Banking, retail confidence moves upwards

Retail and investment banking confidence levels moved upwards in the third quarter of 2010, a survey shows.

According to the Ernst & Young study, banking confidence rose from 33 index points in the second quarter of 2010, to 48 in the third quarter.

"Retail banks continued a slow recovery from a very tough 2009 while investment banks, on the other hand, continued to struggle with weak demand, driven by investor uncertainty and concern about the slow pace of the economic recovery," said Emilio Pera, banking and capital markets director.

"The third quarter of 2010 indicates that retail banks are finally starting to see a turnaround in credit demand, as consumer appetite for taking up additional credit has returned.

"This in turn, is supported by falling credit impairment costs, which has allowed the retail banks to lend more freely than in 2009."

Pera said, however, that investment banks were "not really" seeing the benefit of a turnaround in the general economy.

Demand for finance remained subdued, and this was confirmed by the recent interim and full year financial results reporting, where the banks reiterated the point that demand for corporate debt continued to be flat.

In addition, business volumes at investment banks remained weak in the third quarter of this year.

"With the exception of corporate finance activity which is showing some signs of growth at the moment, investment banking activity in all other areas has remained subdued since the outbreak of the global liquidity crisis in the latter half of 2008, and has yet to recover."

In this environment of weak corporate demand, the bottom-line profits of investment banks had been rather erratic in the last two years, "with very little clear trend emerging".

Pera compared this with the position of retail banks, whose profits troughed in the fourth quarter of 2009.

"Although profits have yet to return to positive growth, there is a clear and visible trend-line, with a gradual improvement in the bottom line."

This, he said, was strongly supported by positive growth in credit levels, coupled with a consistent improvement in impairment costs.

The survey also found that fee income growth at retail banks remained sluggish, and well behind pre-global liquidity crisis levels.

Furthermore, credit impairments continued to decline into the third quarter, following two years of high impairment levels.

Pera said banks continued to ease credit standards in the third quarter.

Retail banks also became net hirers again in the third quarter, after shedding jobs since the beginning of 2009 but the pace of hiring was low compared with historical average hiring rates.

"Profits continue to contract, but at improved levels and banks expect that by the fourth quarter of 2010, profit growth will be flat," he said.

On the investment banking side, the survey found that income levels had been pressured by a combination of weak interest earnings, coupled with contracting fees.

"After a positive first half, bottom-line profits in the third quarter returned to 2009 levels, when profits were pressured by substantially lower revenue flows," Pera said.

Credit standards continued easing, in line with retail banks.

"Banking confidence has been slow to recover from the impact of the global liquidity crisis, and remains well below pre-crisis levels.

"While investment banks appeared to recover quite promptly in 2009, their confidence levels have subsequently dropped, in line with a very subdued corporate market."

Retail banks, on the other hand, troughed a lot sooner, and only really started a slow, gradual recovery from the beginning of 2010.

"This has largely been supported by a more favourable interest rate environment (even if this does pressure margins somewhat), and a slow recovery of confidence in the household's financial position."

Pera said the expectation was that profits should recover to positive growth in 2011, at least for the retail banking sector.