Johannesburg - Confidence in the South African banking sector has risen in the last quarter, but investors remain wary because the consumer outlook is poor.
That's according to research by auditor Ernst & Young and the Bureau for Economic Research, which reported an increase in its confidence gauge to 45 index points in the first quarter of 2010 from 34 points in the fourth quarter.
These results compare to the long-term average level of 80 index points, Ernst & Young said.
Said Emilio Pera, head of banking and capital markets at Ernst & Young: "Banks have undoubtedly recovered from the global liquidity crisis.
"Although their profits continue to shrink, there is nevertheless a turnaround in their financial fundamentals. In addition, the rate of profit contraction has abated, particularly for investment banks."
A sustained rally in bank shares support Pera's view and comes amid signs that the global economy is moving out of recession.
The banking sector has risen more than 10% since the start of 2010, with leading performers Investec and Nedbank rising nearly a fifth each.
Revenue from fees
However, a pinch point for banks currently is the amount of revenue they earn from transactional fees such as cash withdrawals, cheque deposits and cash handling. This source of revenue is now important because interest from credit agreements has dried up.
According to Pera, retail banks sharply reduced fee income growth only in the last quarter of 2009.
"To a large extent retail banks relied on price adjustments to offset weaker volumes of transactions and declining fees stemming from lower levels of new credit agreements," said Pera.
"This kept fee income relatively strong through most of 2009, but by the fourth quarter, non-interest revenue growth was feeling the strain of indebted households," he said.
Pera forecasts that the confidence recovery is likely to continue into the second quarter of 2010 on the back of lower interest rates and increased demand for consumer credit.
However, not everybody is as confident on the sector participants.
In a recent "hold" recommendation issued by Stephen Meintjes of Imara SP Reid, it was noted that Nedbank had raised its fees by 13.1% over the previous financial year. "This may have an impact on transactional volumes in the forthcoming period," Meintjes said.
"Nedbank will need to work hard in the forthcoming period to get its earnings back on track, with the performance of the retail division along with the poor return on equity the major areas needing to be addressed."
Analysts say Nedbank has problems with its underperforming retail operations, but the retail market is becoming difficult for all banks, particularly as credit demand is expected to remain mute.
Capitec has been growing its customers and is to expand its focus from the low end of the market to middle-income consumers. This has forced First National Bank to develop its own low-cost banking products.
On top of this, mobile and technology solutions are being rolled out by the banks as consumers become increasingly technology savvy.
In 2009, cellphone transactions overtook internet banking transactions owing to lower costs and ease of use.
This is beginning to eat into the traditional transaction channels such as ATMs and face-to-face customer service channels, where higher fees are typically levied.