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Financial services sector growth for the past three months is the fastest since June 2007

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Activity in the UK financial services sector grew in the past three months at the fastest rate since June 2007, although this growth was much slower than was expected, a new survey reveals.

Numbers employed rose in the sector for the first time since December 2007, and the balance of +12% was broadly in line with expectations (+14%). But a decline in headcount is expected again next quarter (-20%).
 
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, according to the latest CBI/PricewaterhouseCoopers Financial Services Survey.

Expenditure on training rose in the past 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.


Firms’ investment plans for the next 12 months are the most positive since December 2007 for information technology (IT). Investment plans for land and buildings and vehicles, plant and machinery have also improved, rising above their long-run averages, though are not as strong as IT.

Asked how their business volumes fared in the three months to June, 37% said volumes rose and 9% said they fell. The resulting balance of +28% is the most positive since June 2007 (+51%), although it fell short of expectations (+63%). A similar pace of growth is expected next quarter, by a balance of +24% of firms.

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, CBI chief economic adviser, said: "Activity picked up in the financial services sector in the past 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." 
 
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 (+28%). Next quarter, firms expect a similar growth in profitability.

The number of firms worried that statutory legislation will limit business expansion in the year ahead remains significant, but has fallen back further since the record high in March.

Following a spike in June, the proportion of firms believing there is a high likelihood of further deterioration in financial markets has fallen back to 10%. Concern has receded particularly in the insurance-related sectors. In all sectors, the majority does not expect normal financial conditions to return in the next six months, with the exception of investment management.