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 Q4 2011.
Bank confidence rose noticeably upwards in the fourth quarter, although there is no clear trend emerging just yet. Life Insurers on the other hand, continue to report very strong confidence, on the back of sustained premium growth and bullish equity markets.
Bank confidence improves but remains erratic.
The survey indicates that banking confidence rose in the fourth quarter, after a weak third quarter. The survey found that confidence rose in both the retail and corporate segments of the market. Banking confidence rose from 41 index points in the third quarter of 2011 to 50 in the last quarter.
Comments Emilio Pera, lead Financial Services Director at Ernst & Young, ‘Confidence levels have remained volatile through 2009 and 2010, with banks having still not quite recovered from the global financial crisis. Earnings have not yet returned to pre-crisis levels, and lending growth remains weak by historical standards. This is reflected in confidence levels, which since the first quarter of 2008, has averaged 62 index points.’
He continues, ‘not only is confidence weaker than it was prior to the crisis, but neither retail nor investment banks have had sustained rises in confidence over the last two years, with more of a zigzag pattern emerging, as confidence rises and falls again between one quarter and the next, reflecting the uncertainty in financial markets during this period.’
‘However’, he adds, ‘the latest quarter provides some indication that retail banks may finally be on a sustained path to stronger financial results. Throughout 2011, retail banks reported improving profit trends, starting the year with flat profits, and ending 2011 with relatively strong growth in bottom-line profits.’
By contrast, Investment banking profits remain erratic. The year started off well for investment bankers, but this reversed in the second quarter, and ever since, have reported either shrinking or flat profits. The fourth quarter was no exception, with profits flat.’
Other Retail banking survey findings include:
• A strong positive turnaround in net interest earnings;
• The strongest rise in fee income since the start of the crisis in 2008;
• A major improvement in credit losses and credit impairments in the fourth quarter;
• A rising cost-to-income ratio, as costs accelerated in the fourth quarter;
• Gradually rising credit standards, largely focused around the SMME market.
Emilio Pera comments; ‘Income growth has at last returned to pre crisis levels, with all retail banks indicating that income is growing. There have been gradual improvements throughout 2011, and this has undoubtedly lifted profit growth. The rising income comes at a cost, and banks have had to increase their headcount to cope with higher demand for banking services. There was a moderate rise in headcount across retail banks in the fourth quarter, following a considerable two year period during which banks were cutting headcount.’
The Investment banking survey details include:
• Flat income levels;
• Moderate interest growth, coupled with slow fee growth and shrinking investment income;
• Continued improvements in credit losses and impairments;
• Sustained negative operating jaws.
Pera comments again, ‘Investment banks are starting to benefit from more moderate credit growth, but were negatively impacted by investment losses incurred in the fourth quarter. This is in no small part due to the uncertain investor environment, which has resulted in smaller gains on sale realisations, and weaker returns from equity and bond portfolios.
Despite this rather weak performance in some of the key performance indicators, investment banks nevertheless reported stronger confidence levels. We ascribe this to an expectation that business volumes will improve in the first quarter of 2012, particularly in private equity and stock broking activities. This is expected to push income into positive growth territory, and coupled with sustained improvements in credit losses, provides some relief for investment bankers into the new year.
Retail banks also expect an improved start to 2012, with a strong rise in net profits, supported by higher fee income, and sustained interest growth, coupled with steady cost increases.
Concludes Pera, ‘It is still not clear whether a definite sustained rise in confidence will happen in 2012. The Euro zone crisis continues to impact on the banking sector, and investment banks appear particularly vulnerable, despite an uptick in trading volumes in the last quarter of 2011. The overall lack of investor confidence does appear to be keeping companies from making commitments to investing funds, and the very least that is required is resolution to that crisis before a sustained improved outlook can be expected.’
Life Insurance confidence levels remains strong despite Euro crisis.
The survey reports that life insurance confidence remains surprisingly robust in the fourth quarter, at 93 index points. This means that more than nine out of ten life insurers remain satisfied with business conditions in the fourth quarter of 2011, marginally up from the previous quarter.
Tim Rutherford, Life Insurance spokesperson at Ernst & Young points out that life insurance confidence levels continue to be the strongest in the financial services sector, noticeably ahead of asset managers, where only six out of ten are satisfied with prevailing business conditions, and banks, where five out of ten are.
Tim Rutherford comments, ‘Other Financial Services markets are feeling the impact of the continued global uncertainty stemming from the Euro debt crisis more acutely than what life insurers are. Banks did not fully recover from the global financial crisis when they were knocked by the Euro crisis. This kept funding very tight for bankers, while asset managers felt an immediate impact in terms of weakening inflow trends and tighter margins.’
He adds, ‘South African life insurers have largely shrugged off the impact of the Euro crisis thus far. Even weak economic growth figures have not impeded growth in premium income, which has remained surprisingly strong through 2011. Even investment income, which typically shrinks in times of uncertainty, has remained remarkably steady.’
In addition, he mentions that life insurers had relatively mild benefit payments in the fourth quarter. As a result, the quarter was one in which the asset base grew, and this was true for 2011 as a whole. ‘Life insurers had a strong 2011, and as a result, their confidence levels are well ahead of long-term average levels. This is not true for the banks or asset managers, whose confidence levels are both considerably below long-term average levels.’
He adds ‘2011 was a year in which life insurers increased their agent force noticeably, following a rather different picture in 2010, when distribution channels were kept held constant. Stronger premium growth trends have undoubtedly provided the need for a larger agent force, and this was evident throughout all four quarters of 2011.’
‘On the other hand, the headcount has been more erratic in nature, with the fourth quarter experiencing a strong reduction in headcount. We think this is related to the need for continuous efficiency improvements, which was a strong theme mentioned by the large insurers during their interim results presentations in the third quarter. This focus on improving efficiencies is undoubtedly continuing, and insurers indicated that they expect to cut back on employee numbers into 2012.’
Other survey findings include:
- Strong rises in new business income, although this was partially offset by much stronger lapses and terminations in the fourth quarter.
- Sturdy profitability of risk-based products, following a weak 2010.
- Moderate growth in surrenders, and
- Sharply rising administration expenses through 2011, albeit weaker in 4Q.
Rutherford points out that the improvement in the surrenders trend-line is due to a considerable focus by the industry collectively to manage surrenders. ‘The value of holding policies on one’s books after these policies have matured is considerable, and is far more cost effective than writing new business. The progress that has been made in slowing the rate of surrenders can thus not be underestimated.’
Rutherford also points to the first quarter of 2012 as being critical. The expectations of the survey respondents indicates that the first quarter is not likely to be as strong as the fourth quarter of 2011, but should nevertheless continue to provide very positive numbers. Premium growth is likely to slow, but to remain comfortably positive nevertheless, and investment income should also provide a positive boost for the industry.
He ends by commenting on the general global outlook: ‘Currently, we are seeing a number of weaker economic growth forecasts emerging. Whilst weak GDP growth has not hindered premium growth up till now, the combination of slower premiums, coupled with potential investment income knocks, could change the scenario for life insurers. The banks and asset managers are already feeling that impact. However, if a speedy resolution to the Euro crisis can be found, and should it pan out in the first few months of 2012, life insurers’ prospects will no doubt remain favourable.’
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