Gloom not over for financial services sector

THE UK financial services industry is continuing to feel the brunt of the credit crunch as profitability continues to fall at a record pace and business volumes fell at the fastest rate in 17 years, a study said today.

The latest Financial Services Survey from the CBI and PricewaterhouseCoopers also shows that credit remains expensive and in short supply with the gap between lending and borrowing rates widening more than at any time in the survey’s history.

Job cuts have continued and business has been lost across all customer bases.

Although the credit crunch has already been underway for ten months, nine out of ten firms (91%) think it will take more than six months for market conditions to return to normal.

Asked about business volume trends in the three months to early June, 20 per cent of firms said they had risen, while 55 per cent said they had decreased.

The resulting balance of -35% was in line with expectations, but was the weakest result since March 1991 (-44%).

The outlook for the coming three months is bleaker still, with a balance of 44 per cent expecting business volumes to fall.

Financial services firms had expected profitability in the sector to remain stable but instead it dived sharply, with a balance of 44% reporting a fall, compared with 18% in March.

This is the fastest rate of decline in profitability since the survey began in late 1989, and another heavy fall is anticipated over the next quarter.

In the last three months the value of fee, commission and premium incomes and incomes from net interest, investment or trading both fell for the third consecutive quarter, but at slower rates than reported in March.  Over the coming three months firms expect further falls at similar rates to this quarter.

Business sentiment recorded its steepest fall since September 1990, as a balance of 57% said they are less optimistic about the overall business situation in the financial services sector than they were in March.

Business volumes with industrial and commercial companies, which had been holding up so far during the credit crunch, fell for the first time since March 2005 (a balance of -16%) and are expected to fall more heavily over the coming three months (-33%). Business volumes with financial institutions and private individuals continued to fall, (-23% and -28% respectively) while a pick-up in volumes with overseas customers failed to materialise.

Total operating costs fell sharply (a balance of -23%) at the fastest rate since December 1993 (-49%), given the steep decline in business volumes and firms’ efforts to trim costs. Total costs are expected to fall again over the next three months at a similar rate. However, average operating costs per transaction stayed flat and are expected to remain so next quarter.

In a sign that firms are cutting back to weather difficult times, a balance of 16% expects to spend less on marketing in the next 12 months than they did in the past 12 months, which is the first planned reduction since June 2003. Planned IT capital expenditure is also well below its long run average.

Firms expect that the most significant barrier to limit business over the next 12 months will be the level of demand, but they are less worried about competition or the adequacy of systems capacity than they have been for the past few years.

Ian McCafferty, CBI Chief Economic Adviser, said: “The impact of the credit crunch on financial services has deepened over the last three months, and conditions look set to remain difficult for some time yet. Although credit markets have been somewhat calmer of late, the interbank lending system is still looking gummed up, and spreads have widened more than at any time in the past eighteen years. Profitability in the sector is being badly hit, so firms are trying hard to trim costs by planning to cut back on training and marketing for the first time in a number of years. The problems of the financial sector will echo throughout the wider economy and will drag economic growth down this year and next.”
 
Mark Hannam, Northern head of finical services at PricewaterhouseCoopers LLP, said: “Banks have made their gloomiest profitability prediction since 1994 and sentiment in the sector has fallen the most sharply since 1998. Volumes of business are declining faster than expected and economic worries are broadening from the retail arena to include the commercial sector. Asset write downs continue to impact profitability. Although the outlook for employment remains negative, investment budgets have stabilised and growth in compliance costs is seen as slowing to a more manageable pace.”