Financial services upbeat despite Cyprus worries

FINANCIAL services activity bounced back strongly in the three months to March, with a “robust rise” in business volumes and an increase in profits, according to figures published today.

Banks, in particular, said they were more optimistic and expected volumes and profits to rise again in the next quarter, according to the financial services survey compiled by the CBI and accountancy firm PwC.

Matthew Fell, the CBI’s director for competitive markets, said: “This has been a strong quarter for the financial services sector, with robust growth in business volumes, an increase in profitability and upbeat investment intentions.” However, he warned that – as the survey was completed on 7 March before the financial crisis in Cyprus broke – there might be fears going forward of further eurozone volatility. “Recent problems in Cyprus risk reigniting concerns about eurozone stability,” Fell added.

Despite such headwinds, with increasing regulatory pressures also cited, the survey was upbeat, disclosing that employment in the sector rose by about 2,000 in the latest quarter after three consecutive quarters of decline.

Most firms expect further jobs growth this quarter. A total of 48 per cent of firms said business volumes increased and 17 per cent reported a fall, giving a positive balance of 32 per cent.

Volumes grew in all customer categories, with industrial and commercial up 20 per cent, financial institutions up 12 per cent, private individuals ahead 16 per cent and overseas customers up 8 per cent.

Nearly 40 per cent of firms expect volumes to grow again in the next three months, while 12 per cent expect a fall – giving a positive balance of 32 per cent. Just over one in three firms said profits increased, with average profit margins widening and 15 per cent reported a fall – a balance of plus 19 per cent.

Steve Davies, a partner in PwC’s retail and commercial banking, said the banks’ return to confidence in the previous quarter had continued in the period to March, and that high street and mid-sized business lending were expected to improve further.

However, he said that “a significant number of banks” were putting investment plans on hold due to the risk of inadequate returns.

Stephanie Bruce, head of financial services at PwC in Scotland, warned that the Bank of England’s directive last week that banks had to find £25 billion of extra capital by the end of this year to guard against potential losses meant the sector “could be excused for thinking the goalposts have been moved again for them”.

Meanwhile, Davies said that the impact of the Cyprus implosion on sentiment should not be overplayed “as it has been on the UK banks’ radar for some time”.

Fund management volumes saw their strongest rise since December 2010, with profits up for the fifth quarter running.

PwC partner UK asset manager Paula Smith said: “Investment managers remain remarkably confident, thanks to good equity market performance and particularly strong retailbusiness.” Securities trading profits lifted for the first time in two years, the report said, with fees, commissions and premiums rising at their fastest since December 2010. Building societies’ 
optimism rose at its fastest in seven years “as growth in business volumes surpassed expectations”.

By contrast, volumes fell in both life and general insurance, in the former for the first time since December 2009.

The survey said general insurance suffered from “reduced pricing power”, but still expected business to rally across personal and commercial lines in the coming months.