Volumes of business across the UK financial services sector grew in the three months to June, but at a slower pace than in the last three quarters, found a survey by Confederation of British Industry (CBI) and PricewaterhouseCoopers.
At the same time, the value of fee, commission or premium income rose strongly for the second quarter running, while the value of net interest, investment or trading income grew at its fastest rate since March 2007. Numbers employed in the sector rose unexpectedly, at the fastest rate since the financial crisis began in September 2007.
Asked how their business volumes fared in the three months to June, 44% said that volumes rose and 28% said they fell. The resulting rounded balance of +17% was slower than expected (+30%) and below the balances recorded in the preceding three quarters. Growth in business volumes is expected to slow further in the next three months, with the slowest expectation (+8%) since December 2009 (-13%).
Business volumes grew across all the sub-sectors, apart from banking and securities trading, where volumes fell, and insurance broking where business was fairly flat.
Business slowed most markedly with private individuals, but firms expect business to grow across all of the customer categories, including industrial and commercial companies, financial institutions and overseas customers, over the next three months.
Ian McCafferty, CBI chief economic adviser, said: “The financial services sector continued to recover over the past three months, but with slower volume growth, following three stronger quarters. What is heartening is the unexpected, strong rise in numbers employed in the sector, the fastest since the financial crisis began in 2007.
“Despite sharper cost increases and a small rise in non-performing loans, firms’ profitability continued to improve with growth in volumes and incomes, and a slight widening of spreads,” he added.
Average spreads widened a little, and are not now expected to change much in the coming three months.
There was a slight but unexpected increase in the value of non-performing loans for the first time in a year. This was driven by a rise in bad debts in the retail area of financial services.
Growing business volumes and income meant firms’ profitability increased, though this was constrained by rising costs and the increase in non-performing loans, so was far less dramatic than expected. A similar improvement in profitability is expected in the coming quarter.
For the first time since September last year, numbers employed in financial services rose, and this was at the fastest pace since September 2007. Firms expect numbers employed to continue growing, with the highest hiring expectation recorded since June 2007.
This is reflected in the increase in staff costs as a proportion of total costs, with the highest balance recorded since December 2007 during the past three months. Spending on training also grew, and is expected to pick up further next quarter.
Firms plan to invest more than average in the year ahead on IT and land and buildings, citing the need to increase efficiency and speed.
When asked what factors are likely to limit capital expenditure over the next year, uncertainty about demand was dominant, but the highest proportion since March 2008 cited shortage of labour, including managerial and supervisory staff.
When it came to business expansion in the year ahead, demand uncertainty was again felt to be the main constraint, but concern about the availability of professional staff also featured highly, with the highest figure recorded since June 2008.
Concern over a further worsening in financial markets grew, having fallen back in the previous survey. Most respondents still think that ‘normal’ financial market conditions will only return after at least six months.
Banking saw business volumes fall slightly over the past three months, but the sector expects a more evident fall in volumes next quarter. Banks also reported that business volumes were below normal. The cost base grew, with total and average costs growing at their fastest rates since, respectively, June 2006 and December 2007. Numbers employed had their first rise since the end of 2009 and are predicted to grow again next quarter. There is universal expectation that more will be spent complying with regulations in the coming year.
Andrew Gray, UK banking leader at PwC, said: “Concerns about economic recovery and demand have caused a dip in the banks’ confidence while, for the first time in a year, business volumes are dropping off. It’s been an unsettling quarter, given the release of the Independent Commission on Banking’s interim report and the loss of the Payment Protection Insurance case.
“Regulatory pressure is still immense and the banks now expect to spend even more than anticipated on compliance over the next year. The fresh wave of cost reduction plans announced recently is a sure sign the banks are keenly aware of the need to improve profitability.
“While there is good news on jobs, with an increase over the quarter, banks remain focused on costs. Recent announcements show banks will continue to make headcount reductions where required as they reshape their cost base,” he added.
The survey was conducted between 25 May and 9 June 2011, with 104 respondents. The survey began over 21 years ago in December 1989.
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