Contracting credit demand and falling volumes keep banking confidence low
A survey released by Ernst & Young today indicates that banking profits continued to fall in the 4th quarter of 2009, fuelled by sustained weak credit demand and low transaction volumes. The survey found that banking confidence fell from a revised 41 index points in the 3rd quarter, to 34 in the last quarter of 2009.This is the 32nd quarterly survey conducted to measure confidence in the banking industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.
Banking Confidence Levels 2002 - 2009
(Click on image to enlarge)Comments Emilio Pera, lead Banking & Capital Markets Director at Ernst & Young, ‘ The sustained weak banking confidence is driven by contracting credit demand. Credit demand has been on a long-term declining trend since the beginning of 2008, as the household debt ratio has remained historically high. Credit demand actually declined year-on-year for the first time in September, and this is undoubtedly affecting banks’ revenue growth.’
Although officially South Africa is no longer in recession, there Is scant relief just yet for the banking sector. 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. As a result, only one in three banks are satisfied with current business conditions.’
He continues, ‘ In line with the contracting credit demand, there is also slowing business activity, in both the retail and corporate banking markets. We know from retail sales figures, that the consumer is continuing to struggle. The most recent retail figures available indicate that sales continue to contract sharply. Growing unemployment levels have contributed to the falling sales trends, and in tandem with this, there is less credit uptake. In addition, the latest Financial Affordability survey illustrates that the relative portion of un-banked adults grew in 2009, as unemployment levels have risen.’
On the corporate side, a much anticipated rise in transaction activity failed to materialise. All of Treasury, Specialised Finance, Private Equity, Corporate Finance and Project Finance activity contracted sharply in the 4th quarter of 2009. This had a direct impact on the bottom-line of corporate and investment banks, as they faced a sharp contraction in revenue during the quarter.
This is the eighth successive quarter that bank confidence has been below its long term average level. Says Emilio Pera again, ‘Retail banks were the first to feel the impact of a tightening interest rate cycle, and their confidence started slipping in the 2nd half of 2007. Since then, their confidence has continued to decline, and is currently hovering at these weak levels and struggling to recover.’
In the case of investment banks, confidence levels really fell significantly only at the height of the global financial crisis, in the fourth quarter of 2008. Even so, their confidence levels did not fall as drastically as was the case for retail banks despite their profits often contracting even more sharply than those of retail banks through most of 2009. Says Pera, ‘Up to now, corporate banks have yet to be as badly hit by impairments as their retail bank counterparts have been. Although some segments of the corporate sector are undoubtedly under pressure, there are other segments that have traded relatively well through the downturn.’
The survey results also indicate that retail bank’s credit standards, whilst continuing to tighten, are doing so more moderately than has been the case through 2008 and the first three quarters of 2009. This is directly as a result of improved credit impairment trends, with credit losses rising at their most modest pace in two years. Credit losses remained moderate for investment banks too, despite an uptick during the 4th quarter.
Concludes Pera, ‘Essentially, the uptake of credit in the investment banking market is as weak as it is for the retail banks. But retail banks have the additional pressure of large impairment costs, which the investment banks have experienced far more moderately.
But impairment trends appear to be improving rapidly, and that should provide some relief to bottom-line profits for the banking market in the year ahead. However, for the year-end financial reporting period, expectations are that profits growth will be negative rather than positive, and some of the recent trading updates confirm that this is likely to be the case.’
