South Africa: Slowdown 'Puts Strain On Commercial Banks'
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Business Day (Johannesburg)
8 July 2008
Posted to the web 8 July 2008
Renée Bonorchis
Johannesburg
RETAIL banks are feeling the strain of slowing business fundamentals, according to the Ernst & Young bank index, released yesterday.
This comes just one trading day after news broke that Absa, SA's largest retail bank, would be laying off about 100 of its senior staff. Insurance company Mutual & Federal said last week about 20% of its staff had to go because of tougher conditions.
Emilio Pera, lead banking director at Ernst & Young, said it was not surprising retail banking confidence levels continued to drop while investment banks were holding steady.
"The retail banks are being particularly impacted by rising interest rates and rising inflation. High and rising interest rates have reduced the demand for credit, while simultaneously causing bad debts and provisions to increase ," Pera said.
Absa executive director Louis von Zeuner said recently the higher interest rate cycle could last 12 months or more, and if conditions worsened his bank may have to take "more drastic measures". However some banks make the bulk of their money in the corporate market, and Ernst & Young said yesterday there was still strong demand for corporate credit.
In the year to date, the JSE's banking index has fallen more than 25%. The banks worst affected are Nedbank and Capitec, which have both dropped 34% . Standard Bank, a favourite among analysts , has been the least affected but even it has fallen 19% this year.
However, eight out of 10 investment banks, according to Ernst & Young, were still satisfied with business conditions, and six out of 10 retail banks did not say the business environment was unbearable.
"We are coming out of a very bullish two-year cycle," said Pera. Banks were managing the environment, cutting costs and slowing hiring.
The Competition Commission released the banking inquiry report two weeks ago, and the big banks are about to face further scrutiny on their pricing models. Some analysts expect a 2%- 5% decline in profit for the banks.
Still, the survey found retail banks were optimistic their revenue streams would be positive a year from now.
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