By Daniel Hunter

Financial services firms’ profits increased in the three months to December and optimism improved, despite a further fall in business volumes.

Of the 94 companies that responded to the CBI/PwC survey, 25% saw business volumes rise, and 30% reported a fall. The resulting balance of -5% represented the second consecutive quarterly decline and disappointed expectations of a return to moderate growth (+12%).

Business volumes fell across all customer categories: industrial and commercial companies (-11%), financial institutions (-21%), private individuals (-9%) and overseas customers (-19%).

But growth in volumes is expected to resume next quarter (+34%), and companies are more optimistic about the overall business situation than three months ago (+27%) - the first rise in sentiment since March 2012 (+32%).

A further widening in spreads (+8%), lower total costs (-4%) and an increase in income values, both from fees, commissions and premiums (+12%), and from net interest, investment and trading (+6%) helped profits rebound (+23%), following last quarter’s fall (-6%).

“Companies managed to increase profits this quarter even though business volumes fell slightly," Matthew Fell, CBI Director for Competitive Markets, said.

“It’s encouraging that firms are more optimistic about their business situation than they were last quarter and expect volumes to rebound strongly in the three months ahead.

“However, there is rising concern that staff shortages are likely to limit business and investment over the next year, as well as the challenge of raising finance.”

The number of people employed in the financial services sector fell more sharply than expected (-31% compared with -9%). This was the third consecutive quarterly decline and headcount is expected to fall strongly again next quarter (-25%). Staff turnover was also higher than expected (+23% compared with +4%).

As a result, staffing constraints picked up noticeably. The proportion of survey respondents citing availability of professional staff as a factor likely to limit the level of business over the next year rose to its highest level (32%) since March 2006 (39%). Shortage of labour was also cited by 37% of respondents as likely to constrain investment over the year ahead — the highest proportion since June 2007.

Looking at the year ahead, investment intentions are mixed, with marketing spend still expected to increase relative to the past year (+30% - the strongest balance since March 2011; +67%) and IT investment also set to rise (+11%). However, investment plans for IT have been scaled back over the past year, and firms plan to spend less on land and buildings (-31%) and vehicles, plant and machinery (-39%) in the year ahead.

There was a significant increase in the number of firms planning to invest over the coming year to expand capacity (50% compared with 15% in September). At the same time, uncertainty about demand as a constraint on planned spending fell back sharply (from 73% to 36%), to well below its long-run average (51%). However, more companies cited the cost of finance as an investment constraint (15% - the highest in two years), while 26% said the ability to raise funds would constrain the level of business in the year ahead — the highest since December 2008 (31%).

Meanwhile, regulation has fallen back as a motivation for investment (cited by 50% of firms) to around its long-run average (47%), but remains a significant constraint on the level of business over the year ahead (cited by 56% compared to a long run average of 31%).

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