Financial services sector growth at three-year high

THE financial services sector grew in the last quarter at the fastest rate in more than three years, a survey said.

Profitability improved for a fifth quarter in a row, and is expected to continue growing over the next three months, according to the latest CBI/PwC Financial Services Survey.

Business volumes rose across all sub-sectors of financial services in the past three months, apart from general insurance, which saw a modest fall in activity.

Banks’ volumes increased after two quarters of decline, but at a slower pace, as expected, and building societies saw the fastest rise in volumes since March 2008, helping to achieve a near unanimous rise in profitability.

Asked how their business volumes fared in the three months to June, 37% said that volumes rose and 9% said they fell. The resulting balance of +28% is the most positive since June 2007 (+51%), although it fell short of expectations (+63%).

A similar pace of growth is expected next quarter, by a balance of +24% of firms.
Overall, business grew across all customer groups, apart from business with financial institutions, where there was a modest decline.

Ian McCafferty, chief economic adviser at the CBI said: “Activity picked up in the financial services sector in the last three months at a pace not seen since before the credit crunch. Although this growth was slower than hoped, it did help firms’ profitability to rise further.

“There is ongoing concern that prospective regulation may hold back business expansion in the coming year, but financial services firms have become more worried that weak levels of demand will dampen growth prospects.” 

Total operating costs (excluding costs of funds) continued to fall, but at a much slower pace than in the previous quarter. Average operating costs per transaction also fell, but this was slower than expected.

However, firms expect average operating costs per transaction to fall at a more rapid pace over the next quarter.

Numbers employed rose in the sector for the first time since December 2007, and the balance of +12% was broadly in line with expectations (+14%). However, a decline in headcount is expected again next quarter (-20%).

Expenditure on training rose in the last three months, with the highest balance of firms since September 2007 saying their spending increased. It is expected to be broadly flat next quarter, however.

Firms’ investment plans for the next 12 months are the most positive since December 2007 for information technology. Investment plans for land and buildings and vehicles, plant and machinery have also improved, rising above their long-run averages, though are not as strong as IT.
 
In the banking sector, after falling in the first half of 2010, business volumes rose in the three months to September driven by an increase in business with industrial and commercial companies and overseas customers.

There was better news for building societies, where profitability rose for nearly all respondents in the period, underpinned by strong growth in both business volumes and net interest, investment and trading income.

Mark Hannam, partner and northern head of financial services, at PricewaterhouseCoopers, said: “While the banks are broadly in good shape, business is still constrained by the economic environment.

“Increases in demand are coming from the corporate sector, although the retail sector is subdued.

Concerns about demand are contributing to uncertainty with banks continuing to focus on cross-selling as a source of growth. That said, costs and non-performing loans are under control and profitability is expected to rise.

“Competition is at the forefront of bank leaders’ minds and while new entrants do not rank as a high-level threat, renewed focus on product development and the marketing mix suggest a shake-up of market shares is anticipated.

“Regulation and the spend on compliance it necessitates remain a big concern for the banks – we’ll see the impact of Basel III proposals over the next quarter.

“While the capital requirement proposals are less stringent than some expected, they do place significant financial demands on the banks –which will have consequences for pricing, business models and strategy.”