The financial services sector saw growth in business volumes level off over the past three months, forcing firms to cut costs in order to boost profitability.
The latest quarterly survey by the CBI and PricewaterhouseCoopers will disappoint companies, which saw volumes grow at the fastest rate for two and a half years in the previous quarter.
But business has stabilised at a much more buoyant level than at the turn of the year and firms expect a modest improvement in the run up to Christmas.
Despite falling levels of business, overall profitability has grown for a second successive quarter, though at a slower rate. A balance of plus 16 in this survey compares with plus 26 in the second quarter of 2002. Profitability had been in decline for a year until the June survey but it is now expected to go on rising over the next three months.
Reflecting the drive to hold down outgoings, firms expect to invest significantly less in land, buildings, vehicles, plant and machinery over the next 12 months than they did in the last 12.
Spending on IT and marketing are the exceptions with modest increases in spending expected.
John Hitchins, UK banking leader at PricewaterhouseCoopers, said: “Uncertainty remains a key theme for the industry. No one is prepared to predict the timing of a stock market recovery and there is concern that the growth in consumer spending and house prices is coming to an end. Overall confidence remained stable though, underpinned by progress in controlling costs.”
There has been a large increase in uncertainty about future demand. It has taken over from inadequate returns as the most common restraint on capital spending. It was cited by 70 per cent of respondents which is the highest number since 1995. That compares with fifty per cent in the June survey.
Labour shortages continue to slip in importance as a restraint. They were mentioned by only 13 per cent of respondents. Job cutting earlier in the year means there is a large pool of potential recruits.
Employment in financial services held up over the last quarter but there is expected to be a return to sharp reductions over the next quarter as cost cutting continues. Thirteen per cent expect employment to rise, 32 per cent expect it to fall. However in each of the last four quarters employment has held up better than expectations had indicated.
Ian McCafferty, CBI Chief Economist, said:”The outlook remains difficult for financial services firms both in terms of the amount of business they’re doing and the income it’s generating. But great strides have been made in reducing costs. That has enabled profitability to increase.
“In the year ahead cash flow will be further buoyed up by a tough approach to expenditure on fixed capital, but plans to increase spending on marketing and IT suggest that the sector is not neglecting its long term prospects.”
General insurers and life assurers have reported the biggest increase in business while fund managers and securities traders have reported the biggest falls.
The CBI/PricewaterhouseCoopers survey includes a section on financial services firms’ use of e-business. This time it shows the strong growth in the value of business over the internet recorded in the first half of 2002 has slowed. For the second survey in a row more firms have not seen their hopes for internet business met than have seen them met.
However 38 per cent of respondents have launched an on-line brand. That is the highest figure since the e-business section of the survey began in December 2000. The percentage saying they have not launched an on-line brand has continued to fall. In March it was at a record high of 74 per cent while in this survey it is down to 57 per cent.
The survey was conducted between 27 August and 11 September 2002.A total of 122 companies responded.