The Deloitte CFO Survey

No return to business as usual

2009 Q2 Results
14 July 2009
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

The Deloitte CFO Survey: Conclusions
No return to business as usual
The first quarter 2009 CFO Survey, released in April,
Key points from the 2009 Q2 Survey
reported “glimmers of hope” in the economy and was
one of the earliest indicators to suggest that the
• Optimism about the financial prospects of
economy had, perhaps, troughed. Our latest survey,
the UK corporate sector has risen to the
carried out in June, shows that CFO optimism
highest level in two years.
continued to strengthen in the second quarter. We also
found a clear, though not universal, conviction among
• Most CFOs expect the UK economy to recover
CFOs that the UK economy will recover during next
in 2010.
year. But, while for most the end of the recession is in
sight, CFOs see further problems ahead. This quarter’s
• Credit conditions have improved for the
special questions reveal that UK CFOs expect the
second consecutive quarter but they remain
recovery to be marked by sluggish growth, a strong
tough and CFOs expect this to persist well
focus on cost control and tight lending conditions –
into the recovery.
hardly a return to “business as usual”.

• CFOs are increasingly looking to equity and

Recovery: good news, bad news
bond markets for finance.
In June CFO sentiment about prospects for their own
companies saw the biggest ever increase, taking it to
• The environment for business is expected to
the highest level since the CFO Survey started two years
remain very difficult well into the recovery.
ago. Most CFOs now expect a recovery to unfold in
2010, although a substantial minority, 23%, do not
• GDP growth is expected to be sluggish and
expect a return to growth until 2011 or later.
unemployment is expected to rise for at least
Expectations for M&A, perhaps the most cyclical element
a year into the recovery.
in corporate expectations, have risen very sharply.
83% of CFOs expect M&A to rise over the next year.
• CFOs believe the upturn will be marked by
tight credit conditions and high levels of risk
While sentiment has strengthened, perhaps reflecting
aversion.
an improvement in credit conditions, CFOs do not
expect a quick upturn in demand for their own
• Corporates are likely to react to these
products and services. Most, some 59%, see no revival
conditions by reducing debt levels and cutting
in demand for at least a year. Moreover, one of our
costs.
special questions this quarter shows that an
overwhelming majority of CFOs expect the environment
• Sentiment about issuing debt or equity
for business to remain very difficult through the first
improved sharply in June, taking it to the
year of any recovery.
highest level since the Survey started in 2007.
Most CFOs think the upturn will be sluggish and credit
• Equity is now seen as a far more attractive
conditions will remain tight. Such expectations help
form of finance for corporates than bank
explain why most CFOs expect corporates to reduce
borrowing, a reversal of the situation in 2007
debt levels and to maintain a strong focus on cost
and 2008.
control as the economy recovers.

• CFOs are positive about the outlook for

With CFOs assuming that growth will be weak and cost
mergers and acquisition activity. Sentiment
reduction a priority it is, perhaps, unsurprising that 85%
about M&A and private equity activity has
of CFOs think unemployment will rise through at least
reached the highest level in two years.
the first year of the recovery.

The Deloitte CFO Survey No return to business as usual 1

 Deleveraging ahead
In June CFOs reported a further improvement in credit
conditions, taking them back to levels prevailing before
last September’s 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 continue
through 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.
2
One little noticed aspect of the recession has been the
sharp decline in corporate demand for bank financing
recorded by the Bank of England’s Credit Conditions
Survey. The Bank’s 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
mewing@deloitte.co.uk
Ian Stewart
Chief Economist
020 7007 9386
istewart@deloitte.co.uk
For additional copies of this report please
contact Matt Gentle on 020 7303 0294 or
email mgentle@deloitte.co.uk
Recovery in sight?

CFOs have become much more optimistic about the Chart 1. Financial prospects
financial prospects of their own companies.
Net % of CFOs who are more optimistic about financial prospects for their company now than
three months ago
In June CFO sentiment saw the biggest ever increase,
taking it to the highest level since the CFO Survey 30%

More optimistic
started two years ago. 20% 22%
10%

0%
-9%
-4%
-10%
-19%
-24%
-20%
-30%
-30%
Less optimistic

-40%
-53%
-50%
-59%
-60%
2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2

Most CFOs, 73%, now expect the UK economy to Chart 2. CFOs’ views on the timing of the recovery
recover during 2010.
% of CFOs expecting a recovery in each period

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

4%
to growth until 2011 or later.
23%

73%

Recovery later this year Recovery in the course of 2010 No recovery until 2011
or later

CFOs’ views on the outlook broadly fit with those of Chart 3. Consensus forecasts for UK GDP growth
economists. After a huge downside shock to growth
Evolution of consensus/average growth forecasts for the UK economy
expectations over the last year, economists now expect
the UK to see a weak recovery in 2010. 4
2007
3
The average economist sees the UK economy growing
2
by 0.6% in 2010 following an expected 3.7%
2008
contraction in GDP this year. This profile is consistent 1
2010
with a resumption of quarterly growth later this year. 0

-1
Economists have had to downgrade their growth
forecasts substantially in the last two years but in June -2

GDP forecasts for 2010 have edged up slightly. -3 2009

-4
Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09

Source: The Economist

The Deloitte CFO Survey No return to business as usual 3

No return to boom

While CFOs think that the economy will recover, they Chart 4. When will growth in demand accelerate?
remain cautious about a revival in demand for their
% of CFOs who expect growth in demand for their company’s products and services to
own firms’ products and services. Most, some 59%, see accelerate by
no revival in demand for at least another year.
40%
39%
35%

30%

25%
25%
20%

15% 16%

10% 12%

5%
4% 4%
0%
2009 H1 2009 H2 2010 H1 2010 H2 2011 2012 or beyond

CFOs believe that conditions for corporates will remain Chart 5. Beyond the recession
difficult even as the economy recovers. The first year of
% of CFOs who think corporates will face the following factors for a year or more beyond the
the recovery is expected to be very different from the end of the recession
last years of the boom. There is no expectation of a
return to “business as usual”.
Strong focus on cost control 95%
Most CFOs think that the recovery will be marked by
sluggish GDP growth and a strong focus on cost control
by corporates. Sluggish GDP growth 91%

Risk aversion is expected to remain high among

Tighter lending terms from banks 90%
corporates and 85% of CFOs believe unemployment
will rise for at least a year into the recovery.

Rising unemployment 85%

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. 80%
Deleveraging

CFOs clearly do not expect that the end of the

recession will herald an end to the problems of the Elevated levels of risk aversion 79%
corporate sector.

Significantly reduced availability of credit 69%

Elevated levels of financial market volatility 63%

Falling house prices 41%

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

4
Deleveraging ahead

While financial conditions have improved in recent Chart 6. Debt levels

months, one of the underlying causes of the crisis,
Ratio of debt to GDP among selected advanced economies (in percent, GDP-weighted, 1987=100)
excess debt, remains. This explains the widespread
expectation that a process of deleveraging lies ahead, 300
particularly for financial institutions and households.
Financial
250 institutions

200
Households

150
Corporates

100 Government

50
1987 1990 1993 1996 1999 2002 2005 2008

Source: IMF Global Financial Stability Report, April 2009

History suggests that credit conditions are likely to Chart 7. Financial crises trigger deleveraging
remain tough for some time.
Bank credit to the private sector in Sweden and Japan before and after their crises
(percent of nominal GDP)
The Japanese and Swedish financial crises of the 1990s
were marked by several years of debt reduction. 140
Sweden
130
(Peak – 1992)
The IMF expects that lending by banks in the major
120
industrial economies will continue to contract for at
least a further year. 110

100
Japan
90
(Peak – 1993)
80

70
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years before Peak Years after

Source: IMF Global Financial Stability Report, April 2009

Certainly debt is out of favour with UK CFOs, albeit Chart 8. Leverage

slightly less so than last quarter.
Net % of CFOs who think UK corporate balance sheets are overleveraged

50% of CFOs believe that UK corporate balance sheets 60%

60%
are overleveraged and 5% underleveraged, giving a net
50%
balance shown in the chart of 45%. 
40% 45%
Over leveraged

30% 35%
Almost half of the CFOs polled plan to reduce gearing
27%
in their own companies over the next year. 20% 24%

10% 6%

0%
Under leveraged

-10% -17%
-20% -27%
-30%
2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2

The Deloitte CFO Survey No return to business as usual 5

Optimism on M&A

CFOs have become increasingly bullish on M&A activity, Chart 9. M&A and PE outlook
a development that fits with an improved economic
Net % of respondents who expect M&A and PE activity to increase in the next 12 months
outlook and still-depressed asset valuations.
100%
This quarter saw the biggest ever increase in CFO 81
80%
optimism on M&A, taking it to the highest level since
60%

Will increase
the survey started in September 2007. Sentiment about 42
private equity activity has also turned positive for the 40%
22 19
first time in two years. 20% 16
1
0%
-9 -5
Will decrease
13
-20% -22 -27
-40%
-44
-50
-60% -61
-67 -72
-80%
2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2

M&A activity PE activity

This chart provides perhaps the most graphic illustration Chart 10. Cost and availability of credit
of the evolution of the credit crunch over the last two
Net % of respondents reporting credit is costly and credit is easily available
years.
100% 100%

Credit is available
2007 and 2008 saw a major deterioration in the cost 80% 80%
Credit is costly

and availability of credit to corporates. Cost of credit (lhs)

60% 60%
40% 40%
Those trends have partially reversed since the start of 20% 20%
the year. Credit conditions remain tough, but they are 0% 0%
better than in the aftermath of the failure of Lehman
Credit is cheap

Credit is hard to get

-20% -20%
last autumn. -40% -40%
-60% Availability of credit (rhs) -60%
-80% -80%
-100% -100%
2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2

It is useful to contrast CFOs’ financial attitudes with Chart 11. Credit demand/supply: UK banks’ views
banks’ views as measured by the Bank of England’s 20
Credit Conditions Survey. Bank credit available
10
to corporates
The latest survey shows that banks have increased 0

credit availability, a finding that cross-checks with the -10

CFO Survey. -20

-30
Credit demand is contracting more slowly, but the CFO
Survey suggests that corporates have become more -40

sceptical of the merit of bank financing. -50 Demand for credit

from corporates
-60
Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09

Source: Bank of England Credit Conditions Survey

6
Equity is back

The credit crisis has triggered a shift in CFOs’ preferences Chart 12. Favoured source of corporate funding
for sources of financing for their businesses.
Net % of respondents reporting the following sources of funding as attractive

In 2007, before the crisis really hit, CFOs had a strong 60%
preference for bank borrowing and an antipathy to
equity finance. 40%
Bank borrowing

Attractive
But this year bank borrowing has moved out of favour 20% Equity issuance
and equity has emerged as the most popular form of
0%
finance. In June corporate bond issuance moved ahead Unattractive
of bank borrowing in terms of popularity for the first
-20%
time since the Survey started.
-40% Bond issuance

-60%
2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2

CFOs have become less enthusiastic about bank Chart 13. Good time to issue debt/equity?
financing and are increasingly looking to the bond and
Net % of respondents who think now is a good time to issue debt/equity
equity markets for capital.
20%
Good
time

CFO sentiment about issuing debt and equity saw the 3

biggest ever improvement in June taking it to the 0%
highest level since the Survey started.
Not a good
time

-20%

-33
-40%
-49
-60%
-63 -64
-69 -69 -71
-75 -76 -76
-80% -80
-84
-88
-92 -90
-100%
2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2

Equity Debt

The 2009 Q1 Survey showed that CFOs believe that in Chart 14. Source of funding
future corporates are likely to rely more on equity
Net equity issuance by UK corporates vs net bank borrowing 12 month moving average (in £m)
finance and less on debt finance. The second quarter
Survey confirms CFOs are increasingly willing to 8,000
contemplate issuing equity. 7,000
6,000
Official data show that a major change is already 5,000
underway. Net bank borrowing has collapsed in the UK 4,000
Net bank borrowing
in the last year, while net equity issuance has turned 3,000
positive after several years of declining issuance. 2,000
1,000
0
Net equity issuance
-1,000
-2,000
2004 2005 2006 2007 2008 2009

Source: Bank of England

The Deloitte CFO Survey No return to business as usual 7

Data archive

A note on methodology
Many 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 15
Hard to get 48 55 63 77 89 99 94 72
Net 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 82
Neutral 22 26 25 10 2 4 11 15
Cheap 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 27
Neither attractive nor unattractive 12 28 16 13 14 9 12 22
Unattractive 16 28 25 40 51 62 61 50
Net balance 57 16 34 7 -16 -33 -34 -23

Corporate bonds, as a source of funding, are

Attractive 55 33 28 40 14 20 22 35
Neither attractive nor unattractive 18 33 19 29 17 14 23 32
Unattractive 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, is 

Attractive 26 19 19 29 17 21 27 44
Neither attractive nor unattractive 24 33 9 20 24 13 28 26
Unattractive 50 48 72 51 58 66 45 30
Net balance -24 -29 -53 -22 -41 -45 -18 14

UK corporate balance sheets are

Overleveraged 4 5 13 32 33 38 63 50
Appropriately leveraged 65 73 81 61 61 59 34 44
Underleveraged 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) are 

High 41 35 32 17 15 25 15 9
Normal 49 60 52 56 39 26 13 22
Low 10 5 16 27 45 49 72 68
Net balance 31 30 16 -10 -30 -24 -57 -59

In a year’s time, FTSE 100 will be 

Higher 45 30 50 40 49 66 65 62
Broadly unchanged 33 40 25 33 35 26 23 34
Lower 22 30 25 28 16 8 12 4
Net balance 24 0 25 12 33 58 53 58

Levels of M&A in the UK will 

Increase 14 21 31 38 48 40 56 83
No change 12 14 16 26 27 36 29 15
Decline 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 will

Increase 14 12 22 32 31 20 29 40
No change 6 5 6 23 30 33 37 40
Decline 80 84 72 45 39 47 34 21
Net 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 49
Less optimistic 30 40 31 36 56 66 45 15
Net balance -4 -24 -9 -19 -53 -59 -30 22

8
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.

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