Bank confidence declines due to sharply lower investment bank levels
A survey released by EY today, indicates that banking confidence slowed in the third quarter of 2016, and remains below long-term average levels.
Overall banking confidence fell from 58 to 52 index points in the third quarter, with the long- term average banking confidence level at 72 index points. Post the global financial crisis banking confidence was at 58 index points.
This is the 59th quarterly survey measuring confidence in the banking industry, conducted by the Bureau for Economic Research in Stellenbosch.
Comments Andy Bates, Financial Services Africa Leader at EY, “Bank confidence has not moved significantly since the beginning of the year but it has deteriorated. It has remained within the 50 – 59 range, much in line with where confidence was just post the global financial crisis.”
Bates adds, “The same attributes and drivers remain in place; weak economic growth makes it difficult to find real opportunities for growth in the banking sector. In a low growth environment, the banks faring reasonably well are those best able to take a larger share of the existing pie and thereby grow their market share.”
He points out that, “Prior to the financial crisis, all South African banks were benefitting from strong local growth, in that all banks were confident about business conditions. This held true, uninterrupted for a number of years, from the second half of 2003 to 2008. Post those strong growth years, bank confidence has averaged 58 index points. That means just short of six of every ten banks have been satisfied with conditions since then. Banks reporting high confidence through these times are likely to be the ones that are driving competitor advantage and continuing to find growth in these trying circumstances.”
Survey results show that it was investment banks confidence that declined during the quarter, down more than 20 index points, whilst retail bank confidence levels actually rose. Investment banking confidence levels fell from 61 to 40 index points, whilst retail bank confidence rose from 55 to 61. The weak investment bank confidence levels are in line with a sharp downswing in reported business volumes, with activity across all business lines slowing.
The overall survey findings correlate with the much slower reported earnings figures from the major banks for the first half of 2016. Bates says, “Profits growth slowed from around 17% in the first half of 2015, to mid-single digits in the first half of 2016. These are the slowest growth numbers for a long time, and illustrates the difficulty our banking sector faces. It follows weaker revenue streams (with growth slowing from 13.1% to 11.5% during the same period), and a rise in impairment charges (11.1%).”
He explains, “Not only are banks finding it difficult to identify suitable credit lending opportunities, but they are facing slowing credit advances at the same time that bad debts are rising. This is typically the pattern facing banks during weak growth periods. Up until now, South African banks have largely been shielded from a worsening impairment cycle, but the recent reporting season indicates that this has now changed for the worse.”
Other survey findings include:
Investment banking
- The sharpest contraction in business volumes in the last five years.
- Flat interest earnings and sharply contracting fee income streams.
- Another contraction in net profits – the second consecutive quarter of falling profits.
Retail banking
- Continued tightening in credit lending criteria.
- Rising credit impairments.
- A revival in fee income following a weak second quarter.
- Cutbacks in the headcount for the fifth consecutive quarter.
- A noticeable recovery in income following a very weak first half of year.
Bates concludes, “Conditions remain tough, but thus far our banks have managed the slow growth environment well. We have not had one instance of a bank reporting net losses in the last two years, and with the exception of one bank, that record stretches back even further. So there is pressure on the banking sector from a financial metrics perspective, and understandably so. But there is very little risk of a bank default arising. The recently announced uplift in some of the country’s economic metrics will likely provide a much needed lift for longer term growth prospects.”
