CONFIDENCE levels in South Africa’s retail and corporate banking sector soared to their highest in the third quarter of this year since the 2007 final quarter when the global economy was about to be hit by the worst financial crisis in 60 years, according to research from Ernst & Young released on Tuesday.
Even more surprising was the improved confidence among investment bankers, who have borne the brunt of tepid economic growth as corporate activity fell due to the dearth of deal and trading activity, says Ernst & Young’s lead finance director, Emilio Pera.
The survey found that high confidence levels recorded in the third quarter reversed sharp falls experienced in the second quarter — a period that was characterised by worsening global uncertainty due to the eurozone crisis.
According to Ernst & Young, banking confidence increased from 78 index points in the second quarter to 90 points in the third quarter — the highest since the fourth quarter of 2007.
"Confidence levels finally appear to be back at pre-crisis levels. Although there has been considerable stop-start in getting confidence levels back to above-average levels, this is the first quarter since the fourth quarter of 2007, that both retail and investment banks have recorded strong confidence," Mr Pera says.
David Hodnett, Absa’s group financial director, says it is interesting to see the increase in confidence when the domestic and global macroeconomic environment remains fragile with a forecast of reduced growth. "It looks like the increasing confidence was in the retail and corporate areas," Mr Hodnett says.
First National Bank CEO Michael Jordaan says the survey results reveal the worst is probably over for South African banks.
Impairments are still high and the recent growth in unsecured lending has raised fears that consumer debt is worsening. The rate of disposable income to household debt exceeds 76%, while the number of consumers with impaired credit records rose by 170,000 to 9.22-million in the quarter to June, the latest figures from the National Credit Regulator show.
However, Mr Jordaan says: "These confidence figures indicate much of the painful adjustment required in the wake of the global financial crisis is now behind us ".
"South African banks have emerged with even stronger capital buffers, healthier lending margins and have trimmed excess weight. " He adds that the relatively stronger economic growth in sub-Saharan Africa has "lifted the spirits" of local banks to explore opportunities for organic and acquisitive growth.
Mr Pera, however, doubts how long the feel-good factor for both retail and corporate banking will last, citing domestic and global economic uncertainty.
He says the recent wave of labour unrest in South Africa, one of the reasons Moody’s last month downgraded South Africa’s sovereign credit rating, could affect economic growth, due to lost production.
For banks, this could have a knock-on effect on consumer confidence as worries about job security could force them to cut back on borrowing, he says.
"The downside risks come from both local and global economic uncertainty," Mr Pera says. "If that is sustained, it will have an impact on banks — and whether this will filter through (in terms of confidence levels) into the fourth quarter, or the first quarter of next year is something we do not (yet) know ."
But he insists the fact that confidence among local banks rose to its highest level in the third quarter of this year, since the last crisis, is evidence of the strength of the recovery of retail banks that have been posting solid profits, particularly in the past two years.
Mr Hodnett agrees, saying Absa is expanding its corporate and investment banking franchise, while continuing to restructure the retail banking business. "In the retail area, we have been spending a lot of time on ensuring that our business is correctly structured to take advantage of a changing environment and ensuring that we are focus ed on customer needs."
Mr Pera warns rising impairments can be a potential threat to banks, although he acknowledges that 38-year low interest rates are helping to reduce debt servicing costs for borrowers.
"We noticed during the recent banking reporting cycle that retail banks reported a very sharp rise in credit impairments in the first half of 2012," says Mr Pera.
"It appears that this trend has continued into the third quarter of the year. Should this continue into the fourth quarter, it is likely to start impacting bottom-line profits, and coming so soon after recent mortgage losses in the banking market, is a concern," he says.
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