Category Banking

Bank confidence remains strong, despite weak economy

17 January 2013 Ernst & Young

A survey released by Ernst & Young today indicates that banking confidence remained strong in the fourth quarter of 2012. The survey found that confidence was particularly robust in the retail segment. Overall banking confidence was slightly lower than th

This is the 44th 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 very weak economic prospects. Local and global uncertainty with weak growth prospects in the Euro zone, and uncertainty in the USA in the run-up to presidential elections, all contributed to very weak economic activity in South Africa in the fourth quarter of 2012.

GDP growth slowed to 1.2% in the third quarter of 2012, considerably below its long-term average rate of 3.2%, and substantially down from the second quarter’s 3.4%. In such a low growth environment, both retail and investment banks struggled to grow revenue streams. The slower growth environment resulted in weak demand from the corporate segment, whilst retail banks faced slower lending growth off an already weak base.’

Both interest and fee income growth slowed in the last quarter of 2012 in the case of retail banks. For investment banks, income growth rose somewhat, despite weaker business volumes. Pera comments, ‘Corporate demand for investment banking services remains weak, as evidenced by weaker activity across the core investment banking business lines. This resulted in shrinking fee income, and in addition to this, investment income also shrunk for the third consecutive quarter. As a result, overall earnings shrunk for investment banks in the fourth quarter. Nevertheless they remain confident about their prospects.’

Other survey findings include:

· Retail banks sharply increased tightening of credit, in line with an uptick in credit impairments. The credit policy tightening was confined to the household segment, whilst business banking credit standards remained unchanged.
· Both retail and investment banks reported a net decline in employee numbers. In the case of retail banks, this was the first time since 3Q11 that banks reduced overall numbers.
· Cost growth remained strong albeit softer for retail banks than in the previous quarter, whilst investment banks faced much more modest cost increases.

Pera further comments on the credit tightening, ‘Investment banks have had a relatively benign credit impairment environment for a while, and this continued into the fourth quarter. Retail banks, on the other hand, have had less than two years of improving credit losses, and are again facing a deteriorating credit quality scenario. We think this is at least partially linked to concerns regarding recent rapid growth in the unsecured lending market. In addition, the mortgage market has not fully recovered, and banks remain cautious following the losses they recently incurred in this segment. Given these issues, banks are understandably cautious about the terms and conditions under which they are willing to approve advances.’

Pera concludes, ‘The confidence readings for banks remained strong, despite weaker income and earnings. The lower growth in revenue streams reflects continued weak economic growth, which economic analysts anticipate carried through to the fourth quarter. The banks expect the new year to remain tough, with revenue growth anticipated to slow even more than it did in the fourth quarter in both retail and investment banking.'

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