PwC: Finance sector prepares for long siege

Date: 31-03-2008
Source: Financial Times

Financial services institutions are slashing investment plans and trimming jobs in preparation for a "long siege", convinced they have not yet felt the worst of the credit squeeze, the CBI and PwC report on Monday.

In a quarterly survey of the industry, conducted by the employers' body and the professional services firm just before the latest shock of Bear Stearns' implosion, the vast majority of respondents thought market conditions would deteriorate and 90 per cent saw little hope of a return to normality within the next six months.

"While liquidity injections and interest rate cuts by the Bank of England will help shore up the system, neither will solve the fundamental problem of restoring trust," said Ian McCafferty, CBI chief economic adviser.

Fears of growing funding constraints and a prolonged slump in demand are spreading gloom even to areas of business relatively insulated from the immediate problems in credit markets.

Banks seem to be becoming inured to tougher conditions, with confidence declining less steeply than last quarter. But the survey shows a collapse in confidence among life assurers, as volatility in asset prices threatens both the returns on their portfolios and consumers' willingness to make new investments.

With institutions expecting business volumes, fees and investment income to fall further, there is little appetite for expansion in the sector that has propelled economic growth in recent years.

Twenty five per cent of respondents said they had cut jobs over the past few months, the highest rate since 2003, and a third said they planned to reduce headcount in the next quarter, although sweeping redundancies appear unlikely.

Fewer institutions want to offer new services or gain market share in the next year. The balance planning to cut capital spending on land, buildings and machinery was the largest since 1992.

Forty per cent thought difficulties raising funds could limit their ability to expand, compared with 24 per cent in December's survey. However, a much higher proportion thought sluggish demand would be a constraint, signalling that a slowdown in the real economy was the biggest worry.

Reflecting the stagnant housing market and strains on mortgage lenders, the survey suggests that lending to private individuals has fallen more sharply than corporate lending - although the balance of respondents expected the latter to contract over the next quarter.

One bright spot was the general insurance sector, where business volumes and profitability are still growing strongly, and institutions are splashing out on training and higher-paid staff.

Fund managers, still hiring aggressively, were the only sector where confidence had risen since December.

Banks will on Monday adopt a new version of the Banking Code committing them to responsible lending offering more help to customers facing financial difficulty. Banks will be required to identify customers who might be heading towards financial difficulty and give them helpful information.