Retail banks lead reviving banking confidence levels

A survey released by Ernst & Young today indicates that banking profits are slowly recovering from the levels experienced during the depth of the liquidity crisis (3^rd quarter 2008), and this is lifting banking confidence. Banking confidence recovered from its all-time low, recorded in the second quarter of 2010. The survey found that banking confidence rose from 33 index points in the second quarter of 2010, to 48 in the third quarter.

Banking Confidence Levels 2002 – 3Q2010

This is the 35^th quarterly survey conducted to measure confidence in the banking industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

Comments Emilio Pera, lead Banking & Capital Markets Director at Ernst & Young,‘ Retail and investment banking confidence levels both moved upwards in the third quarter. Retail banks continued a slow recovery from a very tough 2009. Investment banks, on the other hand, continue to struggle with weak demand, driven by investor uncertainty and concern about the slow pace of the economic recovery.’

He adds, ‘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. This in turn, is supported by falling credit impairment costs, which has allowed the retail banks to lend more freely than in 2009.’

However, he continues, ‘as yet investment banks are not really seeing the benefit of a 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.’

In addition, business volumes at investment banks remained weak in the 3^rd quarter. Says Pera, ‘ With the exception of corporate finance activity which is showing some signs of growth at the moment. Investment banking activity in all other areas has remained subdued since the outbreak of the global liquidity crisis in the latter half of 2008, and has yet to recover. In this environment of weak corporate demand, the bottom-line profits of investment banks have been rather erratic in the last two years, with very little clear trend emerging.’

He contrasts this with the position of retail banks, whose profits troughed in the fourth quarter of 2009. ‘Although profits have yet to return to positive growth, there is a clear and visible trend-line, with a gradual improvement in the bottom line. This is strongly supported by positive growth in credit levels, coupled with a consistent improvement in impairment costs.’

Other retail bank survey findings include:
· Fee income growth at retail banks remains sluggish, and well behind pre global liquidity crisis levels.
· Credit impairments continued to decline into the third quarter, following two years of high impairment levels (prior to the 2^nd quarter of 2010).
· Banks continued to ease credit standards in the 3^rd quarter.
· Retail banks became net hirers again in Q3, after shedding jobs since the beginning of 2009. However the pace of hiring is low compared with historical average hiring rates.
· Profits continue to contract, but at improved levels. Banks expect that by the fourth quarter of 2010, profit growth will be flat.

Pera comments on the slow fee growth of retail banks, ‘Consumerism remains fierce in the retail banking market, and a recently released annual bank charges survey illustrates that banks cannot automatically rely on annual inflation related adjustments to grow their revenue flows.’

On the investment banking side, findings include:
· Income levels were pressured by a combination of weak interest earnings, coupled with contracting fees.
· After a positive first half, bottom-line profits in the third quarter returned to 2009 levels, when profits were pressured by substantially lower revenue flows.
· Credit standards continued easing, in line with retail banks.

Pera concludes, ‘Banking confidence has been slow to recover from the impact of the global liquidity crisis, and remains well below pre-crisis levels. Whilst investment banks appeared to recover quite promptly in 2009, their confidence levels have subsequently dropped, in line with a very subdued corporate market. Retail banks, on the other hand, troughed a lot sooner, and only really started a slow, gradual recovery from the beginning of 2010. This has largely been supported by a more favourable interest rate environment (even if this does pressure margins somewhat), and a slow recovery of confidence in the household’s financial position. The expectation is that profits should recover to positive growth in 2011, at least for the retail banking sector.’