Financial services firms remain optimistic

Growth is expected to resume over the next three months, and companies plan higher investment expenditure in the year ahead. This optimism comes despite growth expectations in the previous survey being dashed for most sectors - although those focussed on personal customers did report expansion.

The quarterly survey has been conducted since 1989 and covers all sectors of the financial services - including banks, building societies, traders, fund managers, insurance companies and brokers.

June's survey found that 33 per cent of financial services firms said their business volume had increased during the past three months, whilst the same percentage said business decreased. There was a small decline in profits as pricing power weakened, with a balance of minus seven per cent reporting a fall.

Looking forward, a balance of six per cent of companies expect business to increase over the coming three months, with a balance of 14 per cent expecting profits to rise. Output prices and employment levels are also expected to increase, although a modest rise in costs is also foreseen.

Doug Godden, Head of Economic Analysis at the CBI, said: "Subdued activity has combined with weakening pricing power to depress profitability, despite financial services firms continuing to keep a tight grip on costs. But looking ahead, firms in this sector seem reasonably confident. The expectations of growth and increasing profits, although modest by past standards, are nevertheless encouraging following a period of stagnation. And sagging demand over the last three months did not stop them increasing their headcounts and training expenditure, with more of the same planned for the next quarter."

Financial services firms expect to step up investment in land and buildings and IT over the next twelve months, more so than in the previous survey. Firms also continue to plan increased marketing expenditure.

Competition remains the most likely constraint to business over the coming year, followed closely by the level of demand. The most important constraint to investment is seen as inadequate net returns, with uncertainty about demand easing as an issue since the last survey.

Significant variation exists between different sectors of the financial services industry. Finance houses, securities traders and building societies saw big falls in business levels, whilst general insurance and fund management saw significant growth.

Reflecting the fall in business, profits were hit hard at finance houses and securities traders, yet building societies showed strong profits - reflecting a significant increase in the value of their fee income. The banking sector also saw a substantial fall in profits despite unchanged business levels.

Most sectors expect growth in employment levels, although finance houses predicted a significant decline.

Despite the overall absence of growth in the financial services, there was aggressive expansion in e-business transactions - with a margin of plus 60 per cent of companies saying the value of business carried out over the internet increased in the last three months. e-business transactions have grown consistently since monitoring began in December 2000.

John Hitchins, UK Banking Leader at PricewaterhouseCoopers, said: "The last quarter has been disappointingly flat overall, although certain sectors, particularly life and general insurance, fared better. Business volumes from private individuals saw the strongest growth, which is an encouraging sign that customers are starting to save more as the consumer spending boom slows down. In the longer term, the industry continues to be cautiously optimistic, with an expectation of modest growth in profits and a focus on investment in IT, marketing and property refurbishment."