Credit crunch sees financial business volumes slump

Business volumes among financial services firms fell at their fastest rate for nearly 17 years during the past quarter as the credit crunch continued to bite, figures showed today.

The two-year run of strong growth in the sector came to an end during the three months to early December as the credit squeeze continued, according to the latest financial services survey from the CBI and PricewaterhouseCoopers.

A total of 44% of companies said business volumes had fallen during the period, while just 10% said they had increased.

This gave a net balance of minus 33%, the lowest level since March 1991 when minus 44% of firms reported a slide in activity.

At the same time business sentiment continued to worsen, with 49% of companies now saying they feel less optimistic than they did in September, while operating costs increased for the fourth quarter running.

A balance of 11% of firms also reported a drop in income from fees, commission and premiums, while income from interest, investment and trading fell at its fastest rate since the survey began in 1989.

Average spreads – the difference between the rates at which firms borrow and lend money – also narrowed again, and they are expected to compress further in the coming three months.

But despite this, several sectors of the industry managed to increase profitability during the period, with many still hiring staff and planning to increase investment, particularly in IT.

A fall in business levels with private individuals and financial institutions was behind much of the slowdown in business volumes, though demand from individual consumers is expected to stabilise during the coming three months.

Lending to companies held up better, and this is expected to pick up again going forward.

But despite the problems they faced as a result of the global credit crunch, financial services firms reported a surprise growth in profitability for the fourth quarter in a row.

Overall 6% more firms said profits had increased, less than the balance of 14% in the previous quarter’s survey, but better than the predicted balance of minus 14%, although this trend is not expected to continue into this year.

Seven out of 10 companies said they expected the credit crunch to last longer than six months, while the majority thought credit conditions would deteriorate further going forward.

A record 24% of firms thought their ability to raise funds would constrain their growth during the coming year, with this a particular concern among building societies at 92% and banks at 36%.

Ian McCafferty, CBI chief economic adviser, said: “After two years of strong growth there has been a clear turnaround within the financial services sector.

“The credit squeeze has delivered a sharp shock to business volumes over the past three months, and it seems that difficulties are likely to persist for some time yet.

“This is, however, a very resilient sector that sees better prospects over the horizon, and it is encouraging that profitability, job creation and investment plans are all still positive.”

Meanwhile, a survey by Deloitte found that 58% of chief financial officers at some of the country’s major companies think the recent turmoil in credit markets will adversely hit their businesses in 2008, up from 42% in September.

But 52% said they were optimistic about their ability to find alternatives to bank borrowing, such as raising money through capital debt markets and public and private equity, while 95% said they had additional financial resources that could be used to fund the business during the coming 12 months.

Three-quarters of those questioned said events in the credit markets had increased the price of credit and two-thirds said the availability of credit had reduced.