Two steps forward, one step back at Scottish financial service firms

FINANCIAL service firms' business volumes are expected to fall and profits remain flat over the next three months after activity rose modestly in the past quarter, an authoritative new survey says.

Activity in the sector climbed a little in the three months to December and profitability increased, helped by cost reductions and better profit margins, says today's report from the CBI and PricewaterhouseCoopers.

But banks – and securities traders in particular – do not expect the slight bounce in the sector, for the second consecutive quarter, to be sustained.

Steve Davies, head of financial services consulting at PricewaterhouseCoopers in Scotland, said: "It is probably two steps forward and one step back for Scotland's financial services sector. News on improved margins and cost management is tinged with a view that growth prospects are not good."

John Hitchens, UK banking leader at PwC, said: "The banks have weathered a lot in the last two years and feel they have got through the worst of it."

But he said banking confidence was tempered by the uncertain economic outlook "and a plethora of regulatory initiatives".

Hitchens said banks expected activity and revenues to fall over the coming quarter. "On the savings side, they don't have anything very attractive to offer at the moment with low interest rates," he added.

Hitchens said lending volumes remained "very low" as banks had to hold back a lot more capital to meet tougher regulatory demands, while demand was weak "reflecting the economy".

In the wider financial services sector – ranging from insurers to building societies and asset managers – a positive net balance of 4 per cent of respondents said business volumes rose in the quarter to December. This was lower than September's plus 7 per cent.

A net balance of minus 13 per cent of firms expected a reduction in business volumes over the coming quarter, the most negative expectation since December 2008.

Looking across the customer groups, the slight upturn in business with private individuals in the past quarter was not expected to continue into this quarter.

Ian McCafferty, the CBI's chief economic adviser, said: "Firms see their business volumes falling back again, with no better than flat profits."

McCafferty said the survey suggested further job losses in the financial services industry in the current quarter were expected to be "minimal", at about 5,000.

He said the sector had lost 61,000 jobs between its last employment peak in late 2007 and the end of 2009.

Despite caution about the current quarter, the survey showed that firms' confidence in the business situation continued to increase – with plus 31 per cent more optimistic than last September.