A vast majority of UK financial services firms (99%) do not expect to see normal conditions return to the financial markets within six months, according to a recent survey by Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC), implying that disruption will persist well into next year. John Cridland, CBI deputy director-general, said that the general view is that financial firms need to roll with the punches and look to the second half of 2009 because the first half will be difficult.
Underpinning everything is the slowing economy, which is cooling so fast that growth estimates for 2009 have more than halved since June, according to the Economist. Andrew Gray, UK banking advisory leader at PwC, denied that there was systemic risk within the UK banking system. “There is stress and strain, but no, I do not believe that there is systemic risk. Northern Rock is the closest we have come to a run on a bank, but no retail depositor has lost money up to this point.”
The CBI/PwC research found that the slowdown has become more entrenched and the downturn in commercial business first reported in June again emerges as a key factor of the current survey. Business sentiment fell sharply again, as a balance of 59% said they are less optimistic about the overall business situation in the financial services sector than they were in June.
Profitability is coming under intense pressure, with aggregate figures for the industry the most negative ever recorded by the survey, which started in December 1989. The report identifies two main concerns regarding profitability: the first – and most immediate – is the continuing threat of credit impairments; and the second factor is slowing revenue streams. Market spending and capital investment are being strongly cut back, and more than half of the respondents now expect to employ fewer staff by the end of the year.
Business volumes have also taken a record plunge. Only 10% of firms said they had risen, while 61% said they had dropped. The resulting balance of -51% was much worse than expected, and was the weakest result since the survey started. Volumes are expected to fall again over the coming three months, but at a slower rate (-31%).
Total operating cost growth stabilised (a balance of +3%) and a drop is now expected over the coming three months. Average operating costs have remained flat over the last quarter and are expected to fall over the next quarter mainly because of job losses, which are expected to rise sharply over the coming three months affecting a minimum of 12,000 out of a workforce of one million.
The steepest drop in confidence was seen with fund managers, which now feel uniformly pessimistic about their business situation. Customer activity has plunged with the balance statistic for business volumes swinging from +93% in June to -100% in the current survey.
Robert Mellor, financial services tax leader at PwC, said: “Fund managers thought that the way out was to look overseas for investors. The last quarter’s trend was ‘spend your way out’, but that customer base has departed. Fund managers are becoming increasingly resigned to a long downturn, and are responding accordingly but the sector needs to consider how it can profit from increasing levels of risk aversion among investors.” He added that the fund management area is now looking at job losses for the first time.
In an indication that credit continues to become more expensive, average spreads, which mark the difference between the rates at which money is borrowed and lent, widened for a third quarter running, although a gentler increase is predicted in the next three months.
“The survey paints an increasingly bleak picture of the [financial services] sector, but the dramatic turbulence across the world of finance over the past fortnight, and the renewed paralysis in interbank markets, will only have depressed market confidence even further,” said CBI’s Cridland. “Difficulties in this crucial sector will have huge implications for the rest of the UK economy.”
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