Optimism among CFOs falls for third consecutive quarter


Optimism among the chief financial officers (CFOs) of the UK’s largest businesses has declined for the third consecutive quarter to the lowest levels since spring 2009, according to the latest Deloitte CFO Survey.

The UK has seen an economic recovery, which, by historical standards, has been fairly robust. Nonetheless, CFOs have remained consistently cautious this year on the sustainability of the recovery. As a result, corporates have maintained a strong focus on controlling costs and this remains the top priority for most CFOs.

While the economic outlook is uncertain, credit conditions for large UK corporates have continued to improve. CFOs now see the cost of new credit as being lower than at any time since the Deloitte CFO Survey began in the third quarter of 2007. Perceptions of credit availability also rose sharply and, for the first time, more CFOs rated credit as being “available” than “hard to obtain”.

Richard Knights, Deloitte office senior partner in Cambridge, said: “UK corporates entered 2010 with a cautious view on the sustainability of the recovery and have stuck to this view. The dominant themes we saw in the first half of 2010 continue into the second half of the year. Financial optimism among CFOs has dipped further, credit conditions have continued to improve and corporates remain strongly focussed on cost control.

“The financial and credit crisis may seem to be over, but the headwinds from the recession – especially in the form of overleveraged consumer and government sectors – are leaving CFOs cautious on the recovery. They are reacting by cutting discretionary spending and holding back on hiring.”

Most CFOs (75 per cent) believe this is not a good time to take risks and, for this group, their priorities are defensive - reducing costs and increasing cash flow. However, a substantial minority of 25 per cent take the opposite view, saying this is a good time to take risk. For this group the priorities are introducing new products and services or expanding into new markets or by acquisition.

Irrespective of risk appetite, cash is less of a concern for large corporates than a year ago, reflecting improvements in credit availability and stronger corporate cash flow.

CFOs see expansionary strategies, such as introducing new services and expanding by acquisition, as prominent priorities, testifying to a continued search by the corporate sector for growth opportunities.

CFOs believe that excessive leverage in the corporate sector as a whole has been largely eliminated. With interest rates seen as being at very low levels and credit increasingly available, corporate demand for credit is starting to rise. CFOs are more positive about raising gearing for their own business. After a sharp contraction in demand for credit over the last 12 months, CFOs expect to increase their demand for credit over the next year.

Mr Knights said: “Corporates are finding it much easier to raise credit and there has been a remarkable improvement in perceptions of bank credit availability. Perhaps surprisingly, given that we have just come through a massive credit crisis, CFOs are increasingly willing to contemplate raising gearing.”

Despite all the uncertainties, CFOs are positive on the outlook for corporate revenues and profit margins over the next 12 months. Fifty-nine per cent see revenues rising over the next 12 months, while only 17 per cent expect a decline. They are slightly less positive on profit margins, which may reflect expectations of rising material, wage and other costs.

CFOs also see capital expenditure rising over the next year. But, with cost control at the fore, the balance of opinion is that hiring and discretionary spending will shrink during this period.

“Overall, the good news from this quarter’s CFO Survey is that large UK corporates are finding it easier to raise capital,” said Mr Knights.

“CFOs are positive on the outlook for corporate revenues and profits and many are looking for growth opportunities. Yet one of the dominant findings of the Deloitte CFO Survey during the recession persists a year into the recovery - in an environment of uncertainty cost control is king.”

Other key findings from the Q3 2010 Deloitte CFO Survey include:

• Bond issuance and bank borrowing remain in favour with CFOs as a source of funding. Equity lags behind but has risen in popularity for the first time in 12 months.

• After the recent rally in government bonds, a majority of CFOs regards government bonds as being overvalued. Equities on the other hand are considered to be undervalued.

• 82% of CFOs expect a rise in M&A activity over the year ahead, with 18% rating growth by acquisition as a strong priority for their business over the next 12 months.

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The Deloitte Cambridge office comprises 8 Partners and over 250 staff who deliver a full range of professional services to the East Anglian region. As well as focussing on the life sciences and technology sectors for which the region has become so renowned, the office has long standing specialisms in other sectors including the professions, consumer business, food and agribusiness.

Deloitte LLP