Finance sector busines volumes on the up report reveals

MANY parts of the UK’s financial services sector expect business volumes to rise in the next quarter after 21 months of falls, while optimism about the overall business situation has risen for the first time in two years.

However, according to the latest joint CBI/PricewaterhouseCoopers’ (PwC) financial services survey the banking sector remains under pressure.

The survey found that although the three months to June saw levels of business, income and profitability continue to fall, it was at a much slower pace than earlier in the year.

Insurance companies are the most optimistic about growth in business over the coming quarter while banks also expect volumes to rise.

Building societies have experienced extremely tough business conditions since early 2008, but are now hopeful that volumes, income and profitability will stabilise in the next quarter.

By contrast, securities traders and investment managers expect the recent improvement in their business to be short-lived, with volume declines expected to resume next quarter.

Ian McCafferty, CBI chief economic adviser, said: “Having seen business volumes tumble continuously for 21 months some parts of the financial services sector look like they may be starting to come through the worst.

The pace of decline in incomes and profitability is slowing, and business volumes are expected to rise in the next quarter. However, conditions remain challenging, particularly for the banks.”

He continued: “Although demand looks like it is beginning to recover, it is doing so from a very low base. We can still expect lower profitability, significant job losses and cuts to investment in the coming months. The rising levels of bad debt are a further worry for the industry.”

Asked how their business volumes fared in the last quarter 22% of respondents said they rose while 50% said they fell giving a balance of -28%.

That was worse than firms had expected (-10%), but it was a marked improvement on the previous quarter (-47%) and is the slowest rate of decline since volumes started falling at the end of 2007.

Looking ahead to the next three months, firms are the most upbeat since March 2007 on business volumes with 29% expecting a rise and 18% anticipating a drop, giving a balance of +11%.

Profitability continued to fall in this quarter, but at a much slower rate. 27% saw profits rise, 51% saw a fall giving a rounded balance of -23% (compared to -47% in March). This rate of decline is expected to ease further in the next quarter (-17%).

The drop in the value of the two income categories eased on the previous quarter. A net 17% of firms reported a fall in fee, commission and premium incomes (-53% in the previous quarter). A balance of 40% saw falls in net interest, investment and trading incomes (-54% in the previous quarter).

Over the next quarter, firms expect fees, commissions and premiums to stabilise, and only a small fall is expected in interest, investment and trading income.

Business was lost across all customer categories, except individuals which saw a small rise. In the coming quarter firms expect the amount of business they do with financial institutions and private individuals to contract again.

Business volumes with industrial and commercial companies are expected to stabilise and those with overseas customers are expected to improve.

Business sentiment recorded its first rise in two years with a balance of 13% of firms more optimistic about the overall business situation in the financial services sector than in March (-34%).

The value of non-performing loans or ‘bad debt’, increased sharply at the fastest rate since the survey began in 1989 (+51%) and a similar increase is expected (+50%) in the next quarter.

Staff levels continued to fall sharply although at a slower rate than last quarter. A balance of 33% reported a fall in the numbers employed, and a balance of 28% expect to reduce their headcount in the coming quarter.

Training budgets were cut back at a record rate during the last three months with a balance of 35% reporting a fall, but this is expected to stabilise over the next three months (-2%).

Over the next 12 months capital expenditure in land and buildings, as well as vehicles, plant & machinery is expected to be lower, while firms plan to scale back investment on IT at the fastest rate since September 1992.

The biggest single barrier to investment is still uncertainty about demand and 86% of firms cited level of demand as the most common concern when asked what would prevent business expansion over the coming year – the highest since March 2003.

Mark Hannam, Northern financial services leader at PwC said: “The UK banking industry has seen a further decline in confidence but the rate of decline is slowing.
“While some respondents report an increase in retail business, a sustained upturn is not yet on the cards. Business plans for the year ahead are largely defensive. The probable impact of the recession on impairment charges and the impact of new regulation, will remain a significant pre-occupation for the sector for some time to come.”

He added: “Building societies have recovered some of their poise and results point to optimism that business may soon stabilise. However, the sector remains under considerable pressure and results suggest that the societies are trying to adapt to the changed world in which they find themselves.”