Profitability fell at a record pace and business volumes fell at the fastest rate in 17 years, according to the latest Financial Services Survey from the CBI and PricewaterhouseCoopers LLP. The survey also showed that credit remains expensive and in short supply with the gap between lending and borrowing rates widening more than at any time in the survey's history.
Questions on the credit crunch – asked now for a third successive survey – suggested that firms believe there is a lower risk of further deterioration in financial market conditions than there was three months ago. However, 91% believe it will take longer than six months for normal conditions to resume. The main concerns regarding the short term effects of the credit crunch are increased funding costs and reduced sales and revenue growth. Asset devaluation is a much greater worry in the medium term.
Asked about business volume trends in the three months to early June, 20 per cent of firms said they had risen, while 55 per cent said they had decreased. The resulting balance of -35% was in line with expectations, but was the weakest result since March 1991 (-44%). The outlook for the coming three months is bleaker still, with a balance of 44 per cent expecting business volumes to fall.
Financial services firms had expected profitability in the sector to remain stable but instead it dived sharply, with a balance of 44% reporting a fall, compared with 18% in March. This is the fastest rate of decline in profitability since the survey began in late 1989, and another heavy fall is anticipated over the next quarter.
In the last three months the value of fee, commission and premium incomes and incomes from net interest, investment or trading both fell for the third consecutive quarter, but at slower rates than reported in March. Over the coming three months firms expect further falls at similar rates to this quarter.
Business sentiment recorded its steepest fall since September 1990, as a balance of 57% said they are less optimistic about the overall business situation in the financial services sector than they were in March.
Average spreads, which mark the difference between the rates at which money is borrowed and lent, built on the strong increase of the March survey and again widened more than expected - the 51% balance is a survey record high. The increases in spreads were strongest among banks and building societies. The value of non-performing loans, or bad debt, rose markedly (a balance of +16%) and a similar rate is expected in the three months ahead.
Firms expect that the most significant barrier to limit business over the next 12 months will be the level of demand, but they are less worried about competition or the adequacy of systems capacity than they have been for the past few years.
