The Ernst & Young Financial Services Index increased from an already bullish 86 index points in the fourth quarter of 2003 to a near-record 94 index points in the first quarter of 2004.
This is in line with the same period last year, when the banking component of the financial services index hit a record 91 index points.
Since its inception in the first quarter of 2002, business confidence in the banking sector has varied between a low of 53 to a high of 95 index points.
“These high levels of business confidence in the financial sector are largely attributed to last year’s reduction in the repo rate and substantial recovery in share prices on the JSE, which boosted the business volumes and investment income of financial service providers,” says Rakesh Garach, financial services industry lead partner at audit and business advisory firm Ernst & Young.
The South African Reserve Bank reduced the repo rate by 5,5% during 2003. The subsequent cut in the prime overdraft rate encouraged business volumes and reduced the rate of credit defaults in the banking industry. The JSE all-share index rose 13% between September 26 and December 26 and by a further 5,7% by March 16 2004. Higher equity markets boosted investment income and business volumes for merchant and investment banks.
Garach points out that the higher confidence level of the banking sector matches that of other sector surveys, namely manufacturing, retail, wholesale, new vehicle trade and building.
According to the results of the ninth quarterly Ernst & Young Financial Services Index, released on Tuesday, the banking industry, and particularly the retail banking industry, is also continuing to make big strides regarding improvement in efficiency during the first quarter of 2004.
Since the inception of the survey in the first quarter of 2002, the retail banking sector has recorded strong gains in its cost-to-income ratios. This is in line with the recent financial reporting season, with three of the big four banks reflecting noticeable gains in efficiency.
Retail banks enjoy an uninterrupted improvement in efficiency. According to the survey results, acceleration in net interest income was offset by a slight decrease in non-interest income growth. Despite higher income and lower expenditure growth, net profits were lower than the fourth quarter due to increased taxation.
Garach points out that interest margins grew marginally, despite an expectation that their margin would fall in the first quarter, probably on anticipated Reserve Bank interest rate cuts, which did not materialise.
“It is not surprising that credit standards are easing somewhat, although they remain tight,” Garach comments.
“It appears that the banks are not necessarily dropping credit standards, perhaps aware of the last two spikes in interest rates which followed the rand’s rapid fall in 1998 and late 2001, which resulted in increased bad debts,” he says.
Garach notes that consumers are also well aware of the need to remain prudent in their approach to debt, having been through two cycles in the past six years, where rising interest rates proved problematic.
The survey indicates that retail banks once again reined in operating expenses, thereby continuing an uninterrupted improvement in their efficiency ratios, despite a higher staff complement.
Merchant and investment banks’ income growth remained lacklustre. According to the survey, the strong currency has slowed project finance opportunities for merchant and investment banks and companies are reluctant to commit to fixed investment in the current climate. On the other hand, the survey indicates that corporate finance activity has remained buoyant, driven by black economic empowerment requirements, with many industries in the process of drawing up empowerment charters.
A drop in investment income and stable revenues from net interest income was off-set by an improvement in non-interest revenue. Overall income thus remained flat. The fall in investment income is at odds with higher share prices.
“It is likely that investment income will revive, given the recent turnaround in share prices,” says Garach.
The survey indicates that operating expenses grew moderately, and at a much lower pace than in the previous three quarters, largely due to lower staff numbers, despite a previous expectation that staff numbers would increase. The combination of moderately higher expenditure, coupled with stable income growth, led to a fall in profits. — I-Net Bridge