BANKING: Banking Confidence Shifts Lower, Despite Rising Credit Level
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Banking Confidence Index Levels
This is the 39th 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 Financial Services Director at Ernst and Young, The second quarter provided indications that the South African banking market was showing signs of recovery from the impact of the global financial crisis. Profits had returned to positive growth and investment banks were facing stronger demand for their services. However, the third quarter indicates that the banking market is not necessarily on a sustained recovery path just yet, despite continued signs of improvement in their key financial indicators.
Retail banking confidence declined from 50 in 2Q11 to 38 in 3Q11. This decline corresponds to expectations that the better 3Q11 performance will not carry into 4Q11. After easing credit standards for the first two quarters of 2011, retail banks adopted a tightening bias in 3Q11. However, net profits still grew strongly for a second consecutive quarter. This was driven by income increasing at a faster pace, mainly on account of sharply higher growth in net interest income, whilst containing growth in operating expenses.
Investment Banking Confidence Also Suffers
The confidence of investment banks also dropped, from 67 in 2Q11 to 44 in 3Q11. The underlying drivers for investment banks vary from those of retail banks. The recovery in business volumes seen in previous quarters were cut short and income trends followed suit. Fee income growth slowed sharply, while investment income contracted. In addition, operating cost growth increased at a sustained high pace, resulting in net profits growth easing in 3Q11.
Pera adds; With a number of regulatory and legislative changes that are being implemented (globally and locally) in response to the financial crisis, banks are reconsidering their operating models and product offerings, as well as questioning where future growth will come from. With the renewed uncertainty in global financial markets, local unemployment remaining stubbornly high, and property prices destined to grow at only marginally positive levels, the momentum for rapid credit extension levels of pre-crisis days seem very far removed. Some banks are focusing on non-interest earnings as a key driver for future earnings, but even on that score, it is going to prove difficult to grow these revenue lines with a vocal Minister of Finance watching over what he terms excessive bank charges.
On the other hand, adds Pera, the recent interim results-reporting season indicates that banks are still finding growth opportunities, using everything from innovation in mobile bank offerings, to reaching out to previously unbanked communities, and thereby building their client bases. This combined approach of being innovative across distribution and product lines is benefiting bottom-line profits, and creating new markets in the process. The banking sectors innovation is being driven by competition among established players on the one hand, and increasingly amongst more recent entrants, who typically have lower cost structures and different target market in their focus. Collectively, this is helping drive innovation across the market and help curb the low banking confidence.
Business News Sector Tags: Finance|