Johannesburg - Banking confidence is flat in the third-quarter of the year, although investment and retail banking are moving in different directions, a survey released Wednesday by EY shows.
According to the survey, investment banking confidence is somewhat stronger, while retail banking confidence is moving lower.
Overall, banking confidence rose marginally from 71 index points in the second quarter of 2015, to 73 currently, in line with the long-term average.
This is the 55th quarterly survey conducted to measure confidence in the banking industry, and the research was conducted by the Bureau for Economic Research in Stellenbosch.
Emilio Pera, financial services director at EY says: “We noticed, in the recent financial reporting cycle for the first half of 2015 that corporate and investment bank earnings growth outpaced those of retail and business banking by quite a margin. The latest confidence readings seem to indicate that this trend will continue through to the end of the year.”
However, says Pera “the stronger confidence is difficult to read in an environment where investment banks not only saw shrinking business volumes, but also much slower revenue growth”.
Although retail banking confidence has fallen noticeably since the beginning of the year, in line with weaker economic prospects, this has not manifested in the investment banking segment yet, he adds.
” The survey results also show that investment bank confidence rose despite a sharp fall in the pace of profits growth. Whilst profits growth remains positive, it was only marginally so in the third quarter, a significant change from the first half of the year.”
The retail banking confidence levels are reflective of a weak economic environment, with the economy shrinking in the second quarter, and with annual growth forecasts for 2015 cut back significantly.
The survey also found banks took a more conservative approach in their approach to credit policy, both retail and investment banks alike.
Pera adds “this is the first time in a long period that banks have tightened credit policy. The last few years have seen banks easing their credit standards, or at the very least, holding them constant.
“It appears we may be moving into an period where banks are more concerned about credit standards, given the Reserve Bank’s commentary that it is in a ‘general tightening phase of monetary policy’. This has consequences for banks, as the low growth environment could impact debt affordability quite quickly.”
Pera explains “banks will be attempting to avoid the scenario they experienced at the outbreak of the global financial crisis in 2008, where the local economy slowed and left the industry with major exposure to the mortgage market. It appears unlikely that mortgages will become a concern this time around, given that banks have become more prudent in pricing and loan-to-value maximums.”
Banks are set to face a tough second half in 2015, in line with the rest of the economy, says Pera.
“Thus far, bank earnings have been mostly resilient to the weak economy. This is as a result of a number of factors, including that the industry has been extensively building earnings streams through the rest of Africa, providing some buffer from the weak local market. But the current emerging markets cycle and commodity prices are not providing tailwinds for the banks just yet.”
Adapted from a press release.
IOL