UK financial services firms have enjoyed another quarter of strong growth, but are less optimistic about business in the coming three months, according to the latest Financial Services Survey published this week by the CBI and PricewaterhouseCoopers LLP.
However, ongoing recruitment and strong investment intentions suggest that confidence about the longer-term outlook has held up.
In the three months to June, business volumes grew at their fastest rate in two years, with 50 per cent of firms saying volumes had grown and 6 per cent stating a decrease – a net balance of 44 per cent.
A balance of 28 per cent of respondents said overall profitability had risen in the last three months, whilst 23 per cent reported increases in net interest, investment or trading income.
However, firms expect a tougher three months ahead with the balance of firms saying business volumes will rise being just 4 per cent, and a balance of 5 per cent of firms that expect profitability to fall. The quarterly survey showed that a net 8 per cent of firms were less optimistic about overall business conditions in their sector than three months ago.
Organisations remain upbeat on longer-term plans though, with the balance of firms planning to take on staff and spend more on training over the coming quarter. A robust 41 per cent more firms said they expect to increase spending on marketing over the coming year than decrease it, and intentions for investment in IT and land and buildings are also positive.
The survey has been conducted since 1989 and covers all sectors of the financial services – including banks, building societies, traders, fund managers, insurance companies and brokers.
There is a clear split in short-term expectations, with banks predicting continued expansion but securities traders and fund managers expecting sharp declines along with building societies. This suggests that the stock market declines seen recently in the UK have heavily influenced sentiment, alongside mixed signals from the housing market.
Total operating costs continued to rise, with a net 33 per cent reporting increases. This was greater than expected and is forecast to increase further over the coming quarter. The value of non-performing loans – where customers are not paying interest or repaying capital as agreed – went up for the fifth successive quarter, and is expected to increase by a greater net percentage in the next three months.
In e-business, a net 73 per cent said the value of internet business had increased, and a balance of 69 per cent expect it to continue growing in the next three months.
“The financial services industry has continued to thrive recently, but now expects some tougher times in the next few months, in the wake of renewed doubts about the global economy and stock market uncertainty,” says Doug Godden, Head of Economic Analysis. “The mixed performance of the housing market has also made business challenging for some lenders. The balance of optimism may have shifted, but this has been the financial sector’s fourth consecutive quarter of strong expansion at a time when the picture in the rest of the UK economy has been patchy.”
John Hitchins, UK banking leader, PricewaterhouseCoopers LLP describes the quarter’s overall results as “far from poor, despite the gloom of some respondents. Among the sectors experiencing a drop-off in confidence, the major driver of change has been recent falls in the equity markets. However, given that equity values remain at year-end 2005 levels, the dip in sentiment could represent a short-term over-reaction. IT investment intentions reached their highest level for eight years and overall employment trends also remain positive, with most major sectors expecting either to maintain or expand their staffing levels in the coming quarter. This would appear to suggest that they remain confident about the longer term outlook for the sector.”
There was great variation between sectors:
BANKINGBankers were more upbeat about the business situation than they were in the last quarter. Optimism in the sector stands at a net 22 per cent. The balance of respondents reporting business growth increased to 48 per cent, well ahead of the March figure of 3 per cent, but behind the sector’s own expectations of 73 per cent. A balance of 23 per cent expects growth over the next three months.
BUILDING SOCIETIES AND FINANCE HOUSESBuilding societies reported a slump in optimism with a balance of -74 per cent. Building societies and finance houses saw a weak quarter of lower fee income and declining sales to private individuals.
LIFE INSURANCERapid growth in volumes and premium income did not create a corresponding rise in profits, and a quieter quarter is expected. A net 97 per cent reported business levels to have grown, but only a net 3 per cent expect growth in the next quarter.
GENERAL INSURANCE AND INSURANCE BROKERS
General insurers experienced a quiet quarter with a slight rise in profits and a fall in volumes. Insurance brokers’ optimism and profits fell after another weak quarter for sales to private individuals. Optimism dropped from a balance of -4 per cent in March to -35 per cent.
SECURITIES TRADINGProfits and incomes have risen for a full year but optimism has dived to a net -95 per cent. Reports of volume growth rose to a net 50 per cent, but the figure drops to -83 per cent for expectations over the next three months.
FUND MANAGEMENTVolumes, profits and incomes all grew strongly this quarter. The balance of firms reporting volume increases rose from 15 per cent in March, to 76 per cent. But the situation is expected to reverse almost as strongly next quarter, with a net -62 per cent of firms forecasting a fall in volumes.
The survey was conducted between 25 May and 7 June 2006. There were 70 respondents.