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Profitability fell at a record pace over the past quarter and business volumes fell at the fastest rate in 17 years, a new survey said on Monday.

The latest Financial Services Survey from the CBI and PricewaterhouseCoopers LLP 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.

Job cuts continued 

Job cuts have continued and business has been lost across all customer bases. Although the credit crunch has already been underway for ten months, nine out of ten firms (91 per cent) think it will 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 -35 per cent was in line with expectations, but was the weakest result since March 1991 (-44 per cent). 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 per cent reporting a fall, compared with 18 per cent 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.

Less optimistic 

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 continued to fall, (-23 per cent and -28 per cent respectively) while a pick-up in volumes with overseas customers failed to materialise.

Total operating costs fell sharply (a balance of -23 per cent) at the fastest rate since December 1993 (-49 per cent), given the steep decline in business volumes and firms’ efforts to trim costs. Total costs are expected to fall again over the next three months at a similar rate.

Average operating costs per transaction stayed flat, however, and are expected to remain so next quarter. 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 per cent balance is a survey record high.

Marketing spending down 

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 per cent) and a similar rate is expected in the three months ahead.

Jobs were again lost in the sector, and a balance of 22 per cent reported a fall in numbers employed, but this outcome was not as bad as predicted, and slightly slower than in the March survey. A balance of 19 per cent expects to cut jobs over the next three months.

In a sign that firms are cutting back to weather difficult times, a balance of 16 per cent expects to spend less on marketing in the next 12 months than they did in the past 12 months, which is the first planned reduction since June 2003. Planned IT capital expenditure is also well below its long run average.

Concern about the cost of finance as a constraint to investment edged higher to a new record high (26 per cent), while worries that the ability to raise funds might limit business in the year ahead fell back slightly from the survey high in March (40 per cent down to 32 per cent).

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.

Increased funding costs 

Supplementary 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.

Ninety-one per cent believe, however, that 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.

Ian McCafferty, CBI chief economic adviser, said that the impact of the credit crunch on financial services has deepened over the last three months, and conditions look set to remain difficult for some time yet.

He pointed out 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 eighteen 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. The problems of the financial sector will echo throughout the wider economy and will drag economic growth down this year and next," McCafferty added.

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