A survey of 106 banks, insurers and asset managers by the Confederation of British Industry, an employers' group, and business services firm PricewaterhouseCoopers found firms enjoyed better-than-expected earnings in the final quarter of 2011 but expect business this year to be tougher.
The sovereign debt crisis roiling the euro zone continues to overshadow the industry, survey respondents said. The difficulties banks face getting funding because of investor nervousness about their potential losses from bad euro-zone government loans was given as one of the key factors likely to crimp investment in 2012. Weak demand for financial services and greater competition are likely to limit business expansion, firms said.
Ian McCafferty, the CBI's chief economic adviser, told reporters financial services companies shed about 9,000 jobs in the U.K. in the final three months of 2011 and the CBI expects another 11,000 job losses in the first quarter of this year. There were about 1.04 million people employed in financial services at the end of 2011.
The survey found firms experienced stronger-than-expected growth in business volumes in the final quarter of 2011, largely a result of greater activity in febrile financial markets. Banks said business volumes were higher than normal for the first time since June 2007. Income from interest, investment and trading grew at the quickest pace since June 2006, survey respondents said, while fees and commissions also rose, boosting profits.
Survey respondents said they expect business volumes and income to keep expanding in the first quarter, albeit at a much slower pace. And those expectations are tempered by increasing pessimism about the strength of the global economy.
"Firms are less optimistic, employment is down and investment intentions for this year are weaker, as concerns about the global recovery and ongoing troubles in the euro zone create uncertainty," McCafferty said. The industry contributes between 10% and 12% to the U.K.'s annual gross domestic product, and McCafferty said first-quarter output may be held back if funding conditions mean banks can't get the capital to fuel growth elsewhere in the economy.
The survey found one area where firms do expect to channel investment is in complying with regulations. Financial services firms in the U.K. face a slew of new rules, ranging from higher capital requirements for banks and insurers to stricter consumer protection requirements for financial advisers. Many come into force at the beginning of 2013.
And in an ominous sign for the U.K. economy in 2012, the survey also found banks expect bad loans to rise this year, particularly in their retail loan books.
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