Consumers brace for softer bank profits
South Africa’s banks ended 2009 on a negative note. Ernst & Young’s 32nd quarterly survey of confidence in the banking industry, complied from research conducted by the Bureau for Economic Research in Stellenbosch, fell from 41 index points in Q3 2009, to just 34 points in the fourth quarter. The main reasons for the dip in confidence include falling profits, weak credit demand and low transaction volumes. Banks are concerned over both retail and corporate profit, with the result industry confidence has come in below its long-term average for eight consecutive months! The survey confirms that South Africa’s emergence from technical recession doesn’t necessarily signal relief for the banking sector.
Soft credit demand a major concern
Emilio Pera, lead Banking & Capital Markets Director at Ernst & Young says “the sustained weak banking confidence is driven by contracting credit demand.” Domestic credit demand has been softening since the early 2008 and posted a negative year-on-year result for the first time in September 2009. This contraction in credit demand places massive pressure on banks’ revenue. “A lower interest rate environment has yet to result in improved consumer expenditure and debt service affordability, whilst corporate entities have also not yet responded by increasing credit levels,” says Pera. The survey reveals only on in three banks satisfied with current business conditions.’
Banks’ revenue has been dented due to the general slowdown in economic activity too. “There is also slowing business activity in both the retail and corporate banking markets,” says Pera. The consumer remains under tremendous pressure, as illustrated by recent retails sales figures. Retailers had a disappointing Christmas, and any hopes of a swift turnaround have been dented by the big spike in job cuts and retrenchments through 2008/9. We have yet to witness the full impact of unemployment on the domestic consumer economy.
“On the corporate side, a much anticipated rise in transaction activity failed to materialise too,” says Pera. The sector reported declines across a range of corporate and investment bank business. He observes this slowdown has had a direct impact on the bottom-line of corporate and investment banks – and that they experienced a sharp contraction in revenue during the final quarter of 2009. There is some good news. There is evidence the threat of impairment charges is lifting slightly. This should provide a boost to bottom line profits through 2010. As a result the retail banks have been able to soften their credit standards slightly.
Bad news for bank account holders
Contracting banking sector profit is bad news for shareholders, but even worse news for bank clients. Banks have long viewed individual account holders as a ripe source of inflation-plus revenue growth. Complex fee structures make it difficult to assess year-on-year increases at individual banks, and compare fees from one institution to another. By cleverly hiking fees for certain high-use services banks are able to secure revenue increases by stealth.
A perfect example of this practice is the recent decision by various banks to hike the monthly admin charges on home loan accounts. Standard Bank decided to increase the monthly administration fee from R5.70 in 2008 to R35.00 in 2009, an increase well in excess of 500%. If we look at overall increases across the basket of banking services we consume, then we’re not doing too badly – but the bank has made an absolute killing on a single profit line! This price was hiked by a ‘reasonable’ 7.14% in 2010.
Editor’s thoughts: South Africa has some of the most advanced consumer legislation in the world. Despite the various legislated protections consumers remain prisoners of service providers, particularly in the banking and telecommunications sectors. We soak up increases in these fees without asking the tough questions. Do you think we should fight banks and other service providers on above-inflation increases? Add your comments below, or send them to [email protected]
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