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Cape Town - Banking confidence weakened again in the third quarter of 2013, according to a survey released by EY (formerly Ernst & Young) on Tuesday.
The survey found that confidence fell sharply in the retail segment, while investment banking confidence rose, off an already high base.
Overall banking confidence fell from 62 index points in the second quarter, to 58 points currently, significantly lower than the first quarter reading of 82 index points.
This is the 47th quarterly survey conducted to measure confidence in the banking industry and the research is conducted by the Bureau for Economic Research in Stellenbosch.
“The data indicates that this is really ‘a tale of two cities’," said Emilio Pera, financial services sector leader: Africa at EY.
"For investment banks, this seems to be the best of times and for retail banks, quite the opposite.”
Retail bank confidence fell again in the third quarter, from a weak 46 reading in the second quarter, to only 25 index points currently.
The survey found that profit growth remains solid in the case of retail banks, although lower than levels in the first half of 2013.
“It is not so much that the retail banks financial metrics have worsened, rather that they face strong headwinds," said Pera.
The latest consumer confidence survey points downwards, whilst unemployment and labour strife are also not supportive of revenue and earnings growth.
"As a result, there is very little advances growth potential over the next few months. That in turn will also put pressure on fee revenue growth,” he said.
“Mortgages have been less lucrative for banks since 2009 and most banks are still averse to growing mortgage advances too aggressively, as they aim to re-balance their overall lending portfolios."
Growth opportunities
While mortgages remain a major component of retail bank earnings, the intention is to drive growth in other, more profitable product lines.
"However, those growth opportunities are receding, and come at an inopportune time as incoming capital requirements further contribute to the relative unattractiveness of mortgage financing,” said Pera.
Investment banking confidence, by contrast to retail bank confidence, recorded a rise in the third quarter, from an already strong level of 80 index points, to 90.
The higher confidence was driven by substantially stronger business volumes.
“Business volumes across all lines grew, for the first time since 2008, when the global financial crisis broke. Investment banks across the globe have restructured their core focus activities and South African banks have not been excluded," said Pera.
"They have downscaled proprietary trading and right-sized other activities in response to more onerous capital requirements. In addition, they faced very weak loan demand in recent years.”
Survey results indicate that the primary driver of investment banking profit growth in the third quarter stemmed from fee income.
According to Pera, this is as a direct result of stronger activity levels.
“All business units across investment banking are growing positively again. Project finance activity is particularly strong, with all investment banks reporting stronger numbers," said Pera.
Specialised finance
Similarly, specialised finance and treasury related activity is also up for most banks.
“Even though volumes are so strongly ahead of the previous quarter’s levels, there is still uncertainty about the longevity of these much improved prospects," he said.
"Expectations for fourth quarter business volumes are significantly lower than the actual achieved volumes in the third quarter of 2013.”
In terms of credit standards, the survey results indicate that investment banks are tightening, but at a moderate pace.
This is despite continuing improvements in credit loss ratios.
Pera pointed out that this is another area where there is a considerable difference between the circumstances of retail and investment banks.
“Retail banks have been tightening credit standards at a much stronger pace than what investment banks have been doing," he said.
"And this is driven by higher credit impairments. We did see a noticeable fall in retail credit impairments in the third quarter, but the overall gap between retail and investment banks remains noticeable.”
Whilst investment banking confidence is driven by stronger metrics, retail banks are really concerned about their future growth prospects.
"Although profit growth has slowed, the sharp falls in confidence over the last two quarters is reflective of a pressured consumer, a weaker advances growth outlook, and a slowdown in GDP growth," said Pera.
"As a result, retail banks expect profit growth to slow sharply in the fourth quarter. Investment banks expect lower profits growth too, but the rate of growth should remain comfortably ahead that of retail banks.”
- Fin24
The survey found that confidence fell sharply in the retail segment, while investment banking confidence rose, off an already high base.
Overall banking confidence fell from 62 index points in the second quarter, to 58 points currently, significantly lower than the first quarter reading of 82 index points.
This is the 47th quarterly survey conducted to measure confidence in the banking industry and the research is conducted by the Bureau for Economic Research in Stellenbosch.
“The data indicates that this is really ‘a tale of two cities’," said Emilio Pera, financial services sector leader: Africa at EY.
"For investment banks, this seems to be the best of times and for retail banks, quite the opposite.”
Retail bank confidence fell again in the third quarter, from a weak 46 reading in the second quarter, to only 25 index points currently.
The survey found that profit growth remains solid in the case of retail banks, although lower than levels in the first half of 2013.
“It is not so much that the retail banks financial metrics have worsened, rather that they face strong headwinds," said Pera.
The latest consumer confidence survey points downwards, whilst unemployment and labour strife are also not supportive of revenue and earnings growth.
"As a result, there is very little advances growth potential over the next few months. That in turn will also put pressure on fee revenue growth,” he said.
“Mortgages have been less lucrative for banks since 2009 and most banks are still averse to growing mortgage advances too aggressively, as they aim to re-balance their overall lending portfolios."
Growth opportunities
While mortgages remain a major component of retail bank earnings, the intention is to drive growth in other, more profitable product lines.
"However, those growth opportunities are receding, and come at an inopportune time as incoming capital requirements further contribute to the relative unattractiveness of mortgage financing,” said Pera.
Investment banking confidence, by contrast to retail bank confidence, recorded a rise in the third quarter, from an already strong level of 80 index points, to 90.
The higher confidence was driven by substantially stronger business volumes.
“Business volumes across all lines grew, for the first time since 2008, when the global financial crisis broke. Investment banks across the globe have restructured their core focus activities and South African banks have not been excluded," said Pera.
"They have downscaled proprietary trading and right-sized other activities in response to more onerous capital requirements. In addition, they faced very weak loan demand in recent years.”
Survey results indicate that the primary driver of investment banking profit growth in the third quarter stemmed from fee income.
According to Pera, this is as a direct result of stronger activity levels.
“All business units across investment banking are growing positively again. Project finance activity is particularly strong, with all investment banks reporting stronger numbers," said Pera.
Specialised finance
Similarly, specialised finance and treasury related activity is also up for most banks.
“Even though volumes are so strongly ahead of the previous quarter’s levels, there is still uncertainty about the longevity of these much improved prospects," he said.
"Expectations for fourth quarter business volumes are significantly lower than the actual achieved volumes in the third quarter of 2013.”
In terms of credit standards, the survey results indicate that investment banks are tightening, but at a moderate pace.
This is despite continuing improvements in credit loss ratios.
Pera pointed out that this is another area where there is a considerable difference between the circumstances of retail and investment banks.
“Retail banks have been tightening credit standards at a much stronger pace than what investment banks have been doing," he said.
"And this is driven by higher credit impairments. We did see a noticeable fall in retail credit impairments in the third quarter, but the overall gap between retail and investment banks remains noticeable.”
Whilst investment banking confidence is driven by stronger metrics, retail banks are really concerned about their future growth prospects.
"Although profit growth has slowed, the sharp falls in confidence over the last two quarters is reflective of a pressured consumer, a weaker advances growth outlook, and a slowdown in GDP growth," said Pera.
"As a result, retail banks expect profit growth to slow sharply in the fourth quarter. Investment banks expect lower profits growth too, but the rate of growth should remain comfortably ahead that of retail banks.”
- Fin24
