Johannesburg - South African investment banks remain satisfied with current market conditions despite a more challenging environment but sentiment among retail bankers is worsening, a survey showed on Monday.

The Ernst & Young financial sector confidence index slipped to a six-year low of 61 points in the third quarter of 2008, down from 70 in the previous period.

"It is surprising that eight out of 10 investment banks continued to regard prevailing business conditions as satisfactory," the company said in a report, adding that four out of 10 retail bankers believed the same thing.

South African banks have not faced the same liquidity problems as institutions in the United States and Europe, largely due to exchange controls that limited foreign exposure, but high interest rates have hit heavily-indebted consumers, lifting bad debt levels at retail banks.

Economic growth is also slowing and contagion from a global credit crisis has hit the rand currency and stock market.

The report said investment banks were confident despite weaker business volumes and an expected deterioration in the fourth quarter.

"After the boom of overall business activity of the second half of 2007, growth halved during the first half of 2008, During Q3, growth slackened further," it said.

"Treasury and specialised finance, as well as project finance grew strongly, but private equity and corporate finance contracted more decisively compared to Q2."

Confidence among retail banks dropped to its lowest since the survey started in 2002, falling to 40 from 57 in the second quarter and 78 in the first three months of the year.

Non-performing loans growth remained high, although a slight easing in the second quarter continued in the third quarter, Ernst & Young said.

South Africa's central bank lifted its repo rate by 5 percentage points to 12 percent between June 2006 and June 2008 to try tame inflation.

Tighter monetary policy has slowed consumer spending, and put household budgets under severe strain, as highlighted by contracting retail and new vehicle sales. Credit growth has eased this year and household debt levels dropped in the second quarter from a record high.

Business and consumer confidence measures are either at or near multi-year lows.