Weak economic growth keeps bank confidence subdued

Johannesburg, 16 July

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Weak economic growth keeps bank confidence subdued

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A survey released by EY today indicates that banking confidence remained flat overall in the banking sector in the second quarter of 2014, with softer investment banking confidence, and with somewhat higher retail bank confidence.

Overall banking confidence remained at 56 index points in the second quarter of 2014 for the third consecutive quarter.

Bank Confidence Index Levels

EY - Bank Confidence Index Levels

This is the 50th 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, “A noticeable gap between investment banks and retail banks’ confidence levels has been in place for the last year. Although it has narrowed in the first half of 2014, the gap remains nevertheless noticeable.”

He adds, “We have observed that retail banking confidence has slowly recovered from its low point late in 2013. Meanwhile, investment banking confidence has moved in the opposite direction, (falling from 82 index points late last year to 69 currently).”

Pera believes that the slow economic growth that the country continues to endure provides an indication around the divergent confidence levels. He says, ‘Undoubtedly, the sluggish GDP growth we have experienced over the last few quarters is impacting consumer spend more visibly. As a result retailers have struggled to grow their earnings, and retail banks have similarly competed more fiercely for new clients. However, the corporate sector has been more diversified in that they have greater exposure to earnings outside South Africa.”

He further adds, “The Africa growth story has been a compelling one for a while now. Companies have increasingly moved into Africa to exploit the underlying growth promise that this provides them with. As a result, our local investment banking market has been less affected by the slow growth than what retail banks have been. This is so because very often, local companies are seeking finance and other investment banking services from their local supplier, whom they know and have established relationships with. Although the required finance is then used outside the country, it nevertheless provides the investment banking market with growth opportunities.

There is one more factor that could explain stronger investment banking confidence levels(relative to retail banking). Strong equity markets have defied the weak economic fundamentals for a while now, and in fact, our JSE continues to hit new record highs all the time. Strong equity markets provide a solid platform for banking advisory services, amongst others, and this has no doubt fuelled some of the strong confidence levels that investment banks have reported.”

Other survey findings include:

  • Retail bank earnings and profits rose sharply in the second quarter, driven by the interest rate increase announced in the first quarter of the year.
  • Investment banks also reported stronger interest earnings, but this was offset by falling business volumes, which hurt fee income flows.
  • As a result of slower volumes, investment bank profits fell sharply in the second quarter.
  • Credit standards remain loose in the investment banking space, and are easing in the case of retail banks, driven by a more benign credit impairment environment.

Pera comments, “There seems to be a strong connection between confidence levels and bottom-line profits. Whilst retail banks reported much higher profits growth, they also indicated a greater level of satisfaction with general business conditions. Investment banks, by contrast, reported much slower profits growth, and weaker confidence.”

Pera concludes, “Bank confidence remains below its long term average levels for the fifth consecutive quarter. It has been driven by very weak retail banking confidence, and despite a relatively buoyant investment banking landscape. Whilst local growth prospects remain weak, we expect to see retail bank confidence continue to lag that of investment banks. As companies expand into Africa, so the opportunities for investment banking remain more upbeat. Sustained high stock gains may also provide some support for stronger investment banking confidence going into the second half of 2014.”

-Ends- 

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 50th 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.

EY refers to the global organization and may refer to one or more of the member firms of EY Global Limited, each of which is a separate legal entity. EY Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

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.

Twitter: @EY_Africa

Issued by:

Fathima Naidoo
EY
Tel: +27 (0) 11 772-3151
Cell: +27 (0) 76 662 2842
Email: fathima.naidoo@za.ey.com

On behalf of:

Emilio Pera
EY
Tel: +27-11-772-3491
Email: emilio pera@za.ey.com