Optimism in the financial services sector surged in the three months to September, as firms reported they were the most upbeat about their overall business situation for almost 17 years. That’s according to the latest CBI/PwC Financial Services Survey.
Employment also grew, although at varying rates across different sub-sectors. But business volumes fell unexpectedly, mainly in the banking sector.
The headline fall in volumes was driven by falling business with industrial and commercial companies and overseas customers. Volumes were stable with private individuals, which was disappointing given expectations of growth, while business with financial institutions was the only area to grow.
Nevertheless, profitability rose for the fourth consecutive quarter, as companies managed to offset the fall in business volumes by widening spreads. This reflected gains in a majority of sub-sectors, including banking. Looking ahead, business volumes are expected to recover strongly in the next quarter and, with costs likely to fall, profitability is set to increase further.
Financial services firms also expect to add more jobs in the next three months, although at a slower rate than in this quarter. Stronger demand, changing business strategies and regulatory compliance were identified as major drivers of recruitment.
Stephen Gifford, CBI Director of Economics, said: 'With optimism rising and jobs and profitability growing, this is an encouraging quarter for the financial services sector, despite a fall in business volumes in banking.
'Firms are expecting positive momentum to carry into the next three months, alongside a strong recovery in business volumes, which will boost profits further.
'Financial services companies are less worried than they were about a potential lack of demand, but dealing with regulation is increasingly weighing on plans for business expansion'.
Commenting on the banking sector, Kevin Burrowes, PwC’s UK financial services leader said: 'Banks’ optimism is increasingly buoyant despite seeing a slight seasonal blip in commercial and industrial volumes. Activity and profitability are expected to grow as the economy recovers, and investment in new products and infrastructure is increasing. A reduction in industrial and commercial business down to the quiet summer was expected and is not an indication of a long-term trend. Regulation continues to be the sector’s greatest source of uncertainty, particularly as UK macroeconomic concerns start to fall away.
'We expect the full effect of the UK’s economic recovery to be reflected in bank performance in the coming months, and their solid profitability is supported by predicted cost reductions and increasing focus on growth'.
Companies plan to spend less on land & buildings and vehicles, plant & machinery over the next twelve months. However, firms expect to spend more on IT, with around two fifths of firms saying they would increase spending to combat cybercrime. However, more than a third of respondents (38%) said a shortage of finance was likely to limit capital expenditure, the highest level since December 2008 (41%).
The level of demand has lessened as a constraint on business expansion in the year ahead, falling to its lowest level since 2008 (60%). But statutory legislation and regulation continues to be a burden on financial services companies, with almost three quarters (71%) citing it as a likely brake on their business – the highest proportion since March 2011 (76%). More than half of firms said that dealing with the new twin regulators (the Prudential Regulatory Authority and the Financial Conduct Authority) had already contributed to an increase in costs.
- 59% of financial services firms said they felt more optimistic about the overall business situation in the sector, while 6% said they were less optimistic, giving a balance of +53% - the highest since December 1996 (61%)
- 22% of firms said business volumes were up, 32% said they were down, giving a balance of -10%
- Business with industrial and commercial companies was down (-18%), likewise with overseas customers (-18%). Business increased with financial institutions (+13%) and was flat with private individuals (+1%)
- Looking ahead to next quarter, 51% expect business volumes to increase, while 4% think they will decrease, giving a balance of +47%.
Incomes, costs and profits:
- Income from fees, commissions or premiums decreased in the three months to September (-23%), for the first time in a year. However, net interest, investment or trading income increased slightly (+5%), albeit disappointing expectations of somewhat faster growth (+17%)
- Average spreads widened considerably (+37%) – the fastest pace since June 2012 (+37%)
- Total operating costs rose marginally (+7%), while average operating costs fell (-9%)
- As a result of widening spreads and contained costs growth, profits continued to increase (+26%) and are expected to grow even more strongly next quarter (+35%), as business volumes are set to pick up.
- Numbers employed in the financial services sector increased in the three months to September (+24%) – the fastest rise since September 2007 (+25%)
- Employment is expected to increase again next quarter (+14%)
- Based on the latest survey figures on employment, and their historical relationship with ONS workforce jobs data, we expect financial services jobs to rise by 10,000 in Q3 2013, and then by a further 2,000 in Q4. This will bring the level of financial services jobs to 1.14 million in Q4.
The next 12 months:
- Firms plan to spend more on IT over the next 12 months (+53%) but less on land & buildings (-24%) and vehicles, plant & machinery (-12%)
- A shortage of finance is likely to limit capital expenditure over the next twelve months (38%), to the greatest extent since December 2008 (41%)
- The proportion of companies citing level of demand as a factor likely to limit business during the next year fell (63% from 84% last quarter) to its lowest level since September 2008 (60%)
- However, the number of firms citing statutory legislation and regulation as factors likely to limit business expansion rose from 59% last quarter to 71% - the highest level since March 2011 (76%)
- More than half of firms (58%) said dealing with two regulators – the Prudential Regulatory Authority and the Financial Conduct Authority – had contributed to an increase in regulatory costs.
Analysis by sector:
Banks are very upbeat, with optimism rising rapidly, despite a fall in business volumes over the past three months. A widening of spreads underpinned a solid increase in profits. An expected return to volume growth, combined with falling costs and another rise in spreads are expected to drive profits even higher next quarter. In the year ahead, investment in IT is predicted to increase strongly relative to last year, driven by a desire to improve efficiency. The most widely cited barrier to growth was regulation.
Sentiment among building societies continued to rise and they reported a seventh consecutive quarter of growth in business. Profitability rose at its fastest since December 2010, while employment continued to grow. Business volumes are expected to rise strongly again in the coming quarter, and employment to grow further, albeit at a slower pace. Concerns about future demand restricting business expansion have diminished, but building societies are more wary of stronger competition.
Business was flat for finance houses, with only a marginal increase in profits reported in the three months to September. Modest growth in volumes and profitability is predicted for the next quarter. Headcount continued to expand, though slowed a little. Investment in IT is expected to strengthen in the year ahead, but investment intentions in other areas have become more negative as uncertainty over demand grows. Inadequate net returns have also risen noticeably as a constraint on capital spending, with this quarter’s citations the highest since March 2012.
Sentiment among life insurers rose for the first time in three quarters. Business volumes rose rapidly over the past three months, after declining for two quarters, although the level of business was still judged to be below normal. With pricing power squeezed, profits fell, but life insurers expect a return to growth in profits next quarter, supported by predictions of growing premium and investment income. Headcount increased and is expected to rise further. Recruitment is being driven by two key factors: regulation and strategic change.
General insurers were mildly more optimistic than the previous quarter, with business volumes showing a second successive quarter of growth in the three months to September, and profitability rising at its fastest pace since March 2008, boosted by higher fee & premium income and a fall in costs. Robust growth in business volumes is expected during the next quarter.
Optimism among insurance brokers rose slightly. Business volumes increased markedly in the three months to September, exceeding expectations. Profitability increased at its fastest pace since March 2011. Insurance brokers expect robust growth in volumes and profitability next quarter.
Jonathan Howe, PwC’s UK insurance leader said: 'The general insurance sector saw a modest improvement this quarter - profitability rose at its fastest pace since March 2008 and business volumes showed a second successive quarter of growth. The sector saw more positive results in the higher fee and premium income, alongside a fall in costs.
'General insurers are faced with mixed outlook for next quarter - robust growth in business volumes and an improvement in demand is expected, but there remains caution over predictions of a future rise in compliance and claim costs. The increasing requirements of the new regulator pushes the conduct agenda back to the top of board's priority list. The sector should use this as a reminder of the need to focus on changing customer needs and the opportunity that this brings'.
'Life insurers saw the strongest growth in optimism in three quarters, and the industry is showing strong signs of recovery in contrast to the low profitability concerns of previous quarters. A rapid increase in business volumes is reflective of the increased confidence amongst life insurers, bolstered by predictions of growing premium and investment income. Firm’s historic concerns around skills shortages are being addressed, with increased headcount which is expected to rise further. The search for growth opportunities is still continuing, with investment in new technologies expected to increase'.
Business volumes declined faster than expected, and, alongside a rise in costs, dented profitability – which fell for the first time in three quarters. However, profits are expected to grow in the next three months, and predictions for business volume growth are the highest on record. Indeed, as a sign of increasing confidence in the outlook, an expansion of capacity has become a key driver of capital spending in the year ahead, and firms are showing a strong appetite to develop new products and services to support growth.
Business was slow over the summer, with volumes broadly flat – the first time that they have not grown since June 2012. With pricing power squeezed, incomes stalled and profits fell after strong growth in the previous quarter. Despite this, investment managers remain optimistic about their outlook, with volumes, incomes and profits are expected to recover in the quarter ahead. The sector’s headcount continued to increase strongly in the three months to September.
Paula Smith, PwC’s UK asset management leader said: 'Buoyed by hopes in European equity markets and the positive tone of UK economic recovery, investment managers remain optimistic about their outlook. Headcount is climbing as firms gear up for renewed growth. However, the costs of regulation and tougher competition are two clouds on the horizon.
'Over the next year, investment managers view levels of demand as a receding problem, but competitive threats are an increasing challenge. Investment managers see product development as an increasing priority, which reflects changes to regulation including the Retail Distribution Review, the birth of the FCA and a variety of European initiatives. However, it is also driven by the rapidly changing economic and investment outlook'.
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