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CBI detects first signs of financial services optimism

Although the three months to June saw levels of business, income and profitability continue to fall, this was at a much slower pace than earlier this year. This suggests the industry may now be on a gradual path towards recovery, though differences between the sectors remain.

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. 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% 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 & 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%).

A balance of 22% reported a fall in total operating costs (excluding costs of funds) and this is expected to ease further in the coming three months (-14%). Meanwhile, little change is expected in average operating costs per transaction in the next quarter (-2%).

Average spreads, which show the difference between the rates at which capital is borrowed and lent, widened more than expected after the previous quarter’s contraction (+16%). 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.

Supplementary questions on the credit crunch showed that the number of firms who believe the risk of financial markets deteriorating further is much lower than in March: only 1% think there is a high risk, down from 45% in March. However, nearly all respondents (95%) agreed that it will take longer than six months for normal market conditions to resume. 70% of respondents said they thought the UK had become less competitive as a financial services centre.

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