The impact of the credit crunch on financial services firms – now one of the most important sectors of the UK economy – has worsened over the past few months.
And conditions are not expected to ease until the end of the year, according to a new report published on Monday.
A survey by PricewaterhouseCoopers and the CBI showed that jobs have been cut and business has been lost since the economic problems took off a year ago. Most of the 87 firms polled thought it would take more than six months for market conditions to return to normal.
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 minus 35 per cent was in line with expectations, but was the weakest result since March 1991. The outlook for the coming three months is bleaker still, with a balance of 44 per cent expecting business volumes to fall.
Ian McCafferty, the CBI’s chief economic adviser, said: “Although credit markets have been somewhat calmer of late, the interbank lending system is still looking gummed up, and spreads have widened more than at any time in the past 18 years.
“Profitability in the sector is being badly hit, so firms are trying hard to trim costs by planning to cut back on training and marketing for the first time in a number of years.”
John Hitchins of PwC added: “Banks have made their gloomiest profitability prediction since 1994 and sentiment in the sector has fallen the most sharply since 1998. Volumes of business are declining faster than expected and economic worries are broadening from the retail arena to include the commercial sector.”
David Waller, regional chairman at PwC in the Midlands, also said: “The impact of the credit crunch on financial services companies in the region has deepened over the last three months and conditions look set to remain difficult for some time yet.
“Although we have not been as hard hit as other parts of the country so far. Profitability in the sector is being eroded, so firms are trying hard to trim costs by planning to cut back on training and marketing for the first time in a number of years.The problems facing the financial sector will echo throughout the wider economy and will inevitably have a dampening effect on economic growth this year and next.”
According to the report, 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 per cent said they are less optimistic about the overall business situation in the financial services sector than they were in March.
Business volumes with industrial and commercial companies, which had been holding up so far during the credit crunch, fell for the first time since March 2005 (a balance of -16 per cent) and are expected to fall more heavily over the coming three months (-33 per cent). Business volumes with financial institutions and private individuals also continued to fall, (-23 per cent and -28 per cent respectively).