PwC Quarterly UK Financial Services Survey Reveals Pessimism and Despair

A recent survey conducted by PricewaterhouseCoopers in the UK reveals that participants in the financial services industry are heavily weighed down by poor sentiment, and that recovery is further away than initially anticipated.

There are ongoing concerns over liquidity in the capital and credit markets, despite commendable efforts from central banks across the globe; and the numbers being reported for asset write-downs are still large. US recession predictions abound, with US consumer demand eventually starting to weaken. Industry players would not be surprised by reports of further risks and losses being revealed.

PwC says that all major financial services subsectors in the UK are showing concern over top-line growth, with 2008 second quarter volumes and revenue streams expected to decline. “There is a growing consensus that normality will only surface in 2009, and the credit crunch will impact on profitability to a far greater degree than originally estimated. The industry is beginning to adapt to these conditions and the overall employment outlook in financial services is the most negative in five years.”

In the banking subsector, credit market concerns have extended to worries about the broader economy. Despite some success in repricing key lending products, the outlook for investment banking is negative. Corporate and commercial banking activity is holding up, whereas the retail side is cooling off somewhat. Banks are holding back on capital spending and are reluctant to invest in new services or customer acquisitions. The outlook for staffing levels is the weakest since 1995, but it is one of a more cautious attitude rather than extreme job cutting. Banks have also expressed concern over increased regulation and legislation that could be pushed through more quickly in response to the credit crisis.

Despite a slowdown in mortgages and house price inflation, building societies have managed to attract new retail and commercial deposits, and the traditional model has pleasingly survived the crisis. In fact, quarter one showed a pick up in activity and in lending spreads, which is more profitable for the margins in this subsector.

General insurers have remained isolated from the crunch and remain confident in their ability to raise capital funding, should they so need it. Most players indicated a minimal exposure to illiquid credit instruments.

“In contrast”, says PwC, “life insurers are increasingly despondent as uncertainty in the markets has a direct impact on consumer spending patterns. The cooling property market and falling equity prices are believed to have a marked effect on the consumer, who will shy away from long-term spending decisions at this point in time. Cost reductions, head count pressure and compliance and disclosure issues, all weigh on this subsector. And their own massive investment portfolios are also being knocked around by the continued volatility in markets.”

In the securities trading subsector, profitability is falling fast and there are signs are further cost and staff reductions. Despite world exchanges reporting some record months of trading activity, the securities houses are seeing and forecasting declining volumes and revenues. Secondary market activities in equities and bonds is extremely buoyant so the drag is coming from primary activities such as corporate transactions, investment banking and in particular, structured finance. Profits are being slashed by having to hold on to asset-backed security positions for longer than anticipated.

Fund managers are the only players to report a more positive outlook this quarter round. “This is surprising, considering equity market declines and volatility, investors moving strongly into cash and negative fund flows. They see this year to be one of great focus on asset valuations and clearer reporting on the valuation techniques used, especially in the alternative asset classes.”

In questioning whether the same trends are visible in South Africa, PwC AIMS director, Mark Claassen, says that there all already signs of deterioration in the local life insurance sector. “In times of market volatility, increasing interest rates and pressure on consumer’s disposable incomes, insurance companies generally feel the heat through policy terminations, lower volumes of sales and mobility of corporate business as clients seek to reduce employee benefit costs. All of these problems are already manifest in the current down-turn and exacerbate other business issues the life insurers are wrestling with. Companies with weak brand loyalty and poor controls are going to be hard hit, and sustaining revenue growth is going to be difficult”.

Ernst Maritz, PwC advisory director for financial services is however more positive, He says that South Africa is still underinsured and unbanked and there is significant room for revenue growth through alternative channels.

This 74 th PwC UK quarterly survey was carried out between 20th February and 5th March 2008, shortly before the most recent US Fed Reserve 75 basis point rate cut and the JP Morgan Fed-assisted rescue of Bear Stearns. A total of 79 companies responded, being banks, building societies, finance houses, securities traders, fund managers, commodity brokers, private equity firms, insurance companies and insurance brokers. The survey was conducted in partnership with the Confederation of British Industry.