Weak economic growth keeps bank confidence subdued

A survey released by EY today indicates that banking confidence remained flat overall in the banking sector in the second quarter of 2014, with softer investment banking confidence, and with somewhat higher retail bank confidence.

Overall banking confidence remained at 56 index points in the second quarter of 2014 for the third consecutive quarter.

Bank Confidence Index Levels

This is the 50th 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, Financial Services Sector Leader: Africa at EY, “A noticeable gap between investment banks and retail banks’ confidence levels has been in place for the last year. Although it has narrowed in the first half of 2014, the gap remains nevertheless noticeable.”

He adds, “We have observed that retail banking confidence has slowly recovered from its low point late in 2013. Meanwhile, investment banking confidence has moved in the opposite direction, (falling from 82 index points late last year to 69 currently).”

Pera believes that the slow economic growth that the country continues to endure provides an indication around the divergent confidence levels. He says, ‘Undoubtedly, the sluggish GDP growth we have experienced over the last few quarters is impacting consumer spend more visibly. As a result retailers have struggled to grow their earnings, and retail banks have similarly competed more fiercely for new clients. However, the corporate sector has been more diversified in that they have greater exposure to earnings outside South Africa.”

He further adds, “The Africa growth story has been a compelling one for a while now. Companies have increasingly moved into Africa to exploit the underlying growth promise that this provides them with. As a result, our local investment banking market has been less affected by the slow growth than what retail banks have been. This is so because very often, local companies are seeking finance and other investment banking services from their local supplier, whom they know and have established relationships with. Although the required finance is then used outside the country, it nevertheless provides the investment banking market with growth opportunities.

There is one more factor that could explain stronger investment banking confidence levels(relative to retail banking). Strong equity markets have defied the weak economic fundamentals for a while now, and in fact, our JSE continues to hit new record highs all the time. Strong equity markets provide a solid platform for banking advisory services, amongst others, and this has no doubt fuelled some of the strong confidence levels that investment banks have reported.”

Other survey findings include:

• Retail bank earnings and profits rose sharply in the second quarter, driven by the interest rate increase announced in the first quarter of the year.
• Investment banks also reported stronger interest earnings, but this was offset by falling business volumes, which hurt fee income flows.
• As a result of slower volumes, investment bank profits fell sharply in the second quarter.
• Credit standards remain loose in the investment banking space, and are easing in the case of retail banks, driven by a more benign credit impairment environment.

Pera comments, “There seems to be a strong connection between confidence levels and bottom-line profits. Whilst retail banks reported much higher profits growth, they also indicated a greater level of satisfaction with general business conditions. Investment banks, by contrast, reported much slower profits growth, and weaker confidence.”

Pera concludes, “Bank confidence remains below its long term average levels for the fifth consecutive quarter. It has been driven by very weak retail banking confidence, and despite a relatively buoyant investment banking landscape. Whilst local growth prospects remain weak, we expect to see retail bank confidence continue to lag that of investment banks. As companies expand into Africa, so the opportunities for investment banking remain more upbeat. Sustained high stock gains may also provide some support for stronger investment banking confidence going into the second half of 2014.”