Profitability and growth slow but financial services confident about future

Published at 10:59 AM on 03 October 2010

Financial services firms have seen growth in business volumes slow sharply over the past quarter, as expected; but are optimistic that business will recover, according to the latest Financial Services Survey published today (Tuesday) by the CBI and PricewaterhouseCoopers LLP. The past quarter saw income fall for the first time in two years, profitability growth flatten, and recruitment slacken - broadly as expected in June. But the three months ahead look far more upbeat. Income and business volumes are expected to recover and profitability to strengthen, even if modest job cuts are predicted and marketing and investment plans for the year ahead have been scaled back. In the three months to September, growth in business volumes slowed sharply, as 28 per cent of firms said volumes had grown and 26 per cent reported a decrease – a net balance of 2 per cent, representing near-flat growth. This was in line with expectations, but was a marked contrast to June’s balance of 44 per cent, and ended a year of consistently robust growth. The slowing over the past quarter has brought business volumes down towards more 'normal' levels. The survey, which has been conducted since 1989, showed the slowdown in overall growth was driven primarily by weaker business with private individuals and financial institutions. In the case of private individuals, the balance of minus four per cent represented the first decline in business since December 2004 (-7%). Similarly, both categories of income fell for the first time in two years. Fee, commission and premium income recorded a balance of minus 11 per cent (last negative in Sep 2004, -15%). Meanwhile, a net 10 per cent of firms reported falling investment and trading income (a net 7% last reported a fall in Sep 2004). However, this quarter’s relative weakness is not expected to last, with 10% of firms more optimistic about the overall business situation than they were three months ago. Total operating costs are still rising strongly (a balance of +22%), though the rate of increase has eased from earlier this year. Meanwhile, given the sharp slowing in business volume growth, financial services firms have seen their average costs - costs per transaction - rise for the first time in two years (a balance of +8%, compared with +15% in September 2004). The combination of falling values of business, steady volumes, and rising costs meant that profitability stabilised over the past quarter after a solid year of firm growth. Nevertheless, the strong upward trend is expected to return, with a net 31 per cent of firms predicting that profitability will grow over the next quarter. This represents the strongest expectation on profits for five years (Sep 2000, +32%). The value of non-performing loans, or 'bad debt' where customers are not paying interest or repaying capital, grew for the sixth successive quarter for a balance of 21 per cent. A change in the trend in recruitment appears to be underway. There has already been a significant slowing in hiring over the past quarter (a balance of +8% reported increasing staff, compared with +35% in June), in line with predictions in June. Looking forward, a modest cut back in jobs is now expected over the next three months (-5%). Expenditure plans for the year ahead have also been scaled back. Spending on marketing and on investment have moderated noticeably since June. Intended investment in both IT and land & buildings has weakened markedly, ending the run of the previous four quarters when intentions had been much stronger. Richard Lambert, CBI Director-General, said: “After a year of solid growth, the slower growth in business volumes in this sector is disappointing, even if expected. "Thankfully it seems to be a temporary lull, and next quarter's forecasted recovery is heartening, with volumes and profits returning to the rates of growth enjoyed for much of the past year. But modest job cuts are expected and spending plans for the year ahead have been scaled back. "The financial services industry is a real powerhouse of the UK economy, and it is a sector in which the UK leads the world. But policy makers must not take it for granted - they must nurture it and protect it from undue restrictions at home or abroad." John Hitchins, UK banking leader, PricewaterhouseCoopers LLP said: "Last quarter's dip in confidence has proved to be short lived. Despite disappointing levels of business in several sectors during the quarter, most areas of the financial services industry remain positive in their outlook and most are predicting future growth in volumes of business. "While profitability was reported to have stabilised during the quarter, it is now predicted to expand by the largest overall balance statistic for six years." Clare Thompson, UK insurance leader PricewaterhouseCoopers LLP said: "Profitability growth in the life insurance sector was the strongest on record as volumes of business increased. In contrast, general insurers suffered a downward trend in overall profitability over the last quarter and further downward pressure is expected over the next three months." Results by sector: Banking There was an unexpected deterioration in banking conditions over the past quarter, but this should prove to be temporary. Volumes and values of business, and profits all fell markedly. However, banks are optimistic that strong growth in volumes and profits will resume over the next three months. Meanwhile, job cuts are expected to intensify. Building societies Robust growth in business volumes confounded expectations of further decline. However, the fall in profits was greater than expected. Building societies remain pessimistic about the overall business situation even though moderate growth in business volumes and modest growth in profits are predicted for the next quarter.Life insurance Profits grew at the fastest rate on record, as values of existing business and volumes continued to grow robustly, far exceeding expectations in June. With further robust growth expected over the next quarter, life insurers are much more optimistic about the overall business situation. However, steep job losses are expected to continue. General insuranceProfits slumped over the past quarter, falling at the fastest rate since March 2003, with the same expected again over the coming three months. Falls in volumes and values of business are set to continue. With this in mind, general insurers remain pessimistic about the overall business situation. Securities trading After very buoyant conditions in recent quarters, securities traders have suffered a difficult quarter. Volumes and values of business and profits all fell steeply. However, the declines are not expected to continue, with business volumes and profits set to stabilise. Nevertheless, securities traders remain pessimistic about the overall business situation. Fund management Volumes and values of business fell for the first time in two years. However, robust growth in average commissions, fees and premiums over the past quarter enabled strong growth in profits to continue. Fund managers are optimistic about the overall business situation, and expect volumes and values of business to recover. As such, further significant recruitment is expected.  ENDS

Notes to Editors:

The survey was conducted between 24 August and 6 September 2006. There were 57 respondents. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. Member companies, which decide all policy positions, include: - 80 of the FTSE 100 - some 200,000 small and medium-size firms - more than 20,000 manufacturers - over 150 sectoral associations. The member firms of the PricewaterhouseCoopers network provide industry focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries across our network work collaboratively using connected thinking to develop fresh perspectives and practical advice. Unless otherwise indicated, PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP ( a limited liability partnership incorporated in England. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited. 

For more information contact:

Rebecca Laird.
CIPS Manager, PricewaterhouseCoopers LLP 
Tel:020 7213 5829 
Mobile:07793 680 467 

John Hitchins
partner, PwC 
Tel:020 7804 2497 

Clare Thompson
Tel:020 721 25302


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