Financial services sector ‘bounce’ short-lived says report

ACTIVITY in the UK financial services sector increased slightly over the past three months but the modest growth was less than expected and firms expect volumes of business to fall in the coming quarter, a new survey revealed today.

According to the latest CBI/PricewaterhouseCoopers (PwC) Financial Services Survey business volumes rose a little in the three months to December while profitability also increased helped by cost reductions and increased spreads.

However, firms do not expect growth in business volumes to continue over the coming three months and do not anticipate improving profitability despite further cost reductions.

When asked how their business volumes fared during the period 32% said that volumes rose while 28% said they fell.

The resulting balance of +4% is slightly lower than September’s +7%, and less than expected (+16%).

A balance of 13% of firms expects a reduction in business volumes over the coming quarter – the most negative expectation since December 2008 (-25%).

Meanwhile, banks and securities traders do not expect the growth in business volumes they have seen over the past three months to be maintained in the coming quarter.

The slight upturn in business with private individuals seen in the past quarter (balance +6%) is not expected to continue into the next (-9%).

Poor conditions in lending to industrial & commercial companies and financial institutions continued over the past three months and only a very slight improvement is expected in the next.

The value of fee, commission and premium income rose by less than expected (a balance of +4% against +22%).

The value of net interest, investment and trading income fell unexpectedly (-27% against +9%). Firms expect falls in both types of incomes in the next three months, with the lowest ever balance for expected interest, investment and trading income in the survey’s 20-year history (-54%).

Andrew Palmer, CBI regional director for Yorkshire, said: “The bounce in UK financial services activity over the past six months is not expected to last as we enter 2010. Firms see their business volumes falling back again with no further improvement in profitability over the next three months.

“On a more positive note, financial services firms’ confidence in the general business situation has continued to increase, profitability improved and a much slower reduction in numbers employed was seen in this survey. Job losses are also expected to be minimal in the coming quarter.”

The report found that business sentiment improved for the third quarter in a row with a balance of +31% of firms more optimistic about the general business situation than in September.

Contrary to expectations, numbers employed fell only slightly with a balance of -3% the least negative since December 2007 (+13%).

Employment is expected to be broadly flat again in the next three months (-2%). Staff costs as a proportion of total costs rose (+5%) for the first time since December 2007 (+23%).

Firms’ capital investment plans for the next 12 months are negative although expenditure on marketing is expected to be higher for the first time since March 2008.

Uncertainty about demand continues to rise as an obstacle for investment, with 76% citing it the greatest since September 1992 (83%). Cost of finance was mentioned by the highest proportion of firms in the survey’s history (30%).

Firms are becoming increasingly more confident that there will be no further deterioration in financial markets with 58% giving it a low probability in December – up from 49% in September.

However, around 80% think that the UK is less competitive as a financial centre compared to 66% in September.

John Hitchins, UK banking leader for PwC, said: “Banks are continuing their run of confidence as business volumes and income levels have grown.

“However, the sector’s short term outlook is less encouraging. Activity and revenues are expected to decline over the coming quarter, predictions for demand remain weak and an uncertain regulatory future continues to temper the banks growing confidence with caution. On a positive note, the sector reports growing headcount for the first time in two years and average spreads have increased.”

He added: “Building societies have experienced a sharp upswing in sentiment, the most decisive improvement since 2006.

“Although the sector has also been encouraged by rising average house prices and headcount reductions have been put on hold, recovery is not yet underway. There is no sign yet of any growth in customer demand, and while profitability may have stabilised it is not expected to increase.”