Financial firms rebuild profits after a year of decline

Amanda Jarvis

October 8, 2002

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.

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