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Bank confidence rises sharply, on strong profit growth

17 April 2012 Emilio Pera, lead Financial Services Director at Ernst & Young

A survey released by Ernst & Young today indicates that banking confidence rose in the first quarter of 2012, following gains in the last quarter of last year. The survey found that confidence rose in both the retail and corporate segments of the market.

Comments Emilio Pera, lead Financial Services Director at Ernst & Young, ‘Confidence levels have rebounded from much lower levels recorded through 2009 and 2010, and it appears as if banks have finally shrugged off the global financial crisis. Profits growth has returned to pre-crisis levels, although lending growth remains weak by historical standards. It is thus no surprise that confidence levels have risen as sharply as they did in the first quarter.’

He continues, ‘not only is confidence stronger than it has been for the past two years, but we also see the signs of sustainability in their earnings growth, supported by positive quarter-on-quarter growth in income streams (both interest and non-interest revenue), and this is supporting bottom-line profits accordingly.

‘In addition’, he adds, ‘for the first time in over three years, banking confidence has returned to being above its long-term average levels. The last three years has been a story of confidence levels trailing not only their long-term average levels, but trailing other financial services segments too. This quarter saw banking confidence more in line with other financial services segments. ’

Until the beginning of 2012, Investment banking profits were erratic. And despite not all business lines firing on all cylinders, there is a trend evident in profit growth, which is looking positive,’ explains Pera. ‘Over and above more upbeat revenue trends, investment banks have focused strongly on cost control, and as a result, the operating jaws were positive for the first time in over two years.

Other survey findings include:

· A strong turnaround in both interest and non-interest revenue;
· Sustained fee income growth for both retail and investment banks;
· An improvement in the operating jaws, particularly for investment banks; and
· Continued easing in credit impairments and losses.

Emilio Pera comments; ‘Banks have struggled to contain costs in the aftermath of the GFC, given the regulatory pressures, IT systems enhancements, and general inflationary pressures they faced. It took a strong degree of focus to align the cost base with a slower revenue growth environment. The recent reporting season indicated that banks are now managing their costs carefully, and as a result overall 2011 operating costs across the banking sector were only marginally ahead of 2010 levels.’

‘Even so, he points out, ‘ banks nevertheless have certain unavoidable costs they have to endure, and we can see that in the first quarter’s survey results, with all banks in the retail segment experiencing upward cost pressure.’

Another positive indicator of banking prospects is the continued growth in headcount. Despite recent media headlines, the banking sector is growing net employee numbers, rather than cutting back. Both retail and investment banking segments continued to add to their headcounts in the first quarter.

Pera comments, ‘Some of the headcount growth is undoubtedly coming from growth in the second tier banking segment. But in addition to that, many banks are also placing more emphasis on increasing their client accessibility. This does not necessarily mean an increased branch network, rather a more focused need for ‘walk-in’ centres, which nevertheless results in the need for increased staff numbers. This has undoubtedly been a driver behind some of the headcount growth we have seen in the past few quarters.’

Lastly, Pera comments on the credit impairment trends, by pointing out that there are continued quarter-on-quarter improvements in credit impairments. He says, ‘although the rate of improvement in the current quarter is slightly off the previous quarter, the uplift for bottom-line profits continues to be overwhelmingly positive.’

Pera concludes, ‘The outlook for banks is looking more upbeat than it has for a while, and this is confirmed by the recent financial reporting by the large banks, who are all far more bullish about prospects than they have been for a while. Credit growth continues to strengthen, and is moving gradually upwards from low single-digit figures to high single digit figures. Banks are particularly excited about prospects in select key segments, and are focusing their efforts to support those product markets.’


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