Finance sector a bright spot in UK economy

LONDON - British financial services firms are enjoying rising business, jobs and profits despite weaker economic conditions, but higher oil prices are making banks nervous about the short-term outlook, a survey on Monday showed.

The Confederation of British Industry (CBI) and consultants PricewaterhouseCoopers (PwC) said their September quarterly survey of banks, insurers and finance houses showed the sector was bucking the downturn hitting British retailers, as consumers cut back on spending amid higher energy bills and borrowing costs.

"It would be very satisfying if this survey turned out to be the signal for a revival in the wider economy -- but the odds are stacked against it," the CBI's chief economic adviser, Ian McCafferty, told reporters.

"The factors behind financial services growth are different to those affecting the rest of the economy where conditions remain tough," said McCafferty, who expects the Bank of England to keep interest rates at 4.5 per cent when it meets this week.

Britain is one of the world's largest exporters of financial services and the industry's international focus means it is less dependent on its home environment where economic growth is slowing.

Fund managers and life insurers have also benefited from British consumers saving more and from rising stock markets, which increase fee income and portfolio returns.

Investment banks are enjoying a boom in mergers and acquisitions, and securities traders have also benefited from more activity and volatility in financial markets amid higher energy prices.

Riding a stronger stock market, fund managers reported a huge rebound in confidence, and the financial services sector was more optimistic overall on the business outlook.

The banks, however, gave their most negative response for two years on their short-term prospects amid fears of the impact of high oil prices on consumer and corporate borrowing plans.

But John Hitchins, the British banking leader at PwC, said the banks increased investment in IT systems, property and branch refurbishments showed they remained confident about the economy over the long term.

"The fall in optimism is perhaps slightly surprising when you see that they are experiencing reasonable growth rates. I think it reflects a nervousness about possible shocks to the economy in the short term rather than any fundamental concern about the underlying business."

A rise in the number of consumers unable to repay loans was not a major factor in banks' downbeat outlook, Hitchins said.

"There is no sense out there of a consumer debt crisis." General insurers remained optimistic about their prospects but PwC cautioned that insurers were questioned before the full impact of Hurricane Katrina, which devastated the US Gulf Coast, was known.

Overall, financial services firms are hiring more staff -- 25 per cent of respondents took on more employees than shed them, and a net 29 per cent expected to do so next quarter as business volumes are expected to rise.

Higher wage costs forced up overall costs, but with banks and insurers still outsourcing jobs and centralising IT systems to cut expenses, average costs per transaction fell.

- REUTERS