The UK financial services industry has revived after a poor summer, but the sector’s performance has not reached the heights seen earlier in 2004, and jobs are set to be cut at the fastest rate for two years.
The quarterly survey of sentiment in the industry by the Confederation of British Industry (CBI) and consultants Price Waterhouse Coopers (PwC) found evidence of a return to growth in profitability, but it was achieved through tough cost control, and firms say they will have to go further. However, the survey shows optimism rising as business volumes returned to growth but still well below the rates of expansion seen in the spring.
“The strong performance experienced by financial services firms in the first half of 2004 is unlikely to be repeated at the beginning of 2005 as only modest volume growth is predicted to continue,” says John Hitchins, UK Banking Leader at PricewaterhouseCoopers. “Sectors with significant personal lending businesses had the most pessimistic outlook. The recent reduction in headcount is expected to intensify in the banking, fund management and insurance sectors and all sectors expressed concerns about the level of demand affecting growth this year.” Twenty per cent of companies said business volumes were down but 27 said they were up. The balance of plus seven per cent is an improvement on the minus 14 per cent of the September survey but well down on the plus 44 per cent recorded in June.
Numbers employed in financial services fell for the second quarter in a row and the rate of decline is expected to intensify. The balance of minus 13 per cent for the last three months represents the fastest rate since September 2003 but a balance of minus 26 per cent expect to cut jobs over the next quarter. That is the weakest expectation for employment since December 2002.
This reduced average costs per transaction and as a result companies returned to profitability growth. In the previous survey average costs rose at the fastest rate for nine years with a balance of plus 15 per cent. In this survey the balance was minus 13 per cent.
Forty nine per cent of companies said profitability was up while 27 per cent said it was down. The balance of plus 22 per cent compares with minus 15 per cent in the September survey. It is much higher than the plus two per cent that had been expected but still well short of the plus 40 per cent recorded in June. Over the next three months they expect profitability to go on growing but at a slightly slower rate.
“Like other sectors of the economy financial services picked-up after a poor August and September,” says Ian McCafferty, CBI Chief Economic Adviser. “With oil prices having slipped back from their peak and interest rates likely to be stable for the time being some of the headwinds from the wider economy earlier in the year have diminished. This in turn is helping financial services, though only to a limited extent. The sector had a very strong run up to the middle of last year. That isn’t coming back in the immediate future.”
Investment intentions are still depressed. Spending on land and buildings is not expected to grow at all and expected spending on vehicles, plant and machinery has again been sharply scaled back. IT was the only area where companies expected to spend more than last year.
There is a sharp contrast in fortunes between the different sectors of the financial services industry with only about half doing well. Those sectors most closely linked to the resurgent stock market tended to do best. Fund managers and securities traders saw the biggest growth in business volumes while building societies and life insurers recorded the biggest falls. By contrast life insurers expect the strongest growth over the next three months followed by general insurers. Building societies and finance houses expect the biggest falls.
The fastest rate of job cutting is expected by life insurers and banks while finance houses and building societies now expect to create jobs at the quickest rate.
Over the past quarter the value of business done over the Internet increased slightly more quickly but growth is expected to slow again over the next three months. The proportion of firms saying over 30 per cent of customers used web-based services grew rapidly to 21 per cent from only four per cent in September.
Concerns about security and data protection became less important as a barrier to the growth of on-line financial services. It was the main concern for 35 per cent of respondents but 47 per cent said customer preference for other transaction routes was the main factor. Similar figures are expected for the next quarter.