The Ernst & Young Financial services index survey measures the performance of the banking, investment management and life assurance sectors on a quarterly and consistent basis.
Financial services index Q2 2011.
The Ernst & Young Financial Services Index rose in the 2nd quarter of 2011, supported by a strong rebound in retail banking confidence. Investment banking confidence also continues to rise, while life insurer confidence remained stable at high levels. Only asset managers reported weaker confidence, but nevertheless in line with long-term average levels.
Retail bank confidence rebounds, in line with stronger investment bank confidence.
The survey indicates that banking confidence has recovered significantly, after a weak first quarter. This is largely on the back of the retail segment of the banking sector that experienced a significant turnaround in prospects. Banking confidence rose from a weak 38 index points in the first quarter of 2011 to 58 in the second quarter.
Comments Emilio Pera, lead Banking & Capital Markets Director at Ernst & Young, ‘Retail banking confidence recovered after a particularly weak first quarter. Whilst the level of confidence remains considerably below long term levels, latest indications are that prospects for the banking sector are looking stronger than they were in the previous quarters.’
Driving the positive sentiment, says Pera, ‘are the improving financial circumstances of the household sector. Relatively subdued inflation has led to growth in a number of economic indicators. For example, retail sales growth and vehicle sales have both been stronger in the first five months of 2011 than they were in the same time period last year. This has led to a more positive outlook as reflected in consumer confidence levels.’
Pera adds, ‘The rise in retail banking confidence is strongly in line with the major indicators that measure the financial health of households. However, he adds, sustained low interest rates have not thus far provided a strong stimulus for credit growth. Overall household indebtedness, although improving, remain not far from their recent peak level.’
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By Alistair Darling
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In addition, he notes, ‘There is uncertainty in the property market, which in turn impacts on the mortgage market. The current outlook for property is that prices will move at best sideways in 2011. This in turn affects the risk environment, as banks will be reluctant to lend into a market where they may face a ‘negative equity’ scenario that they have only recently recovered from. ’
On the investment banking side, confidence continued to recover from the financial crisis levels, although they have not yet attained pre-crisis levels. Pera comments, ‘Investment banks have faced more volatile markets than what retail banks have, since the outset of the crisis. It is only really since the middle of 2010 that investment banks finally recovered, and started to report sustained rises in business volumes and earnings.
Investment banks have reported four consecutive quarters of confidence rises, but this still remains at two-thirds of their pre-crisis levels. Strong commodity prices tend to benefit investment banks, by benefiting trading revenues. In addition, trade finance requirements are higher, thus stimulating interest income. However, cautions Pera, ‘global bond markets still remain volatile, and the latest Greek debt crisis indicates that there is unlikely to be any immediate resolution. This in turn, tends to weaken investor confidence, and as a result, the global investment banking market remains vulnerable.’
Other survey findings indicate that the banking sector is responding to current weaker economic conditions by cutting back considerably on expenditure. Says Pera, ‘ there is no doubt that banks are, and have been, strongly focused on costs in more recent times. Whilst they all have differing approaches to maintaining costs, there is a realisation that costs need to be scrutinised far more carefully than was the case prior to the crisis. However, there are some costs that banks will have to unavoidably incur. Continued changing regulatory requirements, and preparation for pending capital needs, all contribute to the high cost environment.
Pera also notes that there was an improvement in efficiency ratios in the second quarter, after a long period of rising cost-to-income ratios. He comments, ‘the moderate increases in income, coupled with a strong focus on cost containment have resulted in more favourable efficiencies. This will need to be sustained in the second half of 2011, if banks are to meet their profit expectations.’
Pera concludes, ‘Stronger retail bank confidence, in line with other consumer and business indicators, is symptomatic of generally improved economic circumstances. Investment banks remain upbeat, with strong business volumes driving higher confidence. Going into the second half of 2011, the risk to banking confidence maintaining relatively strong levels (by recent standards) will be determined by domestic economic prospects as a driver of credit demand. In addition, the risks of oil and commodity prices and the continuing uncertainty over the Greek debt crisis may yet push the global economy back into recession.’
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An IRB Rugby World Cup 2011 guide that provides background information about the host nation, New Zealand, key details of the venues along with tourist highlights. It includes a Tournament fill-in chart, to keep fans in-tune and involved with the matches. It contains details about the teams participating in the World Cup.
Life Insurance confidence remains robust.
The survey reports that life insurance confidence remains robust in the second quarter, at 90 index points. This means that nine out of ten life insurers remained satisfied with business conditions in the second quarter of 2011.
Tim Rutherford, Life Insurance spokesperson at Ernst & Young confirms that life insurance confidence levels remain the strongest in the financial services sector, and is noticeably ahead of banking, where only six out of ten banks were satisfied with prevailing business conditions.
Tim Rutherford continues, ‘Strong life insurance confidence is driven by strong operational fundamentals. Premium income is being fuelled by strong new business volumes. Investment income is also growing at reasonably strong levels by historical levels. As a result, income growth is at its strongest pace in over two years. ’ To a large extent, risk business is the primary driver behind the strong inflows, and growth in this segment is also at a two year high.
‘Also favouring the life insurance industry was benefit payments, which continue to rise at relatively modest levels. As a result, the life insurance sector is in the favourable situation where their asset base is growing.’
Other survey findings include:
- The second quarter saw continued inflows growth outpacing that of outflows.
- Life insurers continued building their agent numbers, after cutting back continuously in 2010.
- Employee numbers are more or less static, with life insurers focused on extracting efficiencies, as cost pressures continue building.
Comments Rutherford, ‘Life insurers weathered the storm of the global financial crisis more successfully than what banks managed and even better than the asset managers did. Local life insurers did not have exposure to credit-default assets. However, they were hurt by the subsequent fall in equity markets, which was a global-wide phenomenon. In the case of local equity markets, however, this proved to be relatively short-lived, and by the end of 2009, stock market capitalisation had recovered markedly. This shielded the life sector to some extent, from subdued premium earnings in 2009 and into 2010.’
‘With the current strong premium growth, life insurers are essentially benefiting from a very favourable environment. This in turn has driven profits to very strong levels in the second quarter, and way above recent profit expectations. This is confirmed by various trading updates from the large life insurers, which confirm positive sentiments.’
Rutherford points out though, that there is one area of concern, namely rising lapse rates. ‘Lapses have received considerable attention over the last few years, and through 2010, major progress was made in stemming outflows arising from this source. But the last two quarters have seen a reverse of the gains made in the previous calendar year. The second quarter saw a particularly sharp spike, and this proves the point that life insurers continuously need to keep an eye on lapse trends.
Rutherford concludes, ‘Overall, life insurers remain optimistic about growth prospects in 2011. Whilst equity markets are notoriously difficult to predict, and associated investment income earnings move strongly in tandem with equities, the respondents expect investment income prospects to remain strong, albeit weaker. Global commodity prices remain strong, and South Africa’s equities benefit strongly from that movement. Added to that, risk premiums are showing signs of sustained volume growth, coupled with rising margins, which is strongly supportive of overall attractive market conditions.’
Asset Managers report sustained strong confidence.
The survey indicates that confidence in the asset management industry slipped again in the second quarter of 2011. The fall in confidence levels was, however, moderate, and confidence is only marginally below long-term average levels.
Asset manager confidence fell from 85 index points in the first quarter to 77 points in the second quarter of 2011.
A breakdown between large and small managers indicates that large managers (those with assets in excess of R20 billion in funds under management) once again reported weaker confidence, falling from 86 index points in the first quarter to its current reading of 73 index points. Small manager confidence on the other hand, continued to rise, from 81 index points to 88, indicating that close on nine out often small managers are satisfied with current business conditions.
Comments Chris Sickle, the lead Asset Management director at Ernst & Young, ‘Similar to Q1, large and small managers showed different experiences. The most significant being institutional net inflows, which declined for large managers and increased for small managers.’
He continues, ‘Since the beginning of the year, asset management confidence has remained more or less in sync with equity markets, with an ongoing correlation between the JSE ALSI index and asset manager confidence. However, in the current quarter we note that asset manager confidence has tapered far more than what the JSE ALSI index has since the beginning of 2011. Again, it would appear that this decline in confidence can be attributed to a considerable drop in institutional net inflows, which is a key measure for asset managers’
Sickle comments, ‘Small manager confidence levels continue to rise even though their profits are shrinking, whilst large manager confidence is falling, despite them remaining broadly profitable, which is largely attributed to an increase in total expenses by small managers.’
He adds, ‘Asset managers are mostly on the lookout for new growth opportunities and new assets under management, and that in turn requires continued investment in different markets and products. This is particularly true for the small managers, who are aiming to boost their presence and awareness in their core or niche markets. In addition, the regulatory and compliance needs also place upward pressure on costs, and that is not something that will dissipate going forwards.’
Other survey findings highlight a decrease in the average asset management fees, especially in the performance fees for the quarter for both large and small managers alike. The product demand for balanced funds and offshore exposure continues to remain high.
Sickle concludes: ‘Despite the weaker confidence registered in the second quarter of 2011, overall confidence levels are only slightly behind long-term averages.’
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