deloitte q2 cfo survey

8/14/2019 Deloitte Q2 CFO Survey

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The Deloitte CFO SurveyNo return to business as usual

2009 Q2 Results

14 July 2009


2/12

Contents

The Deloitte CFO Survey: Conclusions 1

Recovery in sight? 3

No return to boom 4

Deleveraging ahead 5

Optimism on M&A 6

Equity is back 7

Data archive 8

This is the eighth quarterly survey of Chief Financial Officers and Group

Finance Directors of major UK companies. The 2009 second quarter survey took

place between 12 and 26 June. 117 CFOs participated including CFOs of 29

FTSE 100 and 39 FTSE 250 companies. The remaining respondents were CFOs

of other FTSE companies, large private companies and UK subsidiaries of major

companies listed overseas. The combined market value of the 83 UK listed

companies surveyed is 396 billion, or approximately 30% of the UK quoted

equity market. The Deloitte CFO Survey is the only survey of major corporate

users of capital that gauges attitudes to valuations, risk and financing.

For copies of earlier CFO Surveys see www.deloitte.co.uk/cfosurvey


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The Deloitte CFO Survey No return to business as usual 1

Key points from the 2009 Q2 Survey

Optimism about the financial prospects of

the UK corporate sector has risen to the

highest level in two years.

Most CFOs expect the UK economy to recover

in 2010.

Credit conditions have improved for the

second consecutive quarter but they remain

tough and CFOs expect this to persist well

into the recovery.

CFOs are increasingly looking to equity and

bond markets for finance.

The environment for business is expected to

remain very difficult well into the recovery.

GDP growth is expected to be sluggish and

unemployment is expected to rise for at least

a year into the recovery.

CFOs believe the upturn will be marked by

tight credit conditions and high levels of risk

aversion.

Corporates are likely to react to these

conditions by reducing debt levels and cutting

costs.

Sentiment about issuing debt or equity

improved sharply in June, taking it to the

highest level since the Survey started in 2007.

Equity is now seen as a far more attractive

form of finance for corporates than bank

borrowing, a reversal of the situation in 2007

and 2008.

CFOs are positive about the outlook for

mergers and acquisition activity. Sentiment

about M&A and private equity activity has

reached the highest level in two years.

The first quarter 2009 CFO Survey, released in April,reported glimmers of hope in the economy and was

one of the earliest indicators to suggest that the

economy had, perhaps, troughed. Our latest survey,

carried out in June, shows that CFO optimism

continued to strengthen in the second quarter. We also

found a clear, though not universal, conviction among

CFOs that the UK economy will recover during next

year. But, while for most the end of the recession is in

sight, CFOs see further problems ahead. This quarters

special questions reveal that UK CFOs expect the

recovery to be marked by sluggish growth, a strong

focus on cost control and tight lending conditions

hardly a return to business as usual.

Recovery: good news, bad news

In June CFO sentiment about prospects for their own

companies saw the biggest ever increase, taking it to

the highest level since the CFO Survey started two years

ago. Most CFOs now expect a recovery to unfold in

2010, although a substantial minority, 23%, do not

expect a return to growth until 2011 or later.

Expectations for M&A, perhaps the most cyclical element

in corporate expectations, have risen very sharply.

83% of CFOs expect M&A to rise over the next year.

While sentiment has strengthened, perhaps reflecting

an improvement in credit conditions, CFOs do not

expect a quick upturn in demand for their own

products and services. Most, some 59%, see no revival

in demand for at least a year. Moreover, one of our

special questions this quarter shows that an

overwhelming majority of CFOs expect the environment

for business to remain very difficult through the first

year of any recovery.

Most CFOs think the upturn will be sluggish and credit

conditions will remain tight. Such expectations help

explain why most CFOs expect corporates to reduce

debt levels and to maintain a strong focus on cost

control as the economy recovers.

With CFOs assuming that growth will be weak and cost

reduction a priority it is, perhaps, unsurprising that 85%

of CFOs think unemployment will rise through at least

the first year of the recovery.

The Deloitte CFO Survey: ConclusionsNo return to business as usual


4/12

2

Deleveraging aheadIn June CFOs reported a further improvement in credit

conditions, taking them back to levels prevailing before

last Septembers collapse of Lehman. This marks a

significant improvement, and it suggests that government

action to stabilise the financial system is having an

effect. Nonetheless, the overwhelming majority of CFOs

still rate credit as being scarce and expensive. Nor are

UK corporates counting on a return to the easy credit

conditions that preceded the financial crisis. Indeed,

CFOs expectations that lending terms will remain tight

and credit availability reduced is fully consistent with the

experience in previous financial cycles.

Past financial crises have generally triggered a long

process of deleveraging across the economy, something

which continues even as growth recovers. The drive by

consumers and corporates to reduce debt levels reflects

an unwinding of credit boom excesses and a desire to

strengthen balance sheets. In addition, the private

sector almost always has to contend with much reduced

credit as banks themselves de-risk and de-leverage their

balance sheets.

CFOs assume these patterns will repeat in this cycle.

Some 80% of CFOs expect deleveraging to continuethrough the recovery. The proportion of CFOs planning

to reduce gearing in their own companies over the

next year outnumbers those planning to increase it by

two to one.

One little noticed aspect of the recession has been thesharp decline in corporate demand for bank financing

recorded by the Bank of Englands Credit Conditions

Survey. The Banks latest survey shows that credit

demand from corporates is declining more slowly.

But CFOs have become increasingly sceptical about

bank finance as a source of capital for their business

through the recession.

Yet if the banking system proves unable or unwilling

to meet the requirements of the corporate sector for

capital, where can corporates turn?

The CFO Survey shows that CFOs are increasingly

looking towards equity and bond markets for finance.

CFO sentiment about issuing equity and corporate

bonds saw the biggest ever increase in June, taking it to

the highest level since the Survey started in 2007. Equity

has emerged as the most popular form of finance

among CFOs and bank borrowing as the least popular,

a reversal of the situation in 2007 and 2008.

This combination of reduced debt levels and rising

equity issuance suggests that at least the early phase

of the recovery will be marked by falling corporate

gearing in the UK.

Contacts

Margaret Ewing

Partner and Vice Chairman

020 7303 3323

[email protected]

Ian Stewart

Chief Economist

020 7007 [email protected]

For additional copies of this report please

contact Matt Gentle on 020 7303 0294 or

email [email protected]


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Most CFOs, 73%, now expect the UK economy to

recover during 2010.

But a substantial minority, 23%, do not expect a return

to growth until 2011 or later.

CFOs views on the outlook broadly fit with those of

economists. After a huge downside shock to growth

expectations over the last year, economists now expect

the UK to see a weak recovery in 2010.

The average economist sees the UK economy growing

by 0.6% in 2010 following an expected 3.7%

contraction in GDP this year. This profile is consistent

with a resumption of quarterly growth later this year.

Economists have had to downgrade their growth

forecasts substantially in the last two years but in June

GDP forecasts for 2010 have edged up slightly.

Chart 1. Financial prospects

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3

Net % of CFOs who are more optimistic about financial prospects for their company now than

three months ago

22%

-30%

-59%

-53%

-19%

-9%

-24%

-4%

Lessoptim

istic

Moreoptimistic

Chart 2. CFOs views on the timing of the recovery

4%

73%

23%

Recovery later this year Recovery in the course of 2010 No recovery unt il 2011

or later

% of CFOs expecting a recovery in each period

Chart 3. Consensus forecasts for UK GDP growth

Source: The Economist

2007

2008

2009

2010

-4

-3

-2

-1

0

1

2

3

4

Mar 09Sep 08Mar 08Sep 07Mar 07Sep 06Mar 06

Evolution of consensus/average growth forecasts for the UK economy

CFOs have become much more optimistic about thefinancial prospects of their own companies.

In June CFO sentiment saw the biggest ever increase,

taking it to the highest level since the CFO Survey

started two years ago.

Recovery in sight?


6/12

4

While CFOs think that the economy will recover, theyremain cautious about a revival in demand for their

own firms products and services. Most, some 59%, see

no revival in demand for at least another year.

CFOs believe that conditions for corporates will remain

difficult even as the economy recovers. The first year of

the recovery is expected to be very different from the

last years of the boom. There is no expectation of a

return to business as usual.

Most CFOs think that the recovery will be marked by

sluggish GDP growth and a strong focus on cost control

by corporates.

Risk aversion is expected to remain high among

corporates and 85% of CFOs believe unemployment

will rise for at least a year into the recovery.

80% of CFOs believe corporates will continue to reduce

debt levels, and a majority expect credit to remain in

short supply and credit conditions to remain tight.

CFOs clearly do not expect that the end of the

recession will herald an end to the problems of thecorporate sector.

Chart 4. When will growth in demand accelerate?

0%

5%

10%

15%

20%

25%

30%

35%

40%

2012 or beyond20112010 H22010 H12009 H22009 H1

% of CFOs who expect growth in demand for their companys products and services to

accelerate by

4%

16%

39%

25%

12%

4%

Chart 5. Beyond the recession

0% 20% 40% 60% 80% 100%

Falling house prices

Elevated levels of financial market volatility

Significantly reduced availability of credit

Elevated levels of risk aversion

Deleveraging

Rising unemployment

Tighter lending terms from banks

Sluggish GDP growth

Strong focus on cost control

% of CFOs who think corporates will face the following factors for a year or more beyond the

end of the recession

41%

63%

69%

79%

80%

85%

90%

91%

95%

No return to boom


7/12


History suggests that credit conditions are likely to

remain tough for some time.

The Japanese and Swedish financial crises of the 1990s

were marked by several years of debt reduction.

The IMF expects that lending by banks in the major

industrial economies will continue to contract for at

least a further year.

Certainly debt is out of favour with UK CFOs, albeitslightly less so than last quarter.

50% of CFOs believe that UK corporate balance sheets

are overleveraged and 5% underleveraged, giving a net

balance shown in the chart of 45%.Almost half of the CFOs polled plan to reduce gearing

in their own companies over the next year.

Chart 6. Debt levels

Source: IMF Global Financial Stability Report, April 2009

50

100

150

200

250

300

20082005200219991996199319901987

Corporates

Financial

institutions

Households

Government

Ratio of debt to GDP among selected advanced economies (in percent, GDP-weighted, 1987=100)

Chart 7. Financial crises trigger deleveraging

Source: IMF Global Financial Stability Report, April 2009

70

80

90

100

110

120

130

140

1514131211109876543210-1-2-3-4-5-6-7-8-9-10

Sweden

(Peak 1992)

Japan

(Peak 1993)

Peak Years afterYears before

Bank credit to the private sector in Sweden and Japan before and after their crises

(percent of nominal GDP)

Chart 8. Leverage

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3

Net % of CFOs who think UK corporate balance sheets are overleveraged

35%

60%

45%

24%27%

6%

-17%

-27%

Overleveraged

Underleveraged

While financial conditions have improved in recentmonths, one of the underlying causes of the crisis,

excess debt, remains. This explains the widespread

expectation that a process of deleveraging lies ahead,

particularly for financial institutions and households.

Deleveraging ahead


8/12

6

CFOs have become increasingly bullish on M&A activity,a development that fits with an improved economic

outlook and still-depressed asset valuations.

This quarter saw the biggest ever increase in CFO

optimism on M&A, taking it to the highest level since

the survey started in September 2007. Sentiment about

private equity activity has also turned positive for the

first time in two years.

This chart provides perhaps the most graphic illustration

of the evolution of the credit crunch over the last two

years.

2007 and 2008 saw a major deterioration in the cost

and availability of credit to corporates.

Those trends have partially reversed since the start of

the year. Credit conditions remain tough, but they are

better than in the aftermath of the failure of Lehman

last autumn.

It is useful to contrast CFOs financial attitudes with

banks views as measured by the Bank of Englands

Credit Conditions Survey.

The latest survey shows that banks have increased

credit availability, a finding that cross-checks with the

CFO Survey.

Credit demand is contracting more slowly, but the CFO

Survey suggests that corporates have become more

sceptical of the merit of bank financing.

Chart 9. M&A and PE outlook

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3

Net % of respondents who expect M&A and PE activity to increase in the next 12 months

-44

-72

-22

-50

13

1

-9

22

-27

16

-5

42

19

81

-61-67

Willincrease

Willdecrease

M&A activity PE activity

Chart 10. Cost and availability of credit

Cost of credit (lhs)

Availability of credit (rhs)

Creditis

costly

Creditischeap

Net % of respondents reporting credit is costly and credit is easily available

Creditis

available

Creditishardtoget

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3

Chart 11. Credit demand/supply: UK banks views

Source: Bank of England Credit Conditions Survey

Bank credit available

to corporates

Demand for credit

from corporates

-60

-50

-40

-30

-20

-10

0

10

20

Jun 09Mar 09Dec 08Sep 08Jun 08Mar 08Dec 07Sep 07Jun 07

Optimism on M&A


9/12


CFOs have become less enthusiastic about bank

financing and are increasingly looking to the bond and

equity markets for capital.

CFO sentiment about issuing debt and equity saw the

biggest ever improvement in June taking it to the

highest level since the Survey started.

The 2009 Q1 Survey showed that CFOs believe that in

future corporates are likely to rely more on equity

finance and less on debt finance. The second quarter

Survey confirms CFOs are increasingly willing to

contemplate issuing equity.

Official data show that a major change is already

underway. Net bank borrowing has collapsed in the UK

in the last year, while net equity issuance has turned

positive after several years of declining issuance.

Chart 12. Favoured source of corporate funding

Equity issuance

Bank borrowing

Bond issuance

Attractive

Unattractive

Net % of respondents reporting the following sources of funding as attractive

-60%

-40%

-20%

0%

20%

40%

60%

2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3

Chart 13. Good time to issue debt/equity?

-100%

-80%

-60%

-40%

-20%

0%

20%

2009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q3

Net % of respondents who think now is a good time to issue debt/equity

-63

-71

-88

-75 -76-80

-90-92

-84

-76

-64

-49

-33

3

-69-69

Good

time

Notagood

time

Equity Debt

Chart 14. Source of funding

Source: Bank of England

Net bank borrowing

Net equity issuance

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

200920082007200620052004

Net equity issuance by UK corporates vs net bank borrowing 12 month moving average (in m)

The credit crisis has triggered a shift in CFOs preferencesfor sources of financing for their businesses.

In 2007, before the crisis really hit, CFOs had a strong

preference for bank borrowing and an antipathy to

equity finance.

But this year bank borrowing has moved out of favour

and equity has emerged as the most popular form of

finance. In June corporate bond issuance moved ahead

of bank borrowing in terms of popularity for the first

time since the Survey started.

Equity is back


10/12

8

A note on methodologyMany of the charts in the Deloitte CFO Survey show the results in the form of a net balance. This is the percentage of respondents reporting, for

instance, that bank credit is attractive less the percentage saying bank credit is unattractive. This is a standard way of presenting survey data used

by, amongst others, the CBI and the European Commission. To aid interpretation of the results, this table contains a full breakdown of responses

to most of the regular questions covered in the CFO Survey. Due to rounding answers may not sum to 100.

Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009

% % % % % % % %

How would you rate the overall availability of new credit for corporates?Available 42 26 31 16 5 1 2 13

Neutral 10 19 6 7 6 0 4 15Hard to get 48 55 63 77 89 99 94 72Net balance -6 -29 -31 -61 -84 -98 -92 -59

How would you rate the overall cost of new credit for corporates?

Costly 59 64 72 89 97 95 86 82Neutral 22 26 25 10 2 4 11 15Cheap 20 10 3 1 1 1 3 3

Net balance 39 55 69 88 96 94 83 79

Bank borrowing, as a source of funding, is Attractive 73 44 59 47 35 29 27 27Neither attractive nor unattractive 12 28 16 13 14 9 12 22

Unattractive 16 28 25 40 51 62 61 50Net balance 57 16 34 7 -16 -33 -34 -23

Corporate bonds, as a source of funding, areAttractive 55 33 28 40 14 20 22 35

Neither attractive nor unattractive 18 33 19 29 17 14 23 32Unattractive 27 33 53 31 68 66 55 34

Net balance 27 0 -25 8 -54 -46 -33 1

Equity raising, as a source of funding, isAttractive 26 19 19 29 17 21 27 44Neither attractive nor unattractive 24 33 9 20 24 13 28 26

Unattractive 50 48 72 51 58 66 45 30Net balance -24 -29 -53 -22 -41 -45 -18 14

UK corporate balance sheets areOverleveraged 4 5 13 32 33 38 63 50

Appropriately leveraged 65 73 81 61 61 59 34 44Underleveraged 31 22 6 7 6 3 3 5

Net balance -27 -17 6 24 27 35 60 45

Cash return to shareholder ratios (including share buybacks) areHigh 41 35 32 17 15 25 15 9Normal 49 60 52 56 39 26 13 22

Low 10 5 16 27 45 49 72 68Net balance 31 30 16 -10 -30 -24 -57 -59

In a years time, FTSE 100 will beHigher 45 30 50 40 49 66 65 62

Broadly unchanged 33 40 25 33 35 26 23 34Lower 22 30 25 28 16 8 12 4Net balance 24 0 25 12 33 58 53 58

Levels of M&A in the UK willIncrease 14 21 31 38 48 40 56 83No change 12 14 16 26 27 36 29 15Decline 75 65 53 37 26 24 15 2

Net balance -61 -44 -22 1 22 16 41 81

Volume of acquisitions by private equity in the quoted equity market willIncrease 14 12 22 32 31 20 29 40No change 6 5 6 23 30 33 37 40

Decline 80 84 72 45 39 47 34 21Net balance -67 -72 -50 -13 -8 -27 -5 19

Compared with three months ago how do you feel about the financial prospects for your company?More optimistic 26 17 22 17 3 7 15 37

Unchanged 44 43 47 47 41 27 40 49Less optimistic 30 40 31 36 56 66 45 15

Net balance -4 -24 -9 -19 -53 -59 -30 22

Data archive


11/12


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Equity has emerged as the most popular formof finance among CFOs and bank borrowingas the least popular, a reversal of the situation

in 2007 and 2008.

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