The UK financial services sector is to suffer increased job cuts in the next two quarters of 2009, according to the latest CBI/PricewaterhouseCoppers survey.
Q1 and Q2 of 2009 will see 30,000 jobs shed, with 11,000 jobs lost in Q4 of 2008.
The survey was carried out between 18th February and 4th March 2009, before the UK began the process of quantitative easing.
Asked how their business volumes fared in the three months to early March, 9% of firms said that volumes rose, while 56% they fell.
The ensuing balance of -47% marked a sixth quarter of steep declines and was worse than firms had expected (-25%). A balance of 10% expects volumes to drop further over the next three months.
A balance of 47% of firms reported a decline in profitability, which reflected a slight easing back from Decembers record drop (-55%), and a further slowing in the decline is expected over the three months ahead (-27%).
The values of two income categories both fell at the fastest rate since the survey began in December 1989. A net 53% of firms reported a drop in fee, commission and premium incomes, while a balance of 54% saw falls in net interest, investment and trading incomes. Falls in both measures are forecast over the next three months, but a more moderate rate is expected for fee, commission and premium incomes.
Business was lost among all customer categories, although the rate of fall in volumes of business slowed for all customers except overseas customers. Firms expect volumes of business with industrial & commercial companies and private individuals to contract again over the next three months, though at a slower rate.
Business sentiment dropped again, as a balance of 34% of firms said they were less optimistic about the overall business situation in the financial services sector than they were in December.
Reflecting reduced volumes of business and costcutting, a balance of 40% of firms said total operating costs (excluding costs of funds) had fallen, which was the fastest rate of decline since December 1993 (-49%). Average operating costs per transaction dropped quite quickly (a balance of -16%). And staff costs fell as a proportion of total costs at the fastest rate since December 1993 for the second quarter running.
Average spreads, which show the difference between the rates at which capital is borrowed and lent, narrowed for the first time since December 2007. A net 6% of firms reported a reduced gap between the rates, and a similar narrowing is expected over the coming three months. The value of non-performing loans, or bad debt, increased further, but at a much slower rate than in the final quarter of 2008.
With a balance of 40% of firms reporting a reduction in headcount, the numbers employed in financial services fell at their heaviest rate since June 1993 (-41%). This was roughly in line with expectations (-35%) and a similar fall is forecast over the coming quarter (-38%). Staff turnover dropped for the fourth quarter running, reflecting nervousness about switching jobs and a shortage of vacancies. Expenditure on staff training continued to fall and is expected to be cut more heavily over the next three months.
Investment intentions for capital expenditure in land and buildings in the next 12 months are at a record low, and spending on vehicles, plant & machinery is planned to be cut back at the fastest rate since mid 1992. IT investment and marketing expenditure plans for the year ahead are negative for the fourth quarter running.
Firms said that uncertainty about demand was the greatest obstacle to investment, for a second survey in a row, while a shortage of finance eased as a constraint from December’s record high.
When asked what would prevent business expansion over the coming year, the most common concern was the level of demand. Firms are much less worried about competition from other financial services firms outside of their sector, which is a reflection that the business is less attractive to crossover competition and new entrants than it once was.
Supplementary questions on the credit crunch showed that more firms (45%) think there is a high likelihood of further deterioration in financial market conditions than in Decembers survey (18%), and every single respondent thought that it will take more than six months before normal market conditions resume. Two-thirds of respondents thought that the UK had become a less competitive financial services centre as a result of the credit crunch.
Ian McCafferty, CBI Chief Economic Adviser, said: “Conditions remain exceptionally tough in the financial services sector, and have not been helped by equity markets having fallen further since our last survey in December.
“Sharp drops in revenues and profitability are causing continued suffering, while business volumes remain very weak. Firms are making heavy cuts to staff numbers and investment plans to make savings and reflect weak demand.
“Over the past six months any hopes of the pain easing off have been disappointed, but conditions in the sector are not uniformly bad, as many general insurers fared quite well.”
Analysis by sector
BankingBanks reduced their employment at a record rate over the past quarter, helping to bring down total costs, which fell at the fastest rate since 1993. However, further sharp falls in business volumes and incomes, and the first narrowing of spreads in five quarters, meant that profitability also registered a record decline. Looking ahead, banks expect volumes to stabilise next quarter as business with private individuals picks up.
Securities tradingBusiness volumes fell at a steeper rate than expected, with only the trend in business with industrial and commercial companies seeing a slight rise. Fee, commission and premium income and the value of net interest, investment and trading income also both declined faster than expected. Shrinking revenue along with a modest rise in total costs has led to a further fall in profitability, although the rate of decline had eased significantly from the previous quarter. Average spreads fell at their fastest rate since September 1997, while employment was unchanged.
Investment managementBusiness volumes fell sharply in the three months to March, although the rate of decline was slower than that seen in the previous survey. This was reflected in profitability, which fell at a slower pace than expected. Fee, commission and premium income fell faster than predicted, while net interest, investment and trading income saw a rise. Despite expectations of no change, average spreads increased markedly. Expenditure on marketing is expected to remain unchanged in the coming year, while investment plans in all other areas are down relative to the previous twelve months.
Pars Purewal, UK investment management and real estate leader, PricewaterhouseCoopers LLP, said: “Securities traders may be slightly less pessimistic than before, but the downturn in hedge fund activity continues to make its mark. Respondents suggest that activity levels may stabilise during the spring but this should not be mistaken for recovery. Markets remain highly illiquid, securities traders absolute levels of activity are far lower than during the bull market and customer activity with financial institutions continues to fall. A reflection of the rapid drop off in hedge fund activity. Profitability remains on a downward track and respondents are surprisingly equivocal on the need for cost cutting.
“Investment managers expect profitability to fall in the coming quarter. Customer demand is a critical concern for the sector and will be the primary barrier to growth during the year ahead. Investors continue to reduce their risk appetite, shifting from higher margin assets into cash and similar products. The sectors current predicament suggests good scope for consolidation and other scale-building activity. Cutting costs is again a focus and increasing efficiency remains the primary motive for any investment.”
Building societiesBuilding societies saw a record fall in both business volumes and income from fees, commissions, interest and investment; while spreads also narrowed at a record pace. As a result, profitability declined rapidly. Employment fell sharply, and much lower investment spending is planned over the coming year.
Andrew Gray, UK banking advisory leader, PricewaterhouseCoopers LLP, said: “While revenues and business volumes continue to decline in the banking sector, there is cautious hope for stabilisation in the coming quarter and hope that customer demand could pick up slightly, although this is a difficult area to gauge. With a continued squeeze on margins as well as ongoing pressure from non performing loans, overall profitability has been at a historically low level.
The current level of base rates significantly limit ability to improve on spreads, although support from the Asset Protection Scheme should limit future balance sheet write downs. As a result, the year ahead will be nothing short of challenging, although hopefully more predictable and banks will continue to focus on developing customer profitability through carefully selecting those they wish to give credit to as well as cost cutting to improve margins.
“Building societies face lower demand, tighter margins and growing impairments. An environment of exceptionally low base rates and climbing unemployment suggests that 2009 could easily be tougher than 2008. In response, the sector is developing a new commitment to cost control, although we may well see some further mergers as a further response to market pressures.”
Life insuranceBusiness volumes contracted at their fastest pace in the history of the survey and are forecast to fall again rapidly over the next three months. The fall in volumes was broad-based across all categories of customers only business with financial institutions saw no change. The rate of decline in income values was also the fastest in survey history and, as a result, profitability fell at the same record pace seen in the June 2008 quarter. Both average spreads and employment were stable, while life insurers expect to reduce capital expenditure significantly in the year ahead.
General insuranceThe trend in profitability improved this quarter, on the back of growth in both income values and business volumes; the latter also served to drive down average costs per transaction. Employment increased strongly and is predicted to grow at a similar pace over the next quarter. General insurers plan to increase investment in IT, but cut back on other capital expenditure in the coming year relative to the last, including spending on marketing.
Andrew Kail, UK insurance leader, PricewaterhouseCoopers LLP, said: “General insurers feel even more optimistic than they did in December, and are more confident than at any point since 2005, largely as a result of the impact of harder premium rates on underwriting profitability. Companies are expecting to grow across personal and commercial lines and new customers are seen as the most promising source of growth. Claims are increasing at a manageable pace, although the negative effects of the downturn may take several quarters to emerge fully. The anticipated improvements in pricing have put profitability on an upward trend for the first time in a year and in contrast to the rest of financial services.
“Life insurers are reporting the lowest scores for 20 years on the value of new business. Commercial, retail and overseas customer activity are all following a downward trend and overall profitability has also fallen. Life companies are focusing all their effort on reassuring and retaining their existing customers and as a result are cutting costs.