The pace of growth in the UK financial services sector continued to slow in the three months to September, according to the latest CBI/PwC Financial Services Survey. In the next three months, firms expect growth will be slower still and, for the first time in two years, there will be no improvement in profitability. Meanwhile, sentiment has fallen for the first time since March 2009, as firms anticipate more challenging conditions.
Of the 84 financial services firms surveyed, 33% saw business volumes rise in the quarter to September, and 24% reported a fall. The resulting rounded balance of +10% is the lowest since June 2010 (a balance of +9%) and represents a slower rate of growth than the June quarter (+17%).
Both the value of fee, commission and premium income (+15%) and the value of income from net interest, investment and trading (+6%) grew, though at a slightly slower rate than the previous quarter.
The rise in business volumes and income helped push up profitability: 34% of firms reported a rise in profitability and 18% a fall, giving a balance of +16%. That compared with +13% in June. However, firms expect the pace of growth to slacken in the coming quarter, with business volumes expected to ease (+5%) and profitability to flatten out (-4%). That has weighed heavily on sentiment about the general business situation: a net 20% of firms are less optimistic than three months ago, the first time that confidence has fallen back since March 2009 (-34%).
Ian McCafferty, chief economic adviser, CBI, said: “The recovery in the financial services sector is continuing but the pace of growth has slowed compared with earlier in the year. After a torrid couple of months on global financial markets, the mood has clearly darkened. Uncertainty about future demand, worries about the global recovery and shifting regulatory sands are weighing on sentiment. With business volumes predicted to slow further and little growth in income expected, firms are planning to reduce their headcount in the next quarter.”
Business was mostly flat across the main customer groups with only industrial and commercial companies registering modest growth (+6%). However, business is expected to pick up with financial institutions and private individuals in the next quarter.
Numbers employed rose modestly (+5%) but at a far slower rate than had been expected (+20%). Looking ahead to the coming quarter, firms are expected to reduce headcount (-11%).
In the year ahead, firms are planning to invest in IT, but scaling back spending on land and buildings, and vehicles, plant and machinery. The most commonly cited factors limiting spending are uncertainty about demand and business prospects, and inadequate return on investment.
Bankers’ business sentiment was a little lower for the second consecutive quarter. (The survey was conducted between the 23 August and 8 September, at a time of heightened uncertainty about banks’ exposure to sovereign debt). Banks saw little change in the volume of business during the past three months, which they regarded as being at well below normal levels, but they expect to see it increase next quarter. Profitability improved, as both main sources of income increased, and costs grew only marginally. Banks expect cost growth will accelerate next quarter and offset income and volume growth to cause profitability to stabilise.
Andrew Gray, UK banking leader at PwC, said: “Concerns over new regulation continue to overshadow banks’ confidence. This is despite a solid last quarter, which has seen bank margins and overall profitability hold up, revenues growing, albeit slowly, and levels of activity with retail and commercial customers improve. The Independent Commission on Banking’s final proposals are forcing banks to reassess their business models, funding requirements and operations. Despite a short-term increase in operating costs, as banks continue to invest in IT efficiencies and marketing to protect their market share, this is unlikely to last. Many banks continue to control costs aggressively and as a result expect further headcount reductions.”
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