By Max Clarke

The UK’s financial services sector continues to grow, though at a slower pace than the previous two quarters.

33% of business questioned in the joint Confederation of British Industry/ PwC Financial Services Survey reported a rise in business volumes, whilst 24% reported a fall. The +10% balance (rounded) is the lowest reading since March 2009.

“After a torrid couple of months on global financial markets, the mood has clearly darkened,” commented Ian McCafferty, Chief Economic Adviser at the CBI. “Uncertainty about future demand, worries about the global recovery and shifting regulatory sands are weighing on sentiment.”

Bankers’ business sentiment was a little lower for the second consecutive quarter, with little change in the volume of business during the past three months. Banking profitability improved as both main sources of income increased and costs grew only marginally. Banks expect cost growth will accelerate next quarter and offset income and volume growth to cause profitability to stabilise.

“Concerns over new regulation continue to overshadow banks’ confidence,” explains Andrew Gray, UK banking leader at PwC. “This is despite a solid last quarter, which has seen bank margins and overall profitability hold up, revenues growing, albeit slowly, and levels of activity with retail and commercial customers improve. The Independent Commission on Banking’s final proposals are forcing banks to reassess their business models, funding requirements and operations. Despite a short-term increase in operating costs, as banks continue to invest in IT efficiencies and marketing to protect their market share, this is unlikely to last. Many banks continue to control costs aggressively and as a result expect further headcount reductions.

“Building societies’ cost cutting initiatives are starting to pay off as profitability has been boosted during the quarter. Forecasts for business volumes and the value of revenues are also surprisingly positive and the sector has seen a welcome decline in the value of non-performing loans. This positive backdrop is leading building societies to be the only sub-sector of financial services to start hiring again. The sector is also planning to invest heavily in IT systems and applications to retain its existing customers.”

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