Finance firms shrug off bonus rows to report recovery in business levels

Despite the controversy over bonus payments, Britain's financial-services sector continued to recover during the final quarter of 2010, a report from the CBI reveals today, with businesses such as banking, insurance and investment reporting strong growth in activity.

The employers' group's data is a welcome boost following a string of reports in the past week that the economy had begun to falter, particularly in December when the cold weather wreaked havoc for many firms, especially in the service sector of the economy.
shedding jobs
The CBI said that 50 per cent of financial-services businesses had reported a growth in sales volumes during the three months to the end of December, while 23 per cent reported a fall. The positive balance, of 27 per cent, was almost identical to the corresponding figure of 28 per cent for the third quarter of 2010.

With financial services not affected by the weather, volumes improved in every part of the financial-services sector in the final quarter. However, the growth was not matched by an increase in profitability, with profits growing at their slowest pace for 18 months, according to the CBI's survey. Many firms also gave warning that they expected to see the pace at which volumes are growing to slow during the first three months of this year.

John Cridland, the CBI's director-general designate, said that the mixed picture and the cautious outlook was a reminder that the economic recovery would continue to be lumpy.

"Activity in the financial-services sector grew strongly over the second half of 2010, but firms see growth slowing over the coming three months, and expect another fairly moderate increase in profitability," he said.

"Numbers employed have fallen significantly and investment plans have weakened since September – this probably reflects renewed cost control given little growth in incomes and slower growth in profitability."

One particular worry is that the recovery in the financial-services sector, as in other parts of the economy, does not seem to be producing any significant boost for the jobs market, with companies instead focusing on keeping costs as low as possible.

In fact, the CBI said that numbers employed in finance fell at the fastest rate since March 1993 during the fourth quarter. The resulting negative balance of 48 per cent of employers shedding jobs as opposed to taking them on reflects that trend. And staff costs now account for a smaller proportion of total costs than at any time for more than 20 years.

One other anxiety is that in the crucial banking sector, many firms are nervous about the increasing cost of regulation – they also insist that while they are able to increase lending, the demand from businesses and consumers is not there, claims reflected in recent Bank of England surveys.

Andrew Gray, UK banking leader at PricewaterhouseCoopers, the accountancy firm that helps the CBI to compile the data, said confidence was improving among banks but said the focus on cost and efficiency levels would continue. "While almost all banks expect compliance spend to climb this year, they intend to reduce overall costs putting headcount under continued pressure," he said.

"Focus on balance-sheet management as the sole priority seems to have come to an end, allowing more focus on market positioning and business retention," he added. "Falling activity with financial institutions suggests some banks are now able to be more self sufficient and have more stable longer-term funding and reduced reliance on the inter-bank market."