Mergers and acquisitions (M&A) is becoming a larger feature of growth plans according to those interviewed for the latest CBI/PricewaterhouseCoopers financial services survey .
The survey suggests that this is a response to high level transactions such as BlackRock’s acquisition of Barclays Global Investors. As firms’ profitability will come under further pressure and consolidation accelerates, the report says the role of M&A will increase further.
Regulatory risk is also climbing. The report notes that most medium and large firms are now active in the alternative space, so the proposed EU directive on alternative investment fund managers is “a considerable source of concern and irritation for many in the sector”.
While volumes of business stabilised during the quarter, the survey attributes this mainly to the coincidence of the tax year end with an equity market rally. The outlook for revenue remains “extremely tight”.
As a result of lower market values and heavy investor redemptions, neither of which are likely to be revised in the near future, the value of assets under management is far lower than average levels of recent years, the report says. This puts pressure on revenue, and there is a general shift to lower risk assts.
The responses of investment managers were in-line with the overall sentiment in the finance industry. The worst seems to be over, they say, but this does not necessarily mean a recovery is happening. Or, for that matter, that the market is returning to pre-crisis confidence levels.
“Hopes of stabilisation are tempered with caution about the length and severity of the economic downturn, and firms continue to focus on cost control,” the report continues.
Its overtone is more positive, or at least less negative, than in the previous quarter. However the survey notes that this reflects hope for, and not actual, improvements in business activity.
“Recovery remains some way off and long-term competitiveness is a growing concern,” the report says. “Any potential improvement in customer demand is also clouded by the probable impact of the recession in impairment charges.”
Overall, 5% of the interviewees said they expected financial market conditions to improve before 2010. Only 1% said there was a high chance of further deterioration compared with 45% in March. This indicates a growing view in the industry that the worst may be behind. Recovery in output and employment, however, will most likely be slow.
The survey also shows that profitability has fallen. 70% of the interviewees said they were less competitive, with many of them focusing on cost cutting, consumer retention and favouring defensive marketing strategies. The outlook for employment remains negative.
A total of 73 companies responded to the survey including banks, building societies, finance houses, securities traders, investment managers, commodity brokers, private equity firms, insurance companies and insurance brokers.