Growth accelerates in UK financial services sector
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Activity in the UK financial services sector grew in the last three months at the fastest rate since June 2007, although this growth was much slower than was expected, shows the latest survey from CBI and PricewaterhouseCooper.
For the fifth quarter in a row, profitability improved in the financial services sector, and is expected to continue growing over the next three months.
The CBI’s latest Financial Services Survey has been reclassified and re-weighted to bring the data in line with the latest UK and European Commission official classification systems.
Overall, the trends over time between the results generated under the new system and those under the previous classification and weighting are very similar. Asked how their business volumes fared in the three months to September, 37% said that volumes rose and 9% said they fell.
The resulting balance of +28% is the most positive since June 2007, although it fell short of expectations of a 63% increase. A similar pace of growth is expected next quarter.
Business volumes rose across all sub-sectors of financial services in the past three months, apart from general insurance, which saw a modest fall in activity.
Banks’ volumes increased after two quarters of decline, but at a slower pace, as expected, and building societies saw the fastest rise in volumes since March 2008, helping to achieve a near unanimous rise in profitability.
Overall, business grew across all customer groups, apart from business with financial institutions, where there was a modest decline. The strongest growth was seen in business with overseas customers, with the highest balance of firms since September 1999 describing this level of business as above normal.
The value of fee, commission and premium income rose only slightly in the past three months, while the value of income from net interest, investment and trading was broadly flat. While the former is expected to pick up in the coming three months, the latter is expected to fall.
Ian McCafferty, chief economic adviser at CBI, says: “Activity picked up in the financial services sector in the last three months at a pace not seen since before the credit crunch. Although this growth was slower than hoped, it did help firms’ profitability to rise further.
“There is ongoing concern that prospective regulation may hold back business expansion in the coming year, but financial services firms have become more worried that weak levels of demand will dampen growth prospects.”
Total operating costs, excluding costs of funds, continued to fall, but at a much slower pace than in the previous quarter. Average operating costs per transaction also fell, but this was slower than expected. However, firms expect average operating costs per transaction to fall at a more rapid pace over the next quarter.
For the second consecutive quarter, spreads widened markedly, a balance of +34%, although expectations are for a lesser widening in the coming three months.
On the back of falling costs, faster growth in business volumes and the widening of spreads, a rise in profitability was recorded for the fifth quarter in a row. The balance of +23% is the highest since June 2006. Next quarter, firms expect a similar growth in profitability.
Numbers employed rose in the sector for the first time since December 2007, and the balance of plus 12% was broadly in line with expectations. However, a decline in headcount is expected again next quarter, down by 20%.
Expenditure on training rose in the last three months, with the highest balance of firms since September 2007 saying their spending increased. It is expected to be broadly flat next quarter, however.
Shortage of finance is cited as likely to limit capital authorisations over the coming year by the least number of firms since September 2008, and the cost of finance as a concern edged lower.
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