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Volumes continue to fall as crunch filters through

Nearly 50 per cent of firm’s saw their business volumes fall in the three months to March proving the financial services sector is continuing to feel the pinch.

CBI and PricewaterhouseCoopers founds firms expected to find it significantly more expensive to access finance for investment purposes and that the credit squeeze will worsen over the coming six months.

Of the 79 firms surveyed a record 44 per cent reported a fall in the value of fees, commissions and premiums while income from net interest, investment and trading also fell sharply again. Both of these income categories are expected to fall heavily again over the next three months.

Total operating costs, excluding the cost of funds, grew, although this was at a slower rate than the previous four surveys and they are expected to be flat over the next three months. Average operating costs per transaction fell back slightly, after growing at the fastest rate in 17 years in the last survey, and this measure is expected to fall markedly over the coming quarter.

The sector’s profitability has dipped sharply, after holding up last quarter, with 18 per cent reporting a fall. This is the most negative figure since March 2003. But profitability is expected to stabilise in the coming three months.

A quarter of respondents said they had cut jobs over the past three months which is the highest rate for five years and against expectations that numbers employed would increase marginally. A third of firms are expecting numbers employed to decrease over the next few months. This is the weakest figure since December 2002.

Plans for capital investment in the year ahead do not look good, with spending on IT flat and intentions for land and buildings, vehicles and plant machinery the lowest since June 1992. But plans for marketing expenditure have picked up.

The amount of lending to private individuals fell sharply again in the three months to March with 28 per cent reporting a decline. But lending to industrial and commercial companies continued to increase at a slightly faster rate than it did in December.

Even more firms believe the credit squeeze will be more prolonged than was recorded three months ago with 90 per cent believing it will last longer than six months compared with 70 per cent last quarter. A serious 97 per cent believe credit conditions will get worse in the next six months.

CBI chief economic adviser Ian McCafferty says: “It is clear that the credit crunch has worsened over the first three months of this year. The interbank markets have become more gummed up, with banks even more unwilling to lend, and credit spreads have widened. 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 within the markets.

“Credit markets are unlikely to return to anything like normality for some time to come. And even when they do, we will not see a return to the very favourable lending conditions that existed before August. We can expect further tough times in the financial sector, as this feeds through into the wider economy, will inevitably be felt through slower economic growth this year and next.”

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