Banks And Insurers Feel More Confident For 2013 As Costs Fall And Income Starts To Rise

Champagne corks may soon be popping in the City again after data revealed the worst may have finally passed for the financial services sector.

Figures released by the Confederation of British Industries (CBI) on Monday showed business volumes are expected to rise again during the next three months, with companies in the sector more optimistic about the overall business situation than three months ago - the first rise in sentiment since March 2012.

The more optimistic mood is driven by lower total costs, and an increase in income values both from fees, commissions and premiums, and from net interest, investment and trading - all of which helped profits rebound after a fall during the last quarter.

Matthew Fell, the CBI's director for competitive markets, said in a statement: "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, the traditional bloodbath of financial services redundancies over the winter period was particularly savage this time around - the number of people employed in the financial services sector fell by 31%.

This was the third consecutive quarterly decline and headcount is expected to fall strongly again next quarter. Shortage of labour was cited by 37% of respondents as likely to constrain investment over the year ahead – the highest proportion since June 2007.

The UK's financial industry as a whole is predicted to lose 43,000 jobs in six months, with 25,000 positions already cut in the final three months of 2012.

In separate research, global cuts at financial firms have exceeded 115,000 since 2012, as they seek to control compensation expenses and retreat from capital-intensive businesses, according to data compiled by Bloomberg.

Banks were the hardest hit out of the sectors within financial services, and Kevin Burrowes, UK financial services leader at PricewaterhouseCoopers, warned the banks' optimism for the next quarter could be misplaced.

"Although very welcome, banks made similar forecasts before, only to be disappointed. Commercial business in particular failed to live up to its promise, declining during the last months of 2012," he said.

"Banks are facing both a shortage of skills and a growing capital challenge. The UK banking sector is well capitalised by European standards, but banks now expect the ability to raise finance to be a significant limitation on business during 2013. This implies that their upbeat predictions for growth could be undermined by an inability to commit sufficient capital to lending."

By comparison, the insurance industry did well, with business volumes growing for general and life insurance, and brokers expecting an uptick in business for 2013. Employed staff numbers also increased.

PwC's insurance leader Jonathan Howe said life insurers had been boosted by a strong quarter for business and an increase in profitability, while general insurers appeared optimistic about stronger rates in the commercial insurance sector this year.

"The sense of optimism may also reflect more intangible factors, such as relief at the delay of Solvency II," Howe added.