Cautious optimism in financial services, but tough year ahead

BATTERED, beleaguered and besieged it may be, but the first sign that the UK's financial services industry could be on the road to a "gradual recovery" emerges today.

According to a survey by one of the country's major business groups, financial services firms are more upbeat than they have been for two years.

Despite continuing falls in levels of business, income and profitability – alongside continuing job losses – there are now glimmers of hope across the sector.

According to the CBI survey, parts of the financial services sector, including insurance firms, are hopeful that business volumes will rise in the coming quarter.

However, the tentative optimism has been tempered by a warning that the year ahead will continue to be tough, particularly in banking.

The results of the survey will give some hope to Scotland's embattled financial services industry which has been retrenching in the face of bank-induced recession.

Although institutions including the Royal Bank of Scotland and HBOS, now part of Lloyds, have taken a pummelling, insurance groups such as Standard Life, while not immune to the effects of the recession, have weathered the worst of the downturn.

According to the survey, when asked how business volumes fared in the last quarter, 22 per cent of those surveyed said they rose, while 50 per cent said they fell.

The resulting balance of 28 per cent reporting declines was worse than previously expected, but a significant improvement on the 47 per cent seen in the previous quarter.

Looking to the future, firms' optimism rose for the first time since March 2007, with a balance of 11 per cent expecting business volumes to rise in the coming three months.

Ian McCafferty, chief economic adviser at the CBI, said: "Having seen business volumes tumble continuously for 21 months, some parts of the financial services sector look like they may be starting to come through the worst.

"The pace of decline in incomes and profitability is slowing, and business volumes are expected to rise in the next quarter."

But McCafferty warned that "conditions remain challenging, particularly for the banks".

He continued: "Although demand looks like it is beginning to recover, it is doing so from a very low base.

"We can still expect lower profitability, significant job losses and cuts to investment in the coming months. The rising levels of bad debt are a further worry for the industry."

A balance of 23 per cent of firms saw profitability fall in the last quarter, compared with a balance of 47 per cent reporting declines in March.

Staff levels continued to fall sharply, although at a slower rate than in the previous quarter, with a balance of 33 per cent reporting cuts to their workforce in the last three months and 28 per cent anticipating a reduction in the coming quarter.

Owen Kelly, chief executive of industry body Scottish Financial Enterprise, said: "This rings bells with us, reporting as it does a range of views across what is a diverse industry, especially in Scotland.

"It is good to hear that the outlook in some areas, such as insurance, is increasingly optimistic, but there is still a lot of uncertainty to deal with."