Financial services are enjoying a resurgence with rising levels of business, jobs and profits despite the tough conditions afflicting the rest of the economy.
The sector recovered from a year of shrinking or stable volumes to grow briskly in the three months to September 2005, a stark contrast to a year ago when volumes were the lowest since December 1992.
This upbeat picture emerges in the quarterly Financial Services Survey published today by the CBI and PricewaterhouseCoopers.
The report, conducted since 1989, covers the major financial services including banks, building societies, traders, fund managers, insurance companies and brokers.
Employers recruited staff to deal with the new business: 25% more took on employees than shed them and a net 29% expect to do so next quarter as business volumes are forecast to grow again. The associated higher wage bill forced up overall costs (a balance of 21% of companies reported a rise) but, with business expanding, average costs per transaction fell.
Company income – from fees, commission, interest, investment and trading rose and is expected to do so again next quarter. This reflects the increase in business volumes (for a balance of 8% of firms) and outweighed the impact of continued weak pricing power. As a result overall profitability grew, a balance of 21% recorded a rise, despite the increase in costs.
The constraints on pricing power were seen in shrinking spreads (the difference between the rates at which money is borrowed and lent, for example), and, in all likelihood, reflect the fierce degree of competition within the sector. The latter was cited as the biggest likely constraint on growth over the next 12 months. Worries about lack of demand fell markedly to the lowest level since December 1999.
The only dark cloud on the horizon is the increase in non-performing loans, where customers are not paying interest or repaying capital as agreed for some parts of the sector, notably building societies and finance houses.
Overall, financial services firms are optimistic about their prospects for the next quarter and this confidence is reflected in the fact that firms expect to invest more in IT, land and buildings over the next 12 months and increase their marketing too.
Ian McCafferty, chief economic adviser for CBI, says: “It is pleasing that volumes, profitability and employment are all increasing again in financial services after the recent lull. However it is important to keep this in context.
The factors behind financial services growth are different to those affecting the rest of the economy where conditions remain tough.
“In particular, the financial services sector is boosted by consumer decisions to save as well as borrow. Some firms have also benefited from rising stock markets. It would be very satisfying if this survey turned out to be the signal for a revival in the wider economy – but the odds are stacked against it.”
Building societies continued to report a decline in demand from their main customers, namely private individuals, although their profits were protected by increased fees and commission. Finance houses, in contrast, saw volumes rebound after a fall. Both suffered with the growth in value of non-performing loans – the trend for building societies was the highest since March 1993 when the housing market was in the doldrums after the last recession.
Banks reported a small increase in profitability, despite the squeeze on spreads and a small rise in non-performing loans, as the volume and value of their business grew and costs fell.
Insurance companies saw a solid growth in demand, income and profitability and are confident about the future. Brokers also reported increasing business volumes the trend of increasing volumes was the highest since September 2001, which are driving up profits and optimism. Life insurers saw strong income growth but profitability was checked by falling spreads and rising costs.
One notable point has been the strong rise in business volumes and profits for fund managers, driven by both individuals and institutional investors.
This is likely to be a result of diversification of their product range as well as a reflection of the stock market resurgence. Securities traders saw a resurgence in income and profitability after a slump in the previous quarter.
The amount of online business continued to grow strongly, as it has for more than a year, and is predicted to continue although security remains a concern for business development.
John Hitchins, UK banking leader at PricewaterhouseCoopers, says: “The survey shows that the recovery in business activity is gathering pace across most parts of the financial services industry.
“Optimism, however, was muted reflecting concerns over the fragile state of the economy in the short term. Looking longer term, strengthening trends in marketing and investment intentions suggest a stronger underlying confidence.”