4th Quarter bank confidence declines on slower corporate demand - Ernst & Young
The latest Ernst & Young Bank index, released today, illustrates that the significantly slowing economy is hurting the banking sector. Whilst retail banks struggled through 2008, the last quarter saw investment banks also feeling the impact of the global economic liquidity squeeze, a weak and volatile currency, and much slower local economic growth rates.
The 4th quarter 2008 index results show that banking confidence fell once again, from 61 points in the 3rd quarter of 2008, to 50 points in the last quarter of the year. The fall in bank confidence was entirely attributable to the investment banking sector, with confidence falling sharply from its third quarter reading of 81 index points to its current reading of 46. Retail banks, on the other hand, saw little change from the previous quarter, with retail bank confidence slightly ahead of their investment banking peers.
BANKING CONFIDENCE LEVELS 2002 - 2008
(Click on image to enlarge)
Says Emilio Pera, lead banking director at Ernst & Young; ‘We have seen a number of changes in the economic climate in the second half of 2008, and it was only a matter of time before this was going to impact on the corporate and investment banking sector. For example, global commodity prices have retreated since reaching a peak in July 2008. The gold price was an average 20% off its peak price, whilst platinum prices were more than 50% lower in the fourth quarter of 2008.
The current confidence levels are a change from the situation which prevailed through most of 2008 – where retail banks were considerably lagging their investment banking peers in terms of business outlook and prospects. Comments Pera; ‘ The personal segment of the market is always more interest rate sensitive than the corporate sector is, hence retail banks felt the impact of a tougher economic environment more rapidly than the investment banks did. Ultimately, however, the global liquidity crisis is hurting the corporate sector across the globe.’
For as long as global commodity prices were being fuelled by strong growth from the newly developing economies, there was considerable demand in our local market for infrastructure spending, and merger and acquisition opportunities. All of this kept investment banking activity growing. This has subsequently retracted, as commodity and resource companies find themselves with considerably lower cash reserves, while currency depreciation adds considerably to their cost base.
In addition, adds Pera; ‘Other sectors of the corporate market are also under pressure. The retail focused corporate companies have been under pressure throughout 2008, whilst some other key sectors like construction – are also starting to feel the impact of a significantly slower housing and office market. In this environment, coupled with the global liquidity crunch and initiatives in the US and Europe to salvage the banking sector, the general economic operating environment has become a lot tougher for investment banking.
Other survey findings include:
· Contracting retail banking profits, and significantly slower investment banking profits growth;
· Expenses growth significantly outpacing revenue growth in both the retail and investment banking markets;
· Net zero employment growth in the retail sector, and sharply slower employment growth in the investment banking sector;
· Slowing interest and fee income in both banking segments leading to significantly slower income growth;
· All time highs in credit standards tightening, and continuing strong non-performing loan levels.
Comments Pera; ‘ Retail banks have been tightening their credit standards for over two years now, in tandem with higher interest rates. In the investment banking sector, credit standards are being tightened at all banks that were sampled, whilst only three quarters of retail banks are doing the same. However, investment banks started tightening credit standards later than their retail peers, and indeed, the retail banks in fact reported a decline in provisions growth in the last quarter of 2008. Overall though, provisioning remains robust for retail banks.
Continues Pera; ‘Some of the banks issued trading statements in the last two months of 2008, indicating that their profits were under pressure, and that profit expectations were for profits to at best be in line with those of 2007. The index findings are that overall, retail profits will be lower for the year overall, whilst investment banking profits will remain positive, although substantially reduced.’
He adds; ‘In the past, local banks have generally benefited from one of the two segments performing sufficiently strongly to offset any weakness in the other segment. Generally, that relationship holds, but the unexpected downturn in the corporate segment of the market means that pressured retail banking profits are going to be accompanied by a weaker investment banking market. It is thus not surprising that some banks will find themselves reporting lower profits than they reported in their previous financial period.’
In conclusion, says Pera; ‘The banking sector is definitely feeling the impact of slower economic growth and the global liquidity crunch. High interest rates continue to hurt the average retail consumer, while corporate companies are also starting to feel the impact of higher interest rates on their bottom-line. In addition, the segment of the corporate sector that has direct exposure to the retail market is feeling the knock-on impact of significantly slower profit growth, and in some cases, profit contractions. All of these factors are leading to investment banking revenues and profits slowing, whilst retail banking profits are actually contracting. With these weak business fundamentals, it is not surprising that banking confidence reached its lowest level in the seven years the survey has been conducted.’
