CBI says profits drop in financial services

( Reuter )- Profitability at British financial services firms fell at its sharpest rate in five years in the first quarter of 2008 and shows little sign of recovery, according to a survey published on Monday.

Business volumes and income from fees and commissions dropped, despite the growing gap between the rates at which money is borrowed and lent -- the main way in which banks and building societies make their profits.

Companies questioned by the CBI and PricewaterhouseCoopers indicated that the average spread over the three months to March had risen at its sharpest rate since 1993.

The findings make clear how hard the high cost of credit and uncertainty over the value of derivatives linked to U.S. subprime mortgages have hit the sector.

"It is perhaps unsurprising that the results on business activity and performance are relatively negative," said Ian McCafferty , the CBI's chief economic advisor.

"But within this, it is clear that those sectors that are most closely linked to the wholesale money and credit markets are those that are faring the worst."

Banks fared particularly badly, with incomes falling at their fastest rate since the survey began in 1989.

Fund managers said, on average, they were able to expand their headcount aggressively but the overall employment picture was less optimistic.

A quarter of the 79 companies questioned said they had cut jobs over the past three months, the highest rate since March 2003, with a third expecting to make cuts in the next few months.

Forty percent of the firms questioned said their ability to raise funds would be a constraint on business growth in the coming year.

"Ongoing spending on trying to protect market position is evident but long-term investments are quite often being put on hold for the moment," said Andrew Gray, UK banking advisory leader at PWC.

Both banks and building societies said they made significantly fewer new loan approvals, with lending to private individuals falling sharply. Loans to industrial and commercial companies remained strong.

McCafferty added it was "quite unlikely" the economy would go into recession.

"Our view is that we avoid recession -- we're not looking at anything like a recession -- but we have a long period of sub-par growth before we can see any return to trend growth in GDP."

"You've seen a significant slowdown in consumer expenditure, slower growth in public expenditure overall in the economy and that would have led to a normal cyclical period of slower growth in 2008, compared with 2006 and 2007, even had the credit crunch never happened."

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