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Deloitte CFO Survey: Optimism falls, but risk appetite holds up

• Optimism among finance chiefs falls at fastest rate since 2008;

• CFOs are increasing emphasis on cost control and managing cash flow;

• However, financial risk appetite remains high among large UK corporates;

• Companies operating overseas are the most willing to expand;

• Corporates see an end to profit margin growth.

Optimism among the finance directors of large UK corporates has fallen for the second consecutive quarter and is at its lowest level in more than two years, according to the latest Deloitte CFO Survey. This marks the sharpest decline in corporate optimism since the wake of the collapse of Lehman Bros in September 2008.

CFO optimism about the financial prospects for their own businesses is at its lowest level since 2009, when the UK economy was in recession. Confidence that the recovery can be sustained has also taken a knock. On average, CFOs see a 33% chance of a double dip.

Ian Steele, senior partner for Deloitte in Scotland and Northern Ireland, said: “The continued squeeze on UK consumer spending power seems to be weighing on corporate sentiment. Over the last year, real disposable incomes have fallen by 2.7%, the fastest rate of decline since 1976.

“The mood of caution is reflected in a tilt in the balance sheet strategies employed by finance chiefs. CFOs are placing more emphasis on cost control and increasing cash flow than at any time in the last year.”

Ian Stewart, chief economist at Deloitte, added: “There is also a growing belief that the upswing in corporate revenues is likely to slow over the next 12 months. A year ago, the dominant view among CFOs was that profit margins were on the rise. Today, the balance of opinion is that margins are set to narrow. CFOs believe that the period of strong growth in profit margins is drawing to an end.

“However, while CFOs have become more cautious, this has not dented their willingness to take greater risk on to their balance sheets. Risk appetite remains close to the three and a half year high seen last quarter, which seems to reflect the strength of corporate balance sheets, the availability of capital at a relatively low cost and, a perception that, while uncertainties abound, the current environment also presents opportunities for profitable growth.”

The top priorities for CFOs remain the introduction of new products and services, or expanding into new markets. Expanding by acquisition and raising capital expenditure also remain prominent priorities.

This quarter’s CFO Survey findings reveal that companies which derive a high proportion of their revenues overseas generally have a higher level of risk appetite and are pursuing more expansionary strategies than their UK-facing counterparts.

For the overseas exposed companies – those deriving more than 70% of their revenues from outside the UK - the top priorities are introducing new products or services or expanding by acquisition. For companies which derive more than 70% of revenues from the UK, the top priorities are cost reduction and increasing cash flow.

Risk appetite is running well above average levels in the industrial goods sector, while in consumer facing sectors and construction, risk appetite is running below average levels.

Ian Stewart concluded: “CFO optimism has fallen sharply. Yet strong corporate balance sheets and good financing conditions mean that many CFOs are continuing to look for opportunities for expansion. This quarter’s survey suggests that CFOs see many of those opportunities lying overseas.”