Bank confidence improves but remains erratic

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A survey released by EY today indicates that banking confidence rose in the fourth quarter, after a weak third quarter. The survey found that confidence rose in both the retail and corporate segments of the market. Banking confidence rose from 41 index points in the third quarter of 2011 to 50 in the last quarter.

This is the 40th 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 EY, ‘Confidence levels have remained volatile through 2009 and 2010, with banks having still not quite recovered from the global financial crisis. Earnings have not yet returned to pre-crisis levels, and lending growth remains weak by historical standards. This is reflected in confidence levels, which since the first quarter of 2008, has averaged 62 index points.’

He continues, ‘not only is confidence weaker than it was prior to the crisis, but neither retail nor investment banks have had sustained rises in confidence over the last two years, with more of a zigzag pattern emerging, as confidence rises and falls again between one quarter and the next, reflecting the uncertainty in financial markets during this period.’

‘However’, he adds, ‘the latest quarter provides some indication that retail banks may finally be on a sustained path to stronger financial results.  Throughout 2011, retail banks reported improving profit trends, starting the year with flat profits, and ending 2011 with relatively strong growth in bottom-line profits.’

By contrast, Investment banking profits remain erratic. The year started off well for investment bankers, but this reversed in the second quarter, and ever since, have reported either shrinking or flat profits. The fourth quarter was no exception, with profits flat.’

Other Retail banking survey findings include:

• A strong positive turnaround in net interest earnings;
• The strongest rise in fee income since the start of the crisis in 2008;
• A major improvement in credit losses and credit impairments in the fourth quarter;
• A rising cost-to-income ratio, as costs accelerated in the fourth quarter;
• Gradually rising credit standards, largely focused around the SMME market.

Emilio Pera comments; ‘Income growth has at last returned to pre crisis levels, with all retail banks indicating that income is growing. There have been gradual improvements throughout 2011, and this has undoubtedly lifted profit growth. The rising income comes at a cost, and banks have had to increase their headcount to cope with higher demand for banking services. There was a moderate rise in headcount across retail banks in the fourth quarter, following a considerable two year period during which banks were cutting headcount.’

The Investment banking survey details include:

• Flat income levels;
• Moderate interest growth, coupled with slow fee growth and shrinking investment income;
• Continued improvements in credit losses and impairments;
• Sustained negative operating jaws.

Pera comments again, ‘Investment banks are starting to benefit from more moderate credit growth, but were negatively impacted by investment losses incurred in the fourth quarter. This is in no small part due to the uncertain investor environment, which has resulted in smaller gains on sale realisations, and weaker returns from equity and bond portfolios.

Despite this rather weak performance in some of the key performance indicators, investment banks nevertheless reported stronger confidence levels. We ascribe this to an expectation that business volumes will improve in the first quarter of 2012, particularly in private equity and stock broking activities. This is expected to push income into positive growth territory, and coupled with sustained improvements in credit losses, provides some relief for investment bankers into the new year.
Retail banks also expect an improved start to 2012, with a strong rise in net profits, supported by higher fee income, and sustained interest growth, coupled with steady cost increases.

Concludes Pera, ‘It is still not clear whether a definite sustained rise in confidence will happen in 2012. The Euro zone crisis continues to impact on the banking sector, and investment banks appear particularly vulnerable, despite an uptick in trading volumes in the last quarter of 2011. The overall lack of investor confidence does appear to be keeping companies from making commitments to investing funds, and the very least that is required is resolution to that crisis before a sustained improved outlook can be expected.’

About the EY Financial Services Index

The EY 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 40th survey of banks conducted in South Africa.  The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis.

See full report (pdf, 746.1kb) .