UK Banks Anticipate Strong Growth in Commercial Demand in 1Q11

Activity grew strongly in the UK financial services sector for the second quarter in a row, in the three months to December, reveals Confederation of British Industry (CBI)/PricewaterhouseCoopers (PwC) Financial Services Survey. However, profitability did not increase as fast as expected, growing at the slowest pace for 18 months, and numbers employed in the sector fell at the fastest pace for 17 years.

The banking sector reported little change in business volumes over the past three months. Income values declined sharply, and spreads were flat. Furthermore, costs were also unchanged following heavy falls over much of the past two years. Taken together, this led to a sharp fall in profitability, and a similar decline in profitability is expected for the coming quarter.

Although levels of business remain subdued, banking confidence has climbed rapidly and the banks are feeling more confident than at any time since 2005. A balance figure of almost two-thirds (63%) of bank respondents predict commercial demand to pick up in the coming quarter, offering some support for the impression that the UK manufacturing sector is enjoying an economic recovery. This is a significant increase compared with just 2% who believed that in September 2010.

Andrew Gray, UK banking leader at PwC, said: “This prediction is an overall expression of the anticipated economic recovery. We have seen a restocking in the industrial sector and companies are looking at growth plans and business restructuring. In many ways, we have reached a natural point in the economic cycle.

“It is also a response to the political environment. Banks are keen to lend more, particularly to the SME [small and medium-sized enterprise] market segment. Previously, the problem didn’t lie with funds availability, but was a result of the businesses’ limited borrowing capacity and the banks’ stringent lending criteria. The banks are suggesting that the time is now for recovery,” he added.

In supplementary questions, the proportion of firms believing the UK’s competitiveness as a financial centre to have deteriorated has picked up – to 80% – after falling back over the past two surveys. This is largely due to an increase in the number of finance houses and investment managers believing competitiveness to have deteriorated.

In addition, concerns over the further worsening in the financial markets have become more acute. Seventy-two percent of respondents believe there to be a medium likelihood of another deterioration, the highest proportion since June 2009, and 18% cite a high likelihood (up from 10% in September).

The vast majority (95%) of respondents now believe that ‘normal’ financial market conditions will resume only beyond six months, which is an increase over the past two quarters.


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