THE retail banking sector’s prospects remained weak for the second quarter of this year, while investment banks saw an upsurge in sentiment, largely driven by business fundamentals.
Retail banking confidence fell from 32 points in the first quarter this year to a slightly weaker 28 points in the second quarter, while investment banking rose sharply, from 32 to 50.
These are the findings of the 30th quarterly Ernst & Young financial services index, released yesterday. It was carried out by the Bureau for Economic Research in Stellenbosch to measure confidence in the banking industry.
Emilio Pera, the lead financial services director at Ernst & Young, said: “We have been hearing a lot about the appearance of early signs of a recovery (green shoots) in the last four to six weeks. In the case of investment banks, this appears to be more pronounced.”
Pera said it was interesting that business fundamentals were not entirely different between retail and investment banks.
Both segments were experiencing continuing and protracted profit contractions, caused by flat or reduced income growth, and continued high growth in non-performing loans. Investments banks were benefiting from a client base more resilient to interest rate increases over the last two years, although corporate entities were starting to feel the effect toward the end of the rate tightening cycle.
Pera said a more fundamental reason for the return of confidence in investment banking was a turnaround in resource companies. All the major producers had gained from rebounding commodity prices, which had led to a resumption in corporate mergers and acquisitions (M&A) activity and a re-look at moth-balled projects.
While demand for credit remained weak, banks themselves were maintaining stringent credit standards, particularly in the retail sector. On the other hand, investment banks saw a noticeable relaxation of credit standards in the second quarter.
“Retail banks remain wary of granting credit in an environment where the ability of over-extended households to repay secured and unsecured debts continued to be a concern,” Pera said.
“Credit cards, mortgages and instalment finance are all either reflecting negative or flat growth in the year to April,” he said.
It was understandable that banks were more cautious in their credit granting processes. .
