Financial services grow at fastest rate for three years

ACTIVITY in the UK financial services sector grew in the last three months at the fastest rate since June 2007, although this growth was much slower than was expected, a new survey reveals today.

For the fifth quarter in a row, profitability improved in the financial services sector, and is expected to continue growing over the next three months, according to the latest CBI/PwC Financial Services Survey.

PwC regional chairman Mark Smith said the growth would have a positive impact on the economy of the West Midlands.

The CBI also announced that the latest Financial Services Survey has been reclassified and re-weighted to bring the data in line with the latest UK and European Commission official classification systems. This permits easy comparison with other economic indicators. Overall, the trends over time between the results generated under the new system and those under the previous classification and weighting are very similar.

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.

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.

Overall, business grew across all customer groups, apart from business with financial institutions, where there was a modest decline. The strongest growth was seen in business with overseas customers, with the highest balance of firms since September 1999 describing this level of business as above normal.

The value of fee, commission and premium income rose only slightly in the past three months, while the value of income from net interest, investment and trading was broadly flat. While the former is expected to pick up in the coming three months, the latter is expected to fall.

Ian McCafferty, CBI Chief Economic Adviser, 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.”  

Mark Smith, regional chairman at PwC in the Midlands, said: “It is good to see healthy levels of growth returning to the sector – with both volumes and profitability improving. This will have a positive impact on the Midlands region, where the financial services sector remains a key contributor to the local economy. Furthermore growing confidence in the financial services sector should lead to even greater support for other parts of the economy that will be looking to invest as they come out of recession.”