Bank confidence softens but remains at strong levels

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A survey released by Ernst & Young today indicates that banking confidence was marginally softer in the first quarter of 2013. The survey found that confidence was softer in the retail segment, partly offset by slightly stronger confidence in investment banking. Overall banking confidence was marginally lower than fourth quarter levels, falling from 84 index points to 80 points currently, below its first quarter 2012 peak, but well ahead of the weak levels experienced through 2010 and 2011.

Bank Confidence Index Levels

Bank index confidence levels for Q1 2013

This is the 45th 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 remain strong, despite continued weak economic growth and ongoing uncertainty stemming from the Euro area. South African growth prospects remain subdued, and recent currency devaluation has not yet resulted in stronger export volumes.”
GDP growth estimates for 2013 have been adjusted downwards, and growth is likely to be in the region of 1.8%, considerably below the long-term average rate of 3.2%.  As a result, both retail and investment banks have reported very modest credit growth. Latest data indicate that credit growth fell in February (year-on-year) to 7.9% from 8.6% in January.
Pera points out that this is in line with the general sentiment expressed by bank executives during the recent results reporting season.  “Many executives commented on slowing advances growth and a weaker growth environment in general. In some instances, individual banks are purposely slowing unsecured lending growth, concerned about the tightening economic situation, and the plight of the state of consumer finances. As a result we noticed more emphasis on credit tightening, especially in the retail segment.”

Pera adds that this is not unique to South African banks – weak economic growth is the single biggest concern faced by bank executives across the globe (source: EY BCM Global Themes Deck 4Q2012). However, he adds, “South African banks are largely responding to the weak growth in the domestic market by increased focus on their Africa growth plans. Global banks, by contrast, still facing liquidity and capital shortages, are more focused on rebuilding capital levels.”

The survey found that slower advances growth has led to slower revenue streams. Both interest revenue and fees and commissions income growth slowed considerably in the first quarter of 2013. Pera comments; “Slower net interest revenue is undoubtedly linked to a weak advances growth environment. Whilst it was retail banks reporting slower interest income, official data for the year to February 2013 indicates that corporate sector credit growth was especially weak.”

Other survey findings include:

  • Employment growth in the banking sector remains weak. Retail banks reported a net decline in employee numbers, whilst investment banks reported a moderate rise (after a contraction in the last quarter of 2012).
  • Cost growth accelerated for retail banks – off an already strong base, whilst investment banking costs remained flat. Rising impairment charges played a role in pushing costs upwards for both retail and investment banks.
  • Lending growth in the corporate segment was particularly weak, and lagged household credit growth, in line with a corporate sector that has been reluctant to invest in such uncertain times.

Pera says the strong cost pressures building in the retail banking segment is concerning, given that revenue is slowing. “Over time, the survey results indicate that banks generally respond to slower revenue by curtailing cost growth. There was no evidence of this in the first quarter in retail banking. Banks expect costs to rise even more sharply next quarter, despite expectation that revenue growth will slow even more. This indicates to us that cost pressures will remain a major focus for banks, especially retail banks.”

He adds, “Cost pressures continue building on the back of ongoing regulatory reforms. This pressure will remain strong going forward, in addition to the need to invest for future growth also adding to the cost pressure. Banks all acknowledge that cutting costs should not be carried out at the expense of growth. Investing for growth remains a key priority. As an example, focus on African expansion remains a key focus area for all the major banks. This requires significant capital expenditure, which in many instances will only likely generate returns much further down the line.”

In conclusion, says Pera, “Confidence remains above long-term average levels. This is supported by sustained high first quarter profits in the retail bank segment, and much improved profits in the investment banking market. However, with strong cost pressures, coupled with likely continued sluggish advances growth and a rise in impairments, profits are likely to be pressured in the second quarter of 2013. Investment banking profits can vary sharply from one quarter to the next, and whilst the current survey shows strong underlying profits, we will need to see how sustained those profits are.”

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 45th 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 first quarter survey results, please consult the reports that are posted on Ernst & Young's website at the following address:

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