A survey released by EY indicates that banking confidence fell in the fourth quarter of 2015, with retail banking confidence, particularly pressured, and reaching half the levels of investment banking.
Investment banking confidence remains somewhat stronger, despite falling 12 index points.
Overall banking confidence fell from 73 index points in the third quarter of 2015, to 61 in the last quarter, somewhat below the long term average level of 72 index points, and indicating weak business conditions.
This is the 56th quarterly survey conducted to measure
confidence in the banking industry, and the research is conducted by the Bureau
for Economic Research in Stellenbosch.
Andy Bates, Financial Services Sector Leader at EY Africa says, “The weaker confidence levels are in line with the weak and declining economic fundamentals that South Africa currently faces. Confidence levels are down across most, if not all industries, and banks find themselves facing the same set of challenges.”
He adds that the weaker confidence is in line with investment banks shrinking business volumes.
Whilst retail banking confidence fell visibly through the year, in line with weakening economic prospects, this has only more recently impacted the investment banking segment.
The survey results also show that investment bank confidence was in line with flat income levels. Retail bank income growth slowed, despite steady Net Interest Income levels.
The retail banking confidence levels are reflective of weak employment numbers, with the economy slowly recovering from a contraction in the second quarter, and with the growth forecast for 2015 lowered once again.
“Through 2015, retail bank confidence declined, as the reality of weakening mining and manufacturing activity made growth in the personal market very difficult to accomplish,” says Bates.
The survey also found that banks once again adopted a tighter approach to credit policy, both retail and investment banks alike.
There has been more tightening in credit policy, on the back of interest rate hikes already implemented in the last quarter of 2015, and anticipated hikes into 2016. This will further impact bank performance, as the low growth environment will likely result in reduced debt affordability, says Bates.
He believes that banks are better positioned to cope with the tough economic headwinds than they were when the global financial crisis broke in 2008.
Bank confidence levels
Bates points out that the weak confidence levels will likely mean that in the upcoming financial reporting cycle, financial metrics will weaken further.
There is little to suggest 2016 will be any easier for the banking industry.
“Banks are forecasting further deterioration in the key metrics, namely revenue, profits and credit standards going into 2016. Cost growth pressures are not likely to provide meaningful relief either, as it is difficult to slow cost growth below a certain level,” says Bates.