Thursday, April 24, 2008

The Ernst & Young Financial Services Index: 1st Quarter 2008

The Ernst & Young Financial Services Index (E&Y FSI) tumbled 14 index points – from 98 in the last quarter of 2007, to 84 in 08Q11,2. This is the first time in five years (since 03Q4) that the index is below its long term average of 88.

Since the previous survey, the following developments most likely contributed to reduced financial sector confidence:
  • The prime overdraft rate was increased for an eighth time in December 2007. Retail banks now face a further rise in nonperforming
loans and declining demand for new loans from individuals (and some businesses).
  • The implosion of the sub-prime mortgage market in the USA led to stress in financial markets, which in turn led to a major
decline in credit and withdrawal of some financial instruments. As a result, financial market uncertainty and volatility surged
world wide. These developments affected South African financial institutions adversely in several ways:
- Investment banking activity plummeted3.
- Investment managers saw a big drop in net inflows, probably as investors switched from equity investments to safer
havens, such as bank deposits and contractual investments4.
- Falling net inflows and fluctuations in the value of funds under management dampened income growth of investment
managers. This development hurt small managers disproportionately more than large managers.
- Life insurers experienced a big fall in investment income growth.

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