Optimism rose at its fastest rate since the survey began in 1989, as profitability rose for the fifth consecutive quarter.
Business volumes growth was strong across all customer categories, with the exception of financial institutions where they were flat. There was a notable pick-up in business with industrial and commercial companies.
Both business volumes and profitability are expected to increase again next quarter.
The CBI/PwC Financial Services Survey also shows that employment grew at its fastest pace since 2007 and expected employment growth for the first quarter of 2014 is the strongest since the survey began.
Based on the latest CBI/PwC survey figures and their historical relationship with ONS workforce jobs data, we estimate that financial services jobs increased by 10,000 in the fourth quarter of 2013 and expect a further rise of 15,000 in the first quarter of 2014. That would take employment in the sector to 1.16m in Q1 2014 (52,000 lower than Q4 2008).
Firms’ capital spending intentions for the next 12 months are positive across all categories for the first time since the financial crisis.
Companies are now much less concerned about the impact of the level of demand and regulation on business in the year ahead, and more mindful of skills shortages, the capacity of their systems to deal with new business and stronger competition.
Matthew Fell, CBI Director for Competitive Markets, said: 'As the recovery takes root in the wider economy, it is beginning to feed through to financial services firms. Things are starting to look more ‘normal’ after five years of volatility.
'All the key indicators – optimism, business volumes and profitability - are up. But it’s particularly encouraging to see longer term confidence indicators like marketing spend, employment and investment spend also rising strongly.
'It’s also telling that financial services firms are now less worried by levels of demand and regulation and are instead concerned about a skills crunch, their systems capacity and stronger competition'.
Kevin Burrowes, PwC’s UK financial services leader, said: 'Banking sentiment continues to improve strongly, mirroring the UK economic rebound. We hope that as trust is earned and rebuilt over time, banks will increasingly be recognised positively for their role in society and their contribution to the UK economy.
'The sector is enjoying growing revenues and volumes of business. Profitability is increasing too. The sector’s confidence is illustrated by its rising headcount, a striking reversal from one year ago, and fewer respondents are concerned about demand than at any point since the financial crisis.
'The survey suggests that the sector is also beginning to get to grips with its regulatory agenda. Regulation is seen as a lesser obstacle to growth than before, and regulatory spending is growing more slowly. There is no question that compliance remains a major concern, but it is slightly less all-consuming than it was'.
69% of financial services firms said they felt more optimistic about the overall business situation, while 1% said they were less optimistic, giving a balance of +68% - the highest since the survey began in 1989
53% of firms said that business volumes were up, while 7% said they were down giving a balance of +46% - the highest since June 2007 (+51%)
Business volumes increased with industrial & commercial companies (+30%), private individuals (+34%) and overseas individuals (+11%). They were flat with financial institutions (-2%)
Looking ahead to the next quarter 52% of companies expect business volumes to increase, while 2% said they will decrease, giving a balance of +50% - which is the highest since June 2010 (+63%).
Incomes, costs and profits:
Incomes from fees, commissions or premiums increased in the three months to January (+36%) at the fastest pace since June 2012 (+43%)
Income from net interest, investment or trading income also increased (+20%)
Average spreads were stable (+3%)
While total costs rose strongly (+23%) and at the fastest pace since March 2012 (+23%), strong volumes growth meant that average costs remained flat (-1%)
As a result, profits increased for the fifth consecutive quarter (+49%) – the strongest balance since March 2011 (+62%) – and are expected to grow robustly in the next quarter (+39%).
47% of financial services firms said that they had increased employment, while 8% said that it had decreased, giving a balance of +39% - the highest since March 2007 (+39%) and considerably stronger than expectations (+14%)
Firms expect employment to rise even more strongly next quarter (+49%), which is the strongest expectations balance since the survey began in 1989.
The next 12 months:
Financial services companies plan to increase their capital spending in all areas over the next 12 months:
Land and buildings (+18%)
Vehicles, plant & machinery (+10%)
Information technology (+38%)
Factors likely to constrain business over the next year:
The number of firms citing the level of demand as a likely constraint on their business over the next year fell to a survey low of 46%
Concern about the availability of professional staff rose as a constraint, cited by 31%
Concern about the adequacy of system capacity rose as a potential constraint (29%) – the highest number of citations since June 2011 (32%)
Competition emerged as the most significant constraint on business in the year ahead (cited by 50%), although this was still well below the long-term average (66%).
Citations for statutory legislation and regulation also fell (45% from 71% in the previous quarter).
However, a majority of firms still expect to increase spending on regulatory compliance over the next 12 months: (+69%).
Analysis by sector:
Optimism continued to rise briskly, while business volumes rebounded from an unexpected drop last quarter, with strong growth expected again next quarter. With costs contained, profitability is predicted to strengthen further. Improved confidence is reflected in rising headcount, which is a sharp turnaround from the situation one year earlier. The survey suggests that banks are beginning to get a grip on new regulation, which is seen as less of an obstacle to growth than before, while regulatory spending is growing more slowly. The sector’s priorities are shifting towards customer retention and operational efficiency.
Building societies are feeling more optimistic about their business situation than at any time during the past seven years. Although volumes disappointed in the three months to December, activity is predicted to grow in the next quarter. Profitability was supported by falling average costs last quarter and is expected to grow strongly next quarter. Nonetheless, respondents are wary of competition in the mortgage market. Faster growth could also bring with it the possibility of skills shortages, with regulatory compliance remaining a major driver of recruitment.
Optimism among finance houses strengthened in the three months to December. Business volumes grew rapidly, led by business with private individuals. Growth in business volumes is expected to accelerate further next quarter. Profitability was broadly flat, but is expected to pick up over the next quarter, driven by growth in business volumes. Growth in numbers employed slowed further, but is expected to pick up strongly next quarter.
Optimism among life insurers climbed faster than at any time over the last decade, on the back of a second successive quarter of strong growth in business volumes. With confidence increasing, life insurance companies have allowed operating and marketing costs to rise. Yet despite this, profits rose for the first time in a year, with further increases expected. Life insurers continue to invest heavily in IT, to improve efficiency and enhance distribution channels, which is vital to growth following the introduction of the Retail Distribution Review at the start of last year. Regulatory compliance remains a key driver of recruitment.
The general insurance sector is enjoying a gradual recovery in confidence as the broader economic picture improves. Volumes of business expanded for a third successive quarter, and solid growth is expected next quarter. Insurers are keeping operating expenses under control and remain cautious over staffing levels. This helped to deliver a strong increase in profitability. Claims also fell unexpectedly in the three months to December, but are expected to rise during the next quarter. In what is one of the most mature segments of the industry, competitive pressures are an increasing concern among general insurers.
Optimism amongst insurance brokers improved moderately in the three months to December, as business volumes increased at their fastest pace since March 2009. Business with industrial and commercial companies was particularly brisk. Similar growth rates are expected next quarter. Amid a strong rise in total and average costs, profitability fell sharply, but is expected to recover next quarter. Numbers employed grew robustly and an even stronger rise is expected next quarter. Investment intentions are also increasingly positive, driven by regulation and the need to improve efficiency.
Jonathan Howe, PwC’s UK insurance leader, said: 'It’s a really positive review for life insurers. Optimism is at a real high, and they have seen a large upsurge in business volumes. Profitability started to grow again, and despite growing marketing and operating costs growth is expected to continue. Headcount increased at a stronger rate, although many see the scarcity of professional staff as a barrier to growth. This is reflective of the introduction of the new separate regulators and the upcoming Solvency II deadlines.
'General insurers are enjoying a gentler upwards curve. There has been a gradual recovery in confidence and they are starting to make some considered investments. Business volumes continue to grow and there’s no suggestion that this will falter. It’s certainly promising to see that personal lines are finally showing signs of growth after several quarters of falling or flat activity.
'Profitability rose at its fastest rate since March 2008. However the sector remains focused on cost control and headcount, reflecting caution over new entrants and increased competition. IT and compliance will no doubt drive investment, to avoid aging systems and to cope with increased regulatory pressures and the revival of Solvency II'.
Securities traders were unanimously more optimistic about their business situation, in a stark reversal from the sector’s gloomy outlook one year earlier. Against a backdrop of improving investor confidence and strengthening equity markets, profitability in the securities trading sector rose robustly, underpinned by rising business volumes and commission income. Profitability is expected to increase further next quarter. Firms also expect another quarter of strong employment growth and investment intentions are increasingly positive, especially for IT.
Investment managers were feeling bullish at the end of 2013. Rising equity markets drove business volumes higher during the quarter to December, with a large majority of investment managers reporting higher fee income. Volumes are expected to rise further next quarter. With pricing power improved and costs falling, profits rose and a further increase is expected. Staffing levels are increasing rapidly, driven primarily by increased demand.
Paula Smith, PwC’s UK asset management leader said: 'Investment managers were in a dominant position at the end of 2013, and remained more optimistic than we’ve previously seen. Rising equity markets, higher fee incomes and increased profitability are all contributing factors to the bullish confidence that volumes and revenues will continue to grow over the next quarter.
'However, investment managers need to remain aware of the increasing pressure of compliance costs, as the requirements from the regulator get more complex and controls tighten. This is making operational effectiveness key for many firms, and driving increased investment in headcount as firms look to bolster compliance departments. They are making sure they get in shape to deal with these challenges'.