The EY Financial Services Index

1st quarter 2016

The Financial Services Index 1st quarter 2016 EY | 2

Table of contents

Executive Summary .................................................................................................................................... 3

The EY Financial Sector Confidence Index remains flat ................................................................................... 4

Retail bank confidence is marginally stronger ................................................................................................ 6

Investment bank confidence falls sharply ..................................................................................................... 11

Asset management confidence rebounds from 4Q15 lows ............................................................................ 15

Life insurance confidence recovers marginally ............................................................................................. 22

Technical note .......................................................................................................................................... 26

The Financial Services Index 1st quarter 2016 EY | 3

Executive Summary

The EY Financial Services Confidence Index remains flat

The EYFSI remained almost unchanged at 51 in the first quarter of 2016 (16Q1) compared to 52 in the fourth quarter of 2015 (15Q4).

This means that financial sector confidence remained low, with the current reading well below the long-term average of 76, and remaining at low levels last seen at the time of the 2008-9 global financial crisis.

Overall confidence remained unchanged in 16Q1, despite a 17 index point increase in asset manager confidence and moderately higher retail bank and life insurer confidence (four and five points respectively).

The most dramatic movement in confidence came from investment banking, which fell 27 points.

Retail bank confidence is marginally stronger

Growth in income decelerated further, as net interest income plummeted and that of non-interest (i.e. fee and investment) income remained subdued in the first quarter.

Retail banks kept a strong focus on operating cost management, slowing the pace of increases. There was a reduction in headcount. Credit losses continued to move sideways.

Retail banks maintained relatively tight credit standards through the quarter.

First quarter profit growth remained weak in comparison with 2014 and 15Q1, but improved relative to the middle of 2015.

Investment banking confidence falls sharply

An across the board slump in activity hit investment banks in 16Q1.

However, income growth rebounded owing to an upsurge in net-interest and fee income.

Investment banks struggled to contain operating costs.

Credit losses, which surged in 15Q3, have continued to increase at a strong pace.

Net profit growth weakened further.

Asset management confidence rebounds from 4Q15 lows

The BERs survey shows that after plunging in 15Q4, net inflows (unit trust and institutional) expanded slowly in 1Q16.

In 16Q1, absolute return funds demand fell sharply since 15Q3.

Although the demand for balanced funds also softened over this time period, they remain the most sought after.

Growth in total income remained weak in 16Q1, although improved on 15Q4 levels.

Asset managers kept a tight reign on cost increases in 16Q1.

Although net profits after tax remain weak, there was a mild improvement from 15Q4 levels.

Life insurance confidence recovers marginally

According to the BERs survey, growth in premium income was minimal in 16Q1.

Premium income from both risk and investment business contracted again, even more so than in 15Q4.

Continued declines in new business premiums and rising lapses lead to a weak premium income outlook.

After moving broadly sideways during 2015, growth in investment income fell in 16Q1.

Growth in administrative and marketing expenses edged lower during 16Q1.

In 16Q1, net profits after tax increased in line with 15Q4 levels.

The Financial Services Index 1st quarter 2016 EY | 4

The EY Financial Sector Confidence Index remains flat

Continued sluggish economic growth is impacting sentiment across the financial services industry. Recent financial reporting

across all three financial services segments provided solid evidence of the problematic economic environment that banks, life

insurers and asset managers all face. Growth in profits slowed across all three sectors, and in the case of asset management,

even turned negative in some cases.

Given the circumstances, bank earnings held up strongly, growing at double digit figures in 2015, whilst life insurer earnings

were largely in low single digit territory reflecting both squeezed premiums and pressured investment earnings.

Banking confidence in the first quarter was 23 index points below its long-term average level;

Asset Management confidence was 50 points below, and

Life Insurance index confidence is only 3 index points below long term average levels, continueing to be the most confident of

all financial services segments.

The EY Financial Sector Confidence Index (EY FSI) remained almost unchanged in the first quarter of 2016.1,2 A reading of 51

was registered, compared to 52 in the fourth quarter of 2015. At 51 points, financial sector confidence continues to be low,

well below the long-term average of 76 and at its lowest levels since the global financial crisis in 2009.

The percentage of respondents answering satisfied to the question Are prevailing business conditions satisfactory or

unsatisfactory? is taken as the indicator of financial sector confidence.

The EY FSI reflects the unweighted average confidence of four segments of the financial sector, namely:

retail banking,

investment banking,

asset management, and

life insurance.

1. During the first quarter of 2016, respondents were asked to provide their views on the estimated developments for the

period January to March and their expectations for the period April to June 2016. To improve the readability of the report, we refer to the first period as estimation of the first quarter of 2016 (16Q1) and the second period as expectations for the second quarter of 2016 (16Q2).

2. The Bureau for Economic Research (BER) at Stellenbosch University conducted the survey and processed the results on behalf of EY. The survey was conducted between 29 February and 16 March 2016. The results were processed on 17 March 2016. The number of responses processed was: retail banks (16), investment banks (10), asset managers (30) and life insurers (12).

The Financial Services Index 1st quarter 2016 EY | 5

Survey data: Business

confidence *

Retail banking Investment banking and specialised

finance

Asset management

Life insurance EY Financial Services

Confidence Index **

06Q3 100 100 100 98 100

06Q4 100 100 100 100 100

07Q1 100 100 100 83 96

07Q2 100 100 98 90 97

07Q3 94 100 99 100 98

07Q4 96 100 97 100 98

08Q1 78 79 77 100 84

08Q2 57 79 81 63 70

08Q3 43 81 57 51 58

08Q4 53 46 42 48 47

09Q1 32 31 45 50 40

09Q2 28 50 60 53 48

09Q3 25 57 83 58 56

09Q4 26 42 99 71 60

10Q1 35 62 97 77 68

10Q2 40 25 75 91 58

10Q3 62 33 71 83 62

10Q4 38 41 89 79 62

11Q1 20 55 85 90 63

11Q2 50 67 77 90 71

11Q3 38 36 71 91 59

11Q4 50 50 59 93 63

12Q1 87 91 56 93 82

12Q2 69 86 59 81 74

12Q3 88 82 81 75 84

12Q4 88 79 84 93 86

13Q1 80 ##83 83 95 85

13Q2 46 78 85 83 73

13Q3 25 93 92 67 69

13Q4 ##30 ##82 96 80 72

14Q1 38 73 77 79 67

14Q2 46 69 66 64 61

14Q3 50 64 52 67 58

14Q4 ##60 ##89 33 81 66

15Q1 74 82 45 92 73

15Q2 67 75 74 93 77

15Q3 54 92 ##36 80 66

15Q4 42 80 10 74 52

16Q1 46 53 27 79 51

* Percentage of respondents rating prevailing business conditions as satisfactory. 0 = extreme lack of confidence, 100 =

extreme confidence ** The EY Financial Services Confidence Index is calculated as the un-weighted arithmetic mean of the business confidence

indices of retail banks, investment banks, asset managers and life insurers. The average for the period 2002 2015 is 76; a reading above 76 therefore indicates a relatively high confidence level and below 76 a relatively low confidence level.

# Data was revised after the questionnaires that arrived after the cut-off date for the quarter was processed. ## Lower than normal number of responses

The historical survey data could be downloaded after registration for free in MS Excel format on

https://www.ber.ac.za/BER%20Documents/EY-Financial-Services-Index/?doctypeid=1061

https://www.ber.ac.za/BER%20Documents/EY-Financial-Services-Index/?doctypeid=1061

The Financial Services Index 1st quarter 2016 EY | 6

Retail bank confidence was marginally stronger

While the confidence of retail bankers remained low when compared to the first half of 2015, when it averaged 70 index points,

it picked up marginally from 42 in 15Q4 to 46 in 16Q1.

This lower confidence level can primarily be attributed to noticeably weaker income growth and profit performance of retail