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03 April 2006

Reuters: Financial firms’ profits ease

The country's financial service firms' profit growth dropped sharply in the first three months of 2006, but companies were at their most optimistic in nearly a decade about the business outlook, a survey showed on Monday.

The Confederation of British Industry and PriceWaterhouseCoopers survey showed profit growth in the first quarter of 2006 slowed to less than half the rate seen in Q4 2005, as operating costs spiked and business volumes waned.

The balance of firms reporting an increase in profitability fell to +18 in the first quarter of this year from a nine-year high of +41 in the December survey.

However, the latest survey showed firms were their most upbeat in nine years about business volumes in the next three months, with a balance of +58 against +24 in the last survey.

While corporate activity eased in the last three months, business from private investors rose at its fastest rate in six years, helped by a pick up in demand for home loans.

A buoyant stock market -- the FTSE-100 index has recently touched a 5-year high -- also encouraged people to invest, the CBI said.

'Strongest growth has been in business with private individuals, partly by increased borrowing for house purchases and increased interest in savings products,' said Doug Godden, CBI's head of economic analysis.

Firms expect business from private investors to remain strong, with that balance rising to +43, also a six-year high, from +21 in the last survey.

However, as people borrowed more the value of bad debts also climbed.

Non-performing loans showed a balance of +26 -- the highest since March 1993, when the country was emerging from recession and a housing market crash and the CBI said this was dominated by the personal sector.

But the increase was from a low base and was not yet impacting on firms' balance sheets, said John Hitchins at PwC.

'We're not looking at a crisis but at an arrears rate that is coming back to trend, having been below trend for some time,' Hitchins said.

'Although there have been a few hard-luck stories for individuals, these are not coming through in terms of losses as the value of properties is enough to cover those losses.'

By Dan Morgan and Fiona Shaikh

© Reuters

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