Retail bank confidence on the rise
Some argue general retailers are the bell-weather of an economy, while others say retail banks hold sway. Each of these views has some merit. When banks perform so does the market. And retail shares lap up positive sentiment like no other sector. The reason is fairly simple. Retail (or consumption) expenditure, which accounts for much of South Africa’s GDP, is fundamentally linked to bank lending. Consumers borrow from the banks and spend on all manner of household appliances, motor vehicles etc. Can we conclude then, that retail banks and general retailers move in unison?
The argument certainly holds during periods of economic recovery. Since the March 2009 stock market lows the banking and retail sector have moved strongly higher. Stores such as Pick ‘n Pay, Woolworths and Shoprite Checkers, have outperformed on the back of consistent revenue and earnings growth. And talk of an international suitor – subsequently confirmed by Wall-mart’s offer to Massmart shareholders – kept speculators interested. In contrast, banking and financial sector shares have moved higher too, but that’s where the similarities end. Because banks haven’t grown FY2010 profits despite being buoyed by improving market sentiment.
Retail banks come out tops
There’s some light at the end of the tunnel. The 35th Quarterly Ernst & Young Banking Confidence Survey, released early October 2010, indicates that banking profits are slowly recovering from the levels experienced during the depth of the liquidity crisis. Emilio Pera, lead Banking & Capital Markets Director at Ernst & Young reports that both retail and investment banking confidence levels moved upwards in Q3 2010. The retail banks, driven by consumers (the same guys spending cash in South Africa’s chain stores), are building on their slow recovery post-2009. According to the survey banking confidence rose from 33 index points in Q2 to 48 points in the latest quarter.
Bank profits, largely underpinned by lending activities, plummeted in FY2010 as the impact of recession hit home. Shrinking credit extension numbers coincided with some of the heaviest impairments (bad debts) experienced in many years. “The third quarter of 2010 indicates that retail banks are finally starting to see a turnaround in credit demand, as consumer appetite for taking up additional credit has returned,” says Pera. “This improvement is supported by falling credit impairment costs, allowing the retail banks to lend more freely than in 2009.” Analysts expect banking profits in the retail sector to rebound in FY2011.
Still fleeced – even if the banks are profiting less
The report illustrates the changing profit mix at retail banks. Fee income growth – that’s the transaction costs you and I pay for our banking “privileges” – remains sluggish. But don’t be fooled into thinking you’re paying less at the teller window. The truth is although banks haven’t been able to push through pre-crisis fee hikes – something illustrated by Absa bank’s decision to leave many of its transaction fees unchanged in 2010 – they’re still pushing through increases to their customers. That said: “Consumerism remains fierce in the retail banking market, and a recently released annual bank charges survey illustrates that banks cannot rely on annual inflation adjustments to grow revenues.”
The improving credit impairment trend is now well established too, declining in the second and third quarters this year. As a result banks have been able to ease their credit standards and provide much needed impetus in the motor retail and housing markets. South Africa Inc is clearly benefiting from this improved sentiment. The survey shows banks became net hirers in the third quarter, after severely curtailing employment activities through 2009 and in the first half 2010.
Plenty of investment bank laggards
The survey showed that investment banks have been slow to benefit from the turnaround in the general economy. “Demand for finance remains subdued, and this is confirmed by the recent interim and full year financial results reporting, where the banks reiterated the point that demand for corporate debt continues to be subdued,” says Pera. In addition, business volumes at investment banks remained weak in the 3rd quarter. Income levels at investment banks were pressured by a combination of weak interest earnings and lower contracting fees.
What can we conclude from the Ernst & Young survey? They say banking confidence has been slow to recover from the impact of the global liquidity crisis, and remains well below pre-crisis levels. Investment banks are struggling, but retail banks have embarked on a slow and steady recovery.
Editor’s thoughts: The latest banking transaction fees survey published in Finweek suggests banks continue to find ways to squeeze more money from hard-pressed consumers. And the increments are highest for consumers who pay per transaction. Has enough been done to encourage competition among South Africa’s “big four” banks? Add your comment below, or send it to gareth@fanews.co.za
Comments