Financial services endures further tough times

THE financial services sector has endured another difficult quarter, as business volumes continued to fall at a sharp pace while numbers employed and profitability fell at their fastest rates in five years, a new survey said today.

The latest Financial Services Survey from the CBI and PricewaterhouseCoopers (PwC) also revealed that these firms expect to find it significantly more expensive to access finance for investment purposes, and that they fear the credit squeeze will get worse over the coming six months.

Business volumes fell sharply, as 17% of respondents said volumes had grown in the three months to early March, while 47% said they had decreased.

The resulting balance of -30% followed December's near 17-year low of -33%, and was worse than expected. A similar rate of decline is expected over the coming three months.

A record balance of respondents (-44%) reported a fall in the value of fees, commissions and premiums, while income from net interest, investment and trading also fell sharply again. Both of these income categories are expected to fall heavily again over the next three months.

Total operating costs (excluding the cost of funds) grew, although this was at a slower rate than the previous four surveys and they are expected to be flat over the next three months.

Average operating costs per transaction fell back slightly, after growing at the fastest rate in 17 years in the last survey, and this measure is expected to fall markedly over the coming quarter.

The sector's profitability has dipped sharply, after holding up last quarter. The balance of 18% reporting a fall was a weaker figure than expected and the most negative since March 2003 (-19%). On a more positive note, profitability is expected to stabilise in the coming three months.

A net 25% of respondents said they had cut jobs over the past three months, which is the highest rate since March 2003 and against expectations that numbers employed would increase marginally. Firms' expectations for employment over the next few months (a balance of 33% expecting numbers employed to reduce) were the weakest since December 2002.

Plans for capital investment in the year ahead are very weak, with plans for spending on IT flat, and intentions for land and buildings, and vehicles, plant & machinery the lowest since June 1992. Marketing expenditure plans have picked up, however.

Trends in patterns of lending to different types of borrower illustrate the way in which the credit squeeze is feeding through.

The amount of lending to private individuals fell sharply again in the three months to March, and the balance of -28% reporting a decline was the weakest since March 1991 (-45%).

Lending to industrial and commercial companies continued to increase, however, at a slightly faster rate than recorded in December. A balance of 8% nevertheless expects lending to these customers to contract in the next three months, while lending to other domestic customer bases is also expected to decline.

As financial institutions adapt to the credit squeeze, average spreads, which measure the difference between the rates at which money is borrowed and lent, were felt to have widened strongly (a balance of +35%). This was the largest gap since March 1993 (+48%). The value of non-performing loans, or bad debt, rose very slightly but is expected to grow faster next quarter.

Even more firms think the credit squeeze will be prolonged than did so three months ago – 90% believe it will last longer than six months compared with 70%

last quarter, despite firms being a further 3 months into its effects. Nearly all businesses (97%) believe there is a good chance that credit conditions will get worse over the next six months – 35% said it was a 'high' likelihood and 62% saying it was 'medium'.

The growing impact of the credit squeeze is also evident in the proportion of firms saying their ability to raise funds will be a constraint on business growth in the coming 12 months.

Forty per cent of firms saying this would be the case, up from 24% last quarter, is the second consecutive record figure reported. This is largely due to the record proportion of banks expressing concern that fund-raising ability will constrain expansion – this quarter's 66% set a new high, after a record 36% last quarter. The proportion of building societies concerned about this was also very high (83%).

Business sentiment among financial services firms has continued to worsen, and a balance of 29% reported that they are less optimistic about the overall business situation in their sector than they were in December.

Ian McCafferty, CBI chief economic adviser, said: “It is clear that the credit crunch has worsened over the first three months of this year. The interbank markets have become more gummed up, with banks even more unwilling to lend, and credit spreads have widened.

“While liquidity injections and interest rate cuts by the Bank of England will help shore up the system, neither will solve the fundamental problem of restoring trust, so that credit markets are unlikely to return to anything like normality for some time to come. Even when they do, we will not see a return to the very favourable lending conditions that existed before August.

“We can expect further tough times in the financial sector, and as this feeds through into the wider economy it will inevitably be felt through slower economic growth this year and next,” he added.