Financial firms rebuild profits after a year of decline

The latest quarterly survey by the CBI and PricewaterhouseCoopers

will disappoint companies, which saw volumes grow at the fastest

rate for two and a half years in the previous quarter.

But business has stabilised at a much more buoyant level than at

the turn of the year and firms expect a modest improvement in the

run up to Christmas.

Despite falling levels of business, overall profitability has

grown for a second successive quarter, though at a slower rate. A

balance of plus 16 in this survey compares with plus 26 in the

second quarter of 2002. Profitability had been in decline for a

year until the June survey but it is now expected to go on rising

over the next three months.

Reflecting the drive to hold down outgoings, firms expect to

invest significantly less in land, buildings, vehicles, plant and

machinery over the next 12 months than they did in the last 12.

Spending on IT and marketing are the exceptions with modest

increases in spending expected.

John Hitchins, UK banking leader at PricewaterhouseCoopers, said:

“Uncertainty remains a key theme for the industry. No one is

prepared to predict the timing of a stock market recovery and

there is concern that the growth in consumer spending and house

prices is coming to an end. Overall confidence remained stable

though, underpinned by progress in controlling costs.”

There has been a large increase in uncertainty about future

demand. It has taken over from inadequate returns as the most

common restraint on capital spending. It was cited by 70 per cent

of respondents which is the highest number since 1995. That

compares with fifty per cent in the June survey.

Labour shortages continue to slip in importance as a restraint.

They were mentioned by only 13 per cent of respondents. Job

cutting earlier in the year means there is a large pool of

potential recruits.

Employment in financial services held up over the last quarter but

there is expected to be a return to sharp reductions over the next

quarter as cost cutting continues. Thirteen per cent expect

employment to rise, 32 per cent expect it to fall. However in each

of the last four quarters employment has held up better than

expectations had indicated.

Ian McCafferty, CBI Chief Economist, said:”The outlook remains

difficult for financial services firms both in terms of the amount

of business they’re doing and the income it’s generating. But

great strides have been made in reducing costs. That has enabled

profitability to increase.

“In the year ahead cash flow will be further buoyed up by a tough

approach to expenditure on fixed capital, but plans to increase

spending on marketing and IT suggest that the sector is not

neglecting its long term prospects.”

General insurers and life assurers have reported the biggest

increase in business while fund managers and securities traders

have reported the biggest falls.

The CBI/PricewaterhouseCoopers survey includes a section on

financial services firms’ use of e-business. This time it shows

the strong growth in the value of business over the internet

recorded in the first half of 2002 has slowed. For the second

survey in a row more firms have not seen their hopes for internet

business met than have seen them met.

However 38 per cent of respondents have launched an on-line brand.

That is the highest figure since the e-business section of the

survey began in December 2000. The percentage saying they have not

launched an on-line brand has continued to fall. In March it was

at a record high of 74 per cent while in this survey it is down to

57 per cent.