09 January 2006

FT: Profits in financial services soar

Profits in the financial services sector grew at their fastest rate for nine years and optimism soared at the end of 2005 even as outside observers warned the good times must come to an end. Earnings at banks, building societies, insurers and securities houses grew at their quickest rate since 1996 in the final quarter of last year, according to a survey by the CBI, the employers' group, and PwC, the professional services firm. The findings underlined the City's status as one of the best performing parts of the economy. But they also fuelled fears that bumper profits - likely to translate into big bonuses for many City workers - could be lulling executives into a false sense of security.

John Tiner, chief executive of the Financial Services Authority, the City regulator, warned banks last September the condition of the sector might be 'as good as it gets'.

The CBI/PwC survey found the value of banks' non-performing loans had increased for the third consecutive quarter and at its fastest pace since June 2003.

Loans continue to turn sour in the wake of a consumer credit boom, but most lenders say the increase is coming from a low base.

Doug Godden, head of economic analysis at the CBI, said the buoyant state of the financial services sector did not correlate with the broader health of the economy. 'Whether people decide to spend or save, financial services are going to do well,' he said. 'The factors helping financial services are not the same factors driving the economy.'

The City's fortunes are shaped to a large extent by global trends and sentiment, either directly or mediated through the London stock market. But the sector has a big impact on public finances, paying more than a quarter of all corporate tax revenues even though it accounts for less than one-tenth of national income.

The survey measures profitability by subtracting the percentage of companies that say earnings are down on the previous quarter from those that say they are up. The difference in the latest survey was a positive 41 per cent, up from 21 per cent in the previous quarter.

The difference between those more optimistic about business conditions than previously and those less optimistic was 28 per cent.

By Barney Jopson,Financial Correspondent

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