| Profits fall further in financial sector |
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| Written by Adrie van der Luijt | |
| Monday, 30 June 2008 | |
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Page 2 of 2 BankingBanks raised the spread between borrowing and lending costs by a record degree, yet still saw a further deterioration in their profitability as a result of falls in the volume of business and a rise in the value of non-performing loans. These trends are expected to continue next quarter, though spread widening will be slightly less severe. Numbers employed fell further, and banks also plan to spend less on marketing in the year ahead than they did last year. Business volumes rose in the past three months against expectations and are expected to hold steady in the coming quarter. Profitability fell on the back of lower fee and commission incomes, however, and a rise in the value of non-performing loans. Employment fell for the first time in a decade, while investment intentions are largely positive. John Hitchins, UK banking leader at PricewaterhouseCoopers, said that banks had 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. Asset writedowns continue to impact profitability,” he added. Hitchins explained that although the outlook for employment remained negative, investment budgets had stabilised and growth in compliance costs was seen as slowing to a more manageable pace. Life insurance Business volumes fell at their fastest rate since the survey began and are forecast to fall very rapidly again in the next three months. The fall in volumes was concentrated in business with private individuals, but did not spread as feared to companies and financial institutions. Average spreads increased at their fastest rate since the survey began and total operating costs fell for a fourth successive survey. Lower income values and business volumes still resulted in a sharp fall in profitability – the strongest in the survey history. General insurance Profitability fell over the past three months, following growth in the previous two quarters. Spreads continued to widen, but business volumes and income values were down. The fall in business volumes was concentrated on industrial and commercial companies and overseas customers, as business to private individuals continued to rise. Investment intentions for capital and marketing were weaker than in the previous survey, although firms continued to take on additional staff. Andrew Kail, UK insurance leader at PricewaterhouseCoopers, said that general insurers no longer feel somewhat insulated from the effects of the credit crunch, in contrast to last quarter. “The fall in confidence was the steepest for four years, and is accompanied by downbeat responses on volumes, revenues, customer activity and profitability. A re-evaluation of the economic outlook is the most likely cause and maintaining profitability is now the sector's dominant concern," Kail noted. He warned that life insurers have reported their steepest decline yet for profitability and said that new business is expected to continue to fall, investment business is under threat from perceived market volatility and demand for protection products is being affected by the slowdown in the housing market. “The slowdown is putting pressure on the sector's own investment and capital plans. Life insurers intend to commit less capital to IT projects and look likely to reduce headcount," Kail concluded. Securities trading Volumes of business fell sharply for a third successive survey and the level of business was considered to be well below normal. Fee and commission income and the value of interest, investment or trading income also fell for the third successive survey, albeit by much less than expected in the case of the former. Profitability fell, as sharply lower levels of business offset a first fall in total operating costs for three years. Fund management Contrary to expectations, business volumes in fund management rose sharply for a third successive quarter, reflecting healthy growth to overseas customers. Fee and commission income was up, although profitability was sharply lower. This mainly reflected a steep increase in total operating costs and further investment in staff and staff training. Marketing expenditure is expected to be sharply increased over the next twelve months. Robert Mellor, UK financial services tax leader at PricewaterhouseCoopers, said that securities traders' confidence had declined further. He pointed out that they tend to be one of the industry's most pessimistic sectors in their assessment of financial market conditions and also one of the most concerned about the impact of falling revenues on their business. Although the secondary markets are busy, including derivatives and commodities, Mellor said that securities traders are increasingly focused on recalibrating their cost bases for a lower volume world and the share of respondents reporting cuts in total operating costs is the highest since 2002. "Despite a successful quarter of asset gathering, predominantly with foreign customers, and healthy activity over the past three months, fund managers' profitability is under pressure. The sector remains upbeat, however, in its plans for increased headcount and higher marketing expenditure," he concluded. Related articles
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