Investment banking activity is likely to provide some support for bank profits in the short to medium term as retail banking activity is restrained by low economic growth, low interest rates and high levels of debt among consumers.
The EY bank index for the third quarter of this year fell to 25 index points and reveals that confidence among retail bankers continued the sharp decline in the second quarter of the year. Confidence is now at levels not seen since early 2011 in the wake of difficulties suffered by Standard Bank and Nedbank. By contrast, sentiment among investment bankers is currently back up at pre-crisis levels.
In the second quarter of this year, confidence of retail bankers fell to 46 index points from 80 in the first quarter.
Emilio Pera, the financial services sector leader at EY, attributed the sharp slump in confidence to a number of factors “including prolonged labour strife and pressured consumer incomes”.
The survey reveals that the decline in sentiment is not attributable to any weakness in the financial position of the banks and notes that most indicators remain solid although weaker than the levels recorded in the first half of the year.
The retail banks continue to record income growth, declining credit losses and sustained profit increases. The only one indicator suggesting any weakness was costs, which are continuing to rise.
“The faltering confidence of retail banks may stem from the feeling that many in the sector have at present, namely that the next few years hold few easy, new business opportunities,” Pera said.
Banking analysts have pointed to the extremely attractive rates of return on equity achieved by the major South African banks, in excess of 20 percent, compared with their international counterparts, which struggle to get double-digit returns, as an indication of the generally more attractive environment in which South African banks operate.
Income growth at the retail banks did slow down in the third quarter of the year, but this followed rapid growth last year, much of which was attributed to the surge in unsecured lending. The slower growth in total income was due to subdued growth in net interest income, while non-interest income such as fees reported a brisk increase.
Increasing staff numbers and information technology spending meant that total costs continued to increase. On the plus side, credit losses slowed noticeably in the third quarter of the year.
Pera told Business Report that the increase in confidence among investment bankers was attributable to the improved levels of confidence in international markets, although he said that investment banking across the globe was still in a state of flux.