quarter of 2013, significantly below the first quarter of 2013’s 82 reading.

Bank Confidence Index Levels

Graph of bank index Q4 2013 

This is the 48th 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, “This is the third consecutive quarter that the confidence gap between retail and investment banks has been significant. Investment banks continue to benefit from stronger market conditions – after a long period during which they were focused on re-positioning themselves – in line with global investment banks.”

The survey found that retail bank confidence was moderately stronger in the fourth quarter, rising from a very weak 25 reading to 30 index points in the last quarter of the year.
 
Findings also indicate that profit growth continued slowing for retail banks – this being the third consecutive quarter that profits growth has slowed. Pera comments, “The combined impact of slow credit growth, coupled with rising credit losses made for a difficult operating environment in the fourth quarter. With latest estimates of GDP growth for the year at 2%, there are few supportive environmental factors for the market. However, he adds, ‘prospects are not necessarily as bleak as the data suggests. There are some banks that are starting to benefit from their ventures into Africa, and as these business units become more financially meaningful, they will start contributing to overall positive profits growth.”

The survey results also illustrate how banks are struggling to offset slower credit growth by focusing on fee income. In the fourth quarter, fee income growth slowed to its weakest level in over two years. 

Pera points out that public scrutiny around bank charges remains vocal, although this is not a uniquely South African phenomena. “Banks have focused on building their fee income streams for a number of years, but the combined effect of a much more competitive banking environment, coupled with stronger public oversight and consumer lobby groups taking interest in banking charges means that banks are under more scrutiny than ever before. This is likely to remain a challenge, and until real economic activity accelerates, banks will face revenue pressure.”

On the investment banking front, the survey results reveal that profit growth is moderately slower, but remains strong nevertheless. This is supported by favourable factors such as an improving credit loss environment; sustained strong business volume growth, and an improving cost to income ratio trend. On the negative side, revenue growth slowed into the fourth quarter, and was particularly pressured in net-interest revenue, which actually shrunk.

Pera further adds that “investment banks do face some challenges, despite their more upbeat market conditions. For one the credit market remains benign, with few companies actively investing in such an uncertain economic climate. And where they are investing, it is not necessarily in their home market. They too are looking increasingly at Africa as a source for growth, and often financing those investment needs offshore.”

In addition to slower revenue, investment banks also face strong cost pressure build-up. After a mild four quarters up until the middle of 2013, costs accelerated sharply in the second half of the year. Pera says that this is not unusual or unique to investment banks. “All banks have unavoidable costs that they can at best delay. These costs are often borne from regulatory needs, and the associated compliance requirements that must be met. In addition to that though, there is also a compelling need to modernise and restructure systems to drive future revenue growth. This makes it very difficult to contain costs.”

Pera concludes that whilst the fourth quarter was a challenging one for the retail banks, overall bank confidence is not unusually low given the economic outlook. “We saw through the course of 2013 just how challenging the economic scenario was for business in South Africa. Sluggish economic growth will likely continue to keep overall banking confidence weak, and until more solid growth prospects emerge, we don’t expect to see much upside for the banking sector.”

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 47th 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 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.

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