Financial services sector suffers bloody nose in summer months

BRITAIN’S financial services sector has seen business volumes slide unexpectedly in a “tough quarter” in the three months to September, triggering the first fall in profitability in more than three years, a new survey has revealed.

The latest survey from the CBI employers group and accountant PriceWaterhouseCoopers (PwC) today also reveals that 9,000 jobs were shed in the industry in the period – with more to follow this year.

The overall level of business in the financial services sector was considered to be “substantially below normal”,
indicating the biggest slump since March 2010.

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Kevin Burrowes, UK banking head at PwC, said: “Growth in retail banking has come to a halt as the banks focus more on commercial than consumer lending.”

Today’s report says banking was the only sector to increase profits in the three months to September, with widening profit margins offsetting lower volumes. Profits in life insurance, general insurance and securities trading all declined, while building societies and finance houses’ earnings were flat.

In what many see as an unhelpful environment for the imminent initial flotation of Royal Bank of Scotland’s Direct Line business, the survey says the general insurance sector saw business volumes and optimism fall “despite expectations of robust [volume] growth”. Further falls were expected over the next quarter.

Mark Stephens, UK insurance leader at PwC, commented: “For general insurers, volumes and premiums have declined again, confounding hopes of a sector recovery anytime soon.”

Securities traders were also among the most pessimistic sub-sectors, the survey says, with a weak mergers and acquisitions market, and flotations at historic lows, undermining sentiment.

However, a balance of plus 12 per cent of firms felt business volumes would recover in the next three months as the economy was expected to bump along the bottom rather than deteriorate.

Matthew Fell, the CBI’s director for competitive markets, said: “The financial services sector has faced a tough quarter, with sales volumes unexpectedly falling and average costs rising, thus denting profits. Sentiment about the business situation also continued to fall.”

However, Fell added that financial services companies expected a recovery in the final quarter of 2012. “They see this as a blip. They don’t see this as part of a sustained downwards trajectory,” he added.

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Fell said that in response to the fall in business demand “employment fell for the second consecutive quarter and at a faster pace than in the previous quarter, and contrary to expectations”.

The CBI/PwC report says after the 9,000 jobs cut in the industry in the latest quarter, another 3,000 are expected in the next three months.

The biggest cost pressure on financial services remained added regulation, ranging from capital requirements for banks to Solvency II rules for insurers. Fell added that one difficulty for firms meeting extra regulatory costs was that “they are shooting against a still-moving regulatory backdrop”.

Of more than 100 financial services firms that responded to the survey, 30 per cent saw business volumes rise, and 49 per cent reported a fall.