Banking confidence remains flat, with the gap between retail and investment banks remaining wide

A survey released by EY today indicates that banking confidence remained flat overall in the banking sector in the first quarter of 2014, with investment banking confidence softening, but offset by moderately higher retail bank confidence.

Overall banking confidence remained at 56 index points in the first quarter of 2014, considerably below long-term average levels of 74.

This is the 49^th quarterly survey conducted to measure confidence in the banking industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

Emilio Pera, Financial Services Sector Leader for Africa at EY comments, "A noticeable gap between investment banks and retail banks’ confidence levels has been in place for the last year. Although it narrowed in the first quarter of 2014, the gap remains nevertheless visible.”

The survey found that retail bank confidence was moderately stronger in the first quarter, rising from 30 index points in the last quarter of 2013, to 38 index points currently. At the same time, investment banking confidence fell somewhat (from 82 to 73).

Pera says, "Bank confidence remains below that of other financial services segments, although in the case of investment banks, the differential is a marginal one. The real outlier is retail banks, who experienced a tough 2013, and appear to be headed for another difficult trading environment in 2014.”

To add more context to this, he points out, "whilst only four out of every ten retail banks are satisfied with business conditions, double that number of investment banks are confident.”

He adds, "Lending opportunities in the retail market remain difficult, with affordability criteria the key concern. Whilst we have seen stronger growth in certain product lines, overall growth in advances remains sluggish. The unsecured lending market in particular faced turmoil in 2013, and many retail banks responded by slowing growth into this market segment.”

‘By contrast’, he points out, "investment banks have benefited from stronger corporate sector prospects. We noticed in the recent results reporting period that the investment banking component of earnings performed considerably stronger than what the retail segment did. In fact, the second half of 2013 was the first reporting period where investment banking earnings achieved pre-global financial crisis levels.”

Other survey findings include:

- Sustained cost pressures for both retail and investment banks alike, although with retail
banks struggling most to contain costs in line with slowing revenue growth.

- A contraction in headcount numbers for the first time in a year at retail banks, and a
marginal increase in headcount for investment banks.

- Rising credit losses at retail banks, whilst for investment banks, credit losses continue to
fall.

- Slower fee income growth for both retail and investment banks alike.

- Stronger interest income growth, with the investment banks’ NII accelerating sharply from
weak fourth quarter levels.

Pera comments on the stronger interest revenue trends, stating that "stronger margins proved a great stimulus for bank earnings in 2013. This trend is likely to pick up further in 2014, as rising interest rates provide greater scope for margin gains. Our survey respondents in the retail market expect net interest earnings to rise substantially in the second quarter as a result.”

He adds, "Given the limited lending growth that banks have faced in recent times, coupled with strong public scrutiny around bank fees, the sector has struggled to grow either interest or non-interest revenue streams at double digit levels. To help build income streams, the focus has shifted to boosting margins, and this has to some extent accounted for the double digit earnings growth that the major banks reported.”

He concludes that the survey findings illustrate that investment bank earnings growth is likely to exceed that of retail banks once again, at least in the first half of 2013. "Investment banks are well positioned compared to their retail counterparts, with benign credit losses, more promising business flows, and a more resilient corporate sector in a very low growth economic environment.”