Good news, but finance sector is still fragile

Published on Sunday 27 June 2010 21:37

FINANCIAL service sector activity is growing at its fastest pace since Northern Rock's collapse in 2007, with nearly two-thirds of firms expecting another rise in business volumes in the next three months.

• Sector growing at fastest rate since Northern Rock's collapse in 2007

A CBI/PricewaterhouseCoopers survey out today suggests sector profitability rose for the fourth quarter running, but there is a warning that business remains "well below normal" in a fragile economy.

Stephanie Bruce, financial services leader at PWC in Scotland, said: "The level of optimism that has been reflected in the last two surveys within the Scottish and UK financial services sector has continued, alongside encouraging levels of business activity."

Bruce said Scottish fund managers had enjoyed increased fee incomes and "strong levels of profitability". But she added: "The uncertainty in the strength of the financial markets is resulting in a more negative outlook for fee income levels."

Scotland is the second biggest UK financial centre, with more than 300 billion under management.

A total of 38 per cent of UK financial firms polled said business volumes rose in the three months to the beginning of June and 29 per cent said they fell.

CBI/PWC said the resulting positive balance of 9 per cent was the best since September 2007 – when there was a run on Northern Rock that led to the bank's nationalisation – "but was far weaker than expected".

In the next three months, a balance of plus 63 per cent of financial firms expected a rise in business volumes – the most positive expectation since December 1993, when it was plus 65 per cent.

Bruce said the financial sector was "still seeing a measure of caution emerging in a number of areas, with regulation a key factor".

Banks were the only sector to see business volumes fall in the period, while building societies and general insurers were flat.

"Healthy" volume growth was seen by life insurers, finance houses and stock market securities traders, the survey added. UK fund managers' volumes grew slightly, while insurance brokers saw volumes grow for the first time since March 2009.

John Cridland, CBI director-general, said: "The modest pick-up in activity in the past three months fell short of expectations."

He added: "This survey was conducted when financial markets were feeling the intense strain from fears over euro area sovereign debt and, for the first time in over a year, a notable minority of firms were worried that the risk of further market deterioration is high."

Bruce added that the future cost structure of the Scottish and UK financial sector remained "an area of differing views". But she added that average operating costs per transaction fell at a record pace (minus 51 per cent), helped by the modest rise in business volumes.

Numbers employed in the financial sector continued to fall, but only modestly (a balance of minus 6 per cent), and slightly less than expected.

"Firms now expect staff numbers to increase next quarter and, if this materialises, it will be the first increase since December 2007," the report said.

In a key indicator of renewed business confidence, the balance of financial firms planning to spend more on marketing in the coming year has risen to plus 53 per cent – the highest it has been in a decade.