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FINANCE: Bank Confidence Still Erratic, Fuelled By Retail Conditions


Recent Gauteng Business News

A survey released by Ernst and Young today indicates that banking profits remain erratic, with no clear recovery trend emerging, since the onset of the global liquidity crisis in the 3rd quarter of 2008. Although banking confidence has recovered since reaching an all-time low in the 2nd quarter of 2010, the survey found that banking confidence remains far from its long-term average levels.

Bank Confidence Index Levels

This is the 36th 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 and Capital Markets Director at Ernst and Young, ‘ Retail banking confidence fell sharply in the 4th quarter, after previously seeming to be largely on the mend since the crisis. Retail banks’ confidence slid from 62 index points in the previous quarter to the current level of 38 index points.’

By contrast, ‘investment banking confidence rose noticeably during the 4th quarter of 2010, but their confidence levels have been largely erratic for over two years now, with no clear trend evident. Investment bank confidence readings moved from 33 index points in the 3rd quarter to 47 in the 4th of 2010.’

Basically, adds Pera, ‘it previously appeared that the retail banks were gradually recovering from the depths of the crisis, which hurt them hardest in 2009. The latest quarter’s findings suggest that retail banks are still reeling from the impact of the crisis. Income remains pressured, coupled with rising credit impairments. Combined, these factors outweighed the positive force of rising credit demand.’

He continues, ‘The whole banking sector struggled through 2009 and into the first half of 2010, as credit demand shrunk through the period. Although credit demand has returned to positive territory, the growth thus far is only moderately positive, and not anywhere near the strong double-digit growth experienced prior to the crisis.’

‘Household debt ratios are the primary cause of slow credit growth, and corporate entities have also remained largely cash positive through the last two years, as uncertainty prevailed. As a result, private sector credit demand remained weak. The second half of 2010 has seen some upward momentum in credit growth, but this has yet to result in sustained rising bank confidence.’

Pera adds, ‘recent global events continue to show how volatile the global financial system remains. Through the course of 2010, we have seen sovereign debt issues across the weaker economic members of the Euro zone, coupled with the onset of ‘currency wars’, fuelled by quantitative easing in the USA. Collectively, this has contributed to continued uncertainty in global banking markets.’

This in turn has resulted in relatively cheap finance, but a reluctance and often inability to take up additional debt on the part of households or companies. South Africa finds itself in a very similar position. Despite interest rates being at a 30 year low, the demand for credit remains weak, albeit rising. As a result, banks, particularly retail banks’ income streams remain pressured, in turn resulting in continued profit slides.

Turning to investment banking, Pera comments on the turn-around in investment banking fundamentals as follows: ‘we have noticed in the past two years that investment banking confidence has been more volatile than that of retail banks. It has proved difficult for investment banks to forecast business flows during these times. Forecasts of a turnaround in business prospects proved to be optimistic a number of times, and the turnaround in current prospects may once again prove to be short lived.

‘Retail banks on the other hand, had (prior to the last quarter of 2010) made slow progress from a very slow 2009, on the back of a gradual turnaround in household affordability levels. Economic indicators continue to provide contrasting views – while retail sales and motor vehicle sales are rising again, rising unemployment proves to counter some of the positive trends.’

Pera makes another point about sustained weak bank profits. The past two years have proved very difficult for banks to contain costs in line with slower revenue. Growing regulatory changes, for one, have played an instrumental role in driving costs upwards. Basic inflation, although low, also continues to push costs upwards, and in this environment of squeezed income, continued cost increases have proved difficult to manage. All of the major banks have had to focus very strongly on the bottom line, and manage costs carefully. It appears that the first half of 2011 will prove no different, particularly for retail banks, that anticipate continued revenue squeeze, but with a slowing in expenses growth.

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