The retail and merchant banking sector continued to register strong confidence levels in the second quarter of this year on the back of a consumer-led boom, a scramble for Africa and increasing black economic empowerment (BEE) activity.
These are the findings of the 14th quarterly Ernst & Young financial services index, released on Wednesday. The research and analysis of the study was done in conjunction with the Bureau of Economic Research (BER) at the University of Stellenbosch.
The banking confidence index, a component of the financial services index, tracks strong consumer confidence, as well as buoyant business confidence as measured by the RMB business confidence index two weeks ago.
This is the third consecutive quarter that banks have reported 100% confidence levels. The results of the Ernst & Young index coincide with the JSE Securities Exchange (JSE) bank index, which reached a historic high in the period under review.
The index indicates that the strong confidence experienced in the banking industry is in line with investor sentiment on the JSE. It measured 100 index points, with both retail and merchant banks measuring strong and stable confidence.
According to Anton de Souza, financial services partner at Ernst & Young, investment banks are doing well despite the corporate sector’s low appetite for borrowing.
There are two distinct corporate segments — those focused on the local market with healthy profit growth and strong balance sheets, and those focused on export markets — that have struggled in a strong rand environment. De Souza says there have been limited growth opportunities for investment banks in the export-focused sectors for a while.
“However, with expansion into Africa, solid demand for project finance solutions and other advisory services, has grown. In addition, BEE continues to play a pivotal role in overall demand for merchant banking services. All of these factors pushed fee and investment income up strongly in the second quarter, leaving investment banks’ confidence levels at 100%,” says De Souza.
He points out that the solid results announcements from Absa and Investec during the quarter confirms the overall index findings, and provides good reason for the continued rising JSE bank index.
Says De Souza: “The banks provide a good barometer of overall banking activity, with Absa more exposed to the retail market, while Investec’s focus lies more strongly in the corporate market.
“There is no suggestion yet that the banks’ profit growth prospects will falter, given the recently released May Reserve Bank data indicating that mortgage growth for the year was in excess of 26%, whist instalment finance loans rose 21% during the same period.
“Merchant banks, in particular, expect the economic outlook to improve strongly, with the retail banks expecting the outlook to remain strong,” he says.
Retail banks
Retail banks’ performance improved further during the second quarter of 2005 as follows:
- All respondents reported an increase in income. Increased fee income and a further rise in investment income lifted non-interest income.
- Non-performing loans continued to decline, albeit at a lower rate than in the first quarter. As a result, banks reduced their provisions at a lower pace.
- During the second quarter, banks tightened their credit standards for approving loans, following two quarters of easing.
- The strong income growth led to further efficiency gains (as demonstrated by a lower cost-to-income ratio) and net profits after tax increased universally.
Merchant and investment banks
It is not only retail banks that are experiencing good times. The merchant and investment banks have also benefited from the country’s booming conditions and the sector is also recording strong confidence levels.
Undoubtedly, this can be ascribed to the strong business confidence mentioned earlier. Both the retail and wholesale components of the index bounced into high territory, above the 80 mark.
Investment banks’ fortunes improved further during the second quarter of 2005 as follows:
The combination of higher fee income and persistent buoyant investment income growth led to increased non-interest income. The growth in net interest income slipped back, but did not affect total income growth due to its small contribution.
Operating expenses drifted down.
Investment banks reduced provisions, but at a slower pace, and tightened credit standards, as non-performing loans declined by less than they did in the first quarter.
The combination of continuous strong income growth and lower expenditure growth led to further efficiency gains (indicated by a lower cost-to-income ratio) and rise in net profits after tax.
With interest rates at the lowest levels they have been in 20 years, and no strong expectation just yet that rates may move upwards in the near term, banking confidence looks likely to remain strong in the third quarter.
Merchant banks, in particular, expect the economic outlook to improve strongly, with the retail banks expecting the outlook to remain strong. — I-Net Bridge