Profitability and business volumes in the UK financial services sector have fallen at record rates as the industry continues to be battered by the credit crunch, a new survey said today (Monday).
Business was lower across all customer bases, particularly financial institutions and individuals. Meanwhile incomes fell heavily, and the cost of credit increased for a third consecutive quarter.
Job losses continued, but are set to rise sharply over the coming three months. And 99% of firms think that it will take more than six months for "normal" market conditions to return.
Asked how their business volumes had fared in the three months to early September, 10% of firms said they had risen, while 61% said they had dropped. The resulting balance of -51% was much worse than expected, and was the weakest result since the survey started in December 1989. Volumes are expected to fall again over the coming three months, but at a slower rate (-31%).
Profitability in the sector declined at a record rate, as a balance of 49% of firms reported a fall, and this rate is set to continue over the next three months.
The value of fee, commission and premium incomes fell over the last three months, as did income from net interest, investment or trading. All have been falling for a year and dropped more heavily than in June's survey. Slightly more moderate falls are expected in the coming quarter.
Business sentiment fell sharply again, as a balance of 59% said they are less optimistic about the overall business situation in the financial services sector than they were in June.
The volume of business shrank across all customer bases, but was most marked with financial institutions (a balance of -46%) and private individuals (-41%), where further contractions are expected over the coming three months.
Total operating cost growth stabilized (a balance of +3%) and a drop is now expected over the coming three months. Average operating costs remained flat, as expected.
In an indication that credit continues to become more expensive, average spreads, which mark the difference between the rates at which money is borrowed and lent, widened for a third quarter running, although a gentler increase is predicted in the next three months. A balance of 19% of firms reported an increase in the value of non-performing loans, or bad debt, and 24% expect a rise in the coming quarter, in what is becoming a steadily rising trend.
Numbers employed in the sector fell (a balance of -16%) but a significantly bigger reduction is expected over the three months ahead (-44%).
Capital expenditure in real estate and machinery is expected to be lower in the next 12 months than in the past year. Drops in IT investment and marketing expenditure are also predicted, as firms cut back to save costs and readjust for lower demand.
Firms cited the level of demand and strength of competition as the factors most likely to limit business expansion over the next year. However, all the factors cited were below their long-run averages, except the ability to raise funds. This was above its long-run average for the fifth quarter in a row.
Supplementary questions about the credit crunch, which have now been asked for a fourth successive survey, showed that virtually all financial services firms (99%) expect it to be more than six months before "normal" financial market conditions resume. Asked about the impacts of the credit crunch, firms said that reduced sales or revenue growth was the greatest concern across both the short and medium terms.
John Cridland, CBI Deputy Director-General, said:
“One year after the credit crunch first took hold, business volumes and profitability in the financial sector have taken their hardest hammering yet. Firms have become more fearful about the extent and length of the credit crunch, and they are now looking to cut more jobs and scale back investment.
“The survey paints an increasingly bleak picture of the sector, but the dramatic turbulence across the world of finance over the past fortnight, and the renewed paralysis in interbank markets, will only have depressed market confidence even further.
“Difficulties in this crucial sector will have huge implications for the rest of the UK economy.”
Banking
Banks saw the negative trend in their profitability accelerate during the past three months, as the decline in the volume of business outweighed the effect of higher spreads between lending and borrowing. Business with domestic customers was below normal to the greatest extent since December 1991. Numbers employed were stable, but look set for a big fall in the next quarter.
Building societies
Building societies saw profitability decline at a record rate over the last three months, on the back of lower business volumes, fee & commission income, and the first fall in spreads for a year. Numbers employed were flat, as predicted, but are set to fall heavily for the second time this year in the coming quarter.
Andrew Gray, UK banking advisory leader, PricewaterhouseCoopers LLP, said:
“As the banking sector faces up to growing credit impairments, slowing revenues and higher funding costs, the sector remains more depressed than at any other time since 1998 and has given its most downbeat prediction for profitability in nineteen years. While banks again report an increase in average spreads, a key challenge going forward will be how to improve customer service and develop new revenue streams to compete in a world of slowing lending growth.
“Building societies’ confidence may have pulled back from its lowest ebb, but sentiment remains negative and the sector faces a marked downturn in business activity. The threat of falling profitability is putting market consolidation back on the agenda and helps to explain why the usually cautious societies have a negative expectation on headcount for the first time in six years.”
Life insurance
Life insurers saw another steep fall in both new and total business volumes over the three months to September, as well as declines in income from premiums, investment and trading. This outweighed the further increase in spreads, with profitability falling - but more slowly than in the prior quarter. Numbers employed fell heavily, and the reduction in headcount is expected to continue at the same rate next quarter.
General insurance
General insurers saw their volume of business decline relatively moderately over the past three months, as well as reporting lower income values and higher total costs. Reflecting this, profitability fell for the second successive quarter. Meanwhile, general insurers plan to raise their marketing and IT investment, but not other investment, over the coming year relative to last.
Andrew Kail, UK insurance leader, PricewaterhouseCoopers LLP, said:
“After reporting a marked downturn in sentiment, general insurers retain a negative outlook. The premium levels in most classes continue to fall, owing to softening rates and the downward trend in business volumes. Profitability is falling in response to lower like for like premiums combined with falling investment returns, hit by the falling stockmarket values. The insurers are responding by managing the cost base down, including an expectation that numbers employed will fall over the coming months.
“Despite increasingly challenging market conditions, life insurers are feeling slightly more sanguine about their prospects. The falling volumes, particularly in the retail business, are driving lower profitability. This, combined with the continuing volatility in investment market, suggests that the sector will need to keep a close watch on capital levels over the coming months. The sector is responding to the current environment by ‘tightening its belt’ and managing its operating costs.”
Securities trading
Business volumes fell sharply over the last three months, completing a full year of declines. Fee & commission income and the value of interest, investment or trading income also declined for the fourth successive survey. Reflecting this, lower profitability was reported. Employment within securities trading fell back less rapidly than it did last quarter, but a steeper reduction is expected in the three months to December.
Fund management
Business volumes fell for all survey respondents, ending a three quarter sequence of increases. The drop in volumes was particularly pronounced with financial institutions and private individuals. Furthermore, the value of fee and commission income was down, as was net interest, investment or trading income. The sharp falls in volumes of business and value of income over the past quarter, meant that profitability fell for all respondents.
Robert Mellor, financial services tax leader, PricewaterhouseCoopers LLP, said:
“Securities traders report a negative picture of business volumes, commission income and trading performance and profitability predictions are at their weakest level since the emerging markets crisis of 1998. Levels of business with financial institutions were a disappointment, suggesting that concerns over counterparty creditworthiness persisted into the survey period. Activity across fixed income remains subdued while investment banking continues to be affected by reduced access to funding. Setting an appropriate level of costs and staffing is emerging as a key challenge for the sector.
“Fund managers’ sentiment has plunged. Facing up to falling asset prices and net fund outflows across all customer segments, the sector reports negative trends in business with retail, institutional and corporate customers. Fund managers are becoming increasingly resigned to a long downturn, and are responding accordingly but the sector needs to consider how it can profit from increasing levels of risk aversion among investors.”