Credit crunch hits financial incomes

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Business levels in the financial sector fell at the fastest pace for more than 16 years at the end of last year as the credit crunch drained confidence from the industry, a closely watched survey showed.

Banks, building societies and securities traders were the main casualties as income slumped and transactions dropped in the fourth quarter of 2007, the Confederation of British Industry/ PricewaterhouseCoopers survey revealed. Conditions are expected to stay tight for at least the first half of this year. Income from fees, commissions and premiums fell in line with expectations but revenue from net interest, investment and trading plunged at the quickest pace since the survey began in 1989. Both sources of income are expected to fall more in the next three months.

The survey results come on top of Bank of England figures last week showing an unexpectedly severe tightening of lending by cash-strapped banks seeking to minimise risk. The gloomy mood of the financial sector will add to reasons for the Bank of England's Monetary Policy Committee to cut interest rates at this Thursday's meeting.

Ian McCafferty, chief econ-omic adviser at the CBI, said: "After two years of strong growth there has been a clear turnaround within the financial services sector. The credit squeeze has delivered a sharp shock to business volumes over the past three months, and it seems that difficulties are likely to persist for some time yet."

The gloom is set to continue, with 70 per cent of respondents saying the squeeze would last longer than six months and a majority predicting worsening credit conditions.

Scarce funding is the biggest worry for the sector after panic over US sub-prime losses caused securitisation markets to dry up and money market rates to rocket. A record 36 per cent of banks thought lack of funds would limit their growth this year but building societies were even harder hit, with 92 per cent flagging funding fears.

Building societies were the most pessimistic sector, with all respondents more downbeat than in the previous quarter the first time this had happened in the history of the survey. The societies' profitability fell at its fastest pace for 15 years.

John Hitchins, banking leader at PwC, said big diversified banks were still able to raise wholesale funds but that the markets were virtually closed for small institutions like building societies.

Banks' non-performing loans are expected to rise in the current quarter as more than a million customers start to come off low fixed-rate mortgages this year. Mr Hitchins said lenders were hiring extra staff for their debt workout groups in preparation.

Securities traders were unanimously gloomier after business slumped at a record rate and profitability plunged. Further steep falls in business and profitability are predicted for this quarter. Life insurers and fund managers were also downbeat as fears about share prices increased.

The financial industry continued to create jobs but at a slowing pace. Net hiring is expected to come to a standstill this quarter and most investment is now aimed at boosting efficiency rather than business expansion.

The survey ended on 5 December, just before concerted action by central banks started to bring inter-bank borrowing rates down. The easing of the inter-bank market may have taken pressure off some institutions but rates are still higher than would be expected, with a series of base rate cuts forecast from the Bank of England.