Optimism falls, but Financial Services firms expect strong growth for the rest of 2017 - CBI/PwC

Sentiment continued to deteriorate across the financial services sector in the three months to September, despite an expansion of business volumes and expectations of a stronger quarter ahead, according to the latest CBI/PwC Financial Services Survey.

The latest quarterly survey of 94 firms found that overall optimism about the business situation fell slightly, having deteriorated fairly steadily since the beginning of 2016. But while banks and building societies were markedly less optimistic, finance houses, life insurers and investment managers were more optimistic than they had been in the previous three months.

Growth in overall business volumes slowed in comparison with the first half of 2017, but the overall level of business was described as normal. Volumes expanded in all sub-sectors except building societies where business volumes contracted at the fastest pace since 2011. Looking ahead, demand in the financial services sector as a whole is expected to strengthen next quarter, although building societies expect little respite, with a further fall in volumes expected.

Growth in profits improved for a third successive quarter, although more slowly than in the first half of the year, with profitability expected to improve at a more robust pace in the next three months. Building societies are again the exception, as falling volumes coupled with rising average costs saw profits drop. This profits decline is expected to continue for the rest of 2017.

Across the sector as a whole, employment remained stable in the three months to September, but firms expect to increase recruitment over the coming quarter. Investment intentions for the year ahead have improved significantly, with marketing budgets increasing, investment in IT anticipated to rise at the fastest pace in two and a half years, and planned investments in land & buildings rising for the first time since 2014.

 

Rain Newton-Smith, CBI Chief Economist, said:

 

“It’s encouraging to see volumes and profitability continuing to expand for most financial services firms, with hiring expected to pick up and investment intentions improving.

 

“While demand in the sector is expected to hold up in the near-term, we can’t ignore the fact that optimism has dropped in almost every quarter for the past two years. With Brexit uncertainty affecting the wider economy, it’s vital that substantive progress is made during the next round of Brexit negotiations, so that transitional arrangements can be agreed and businesses can make decisions now about investment and employment that will affect economic growth and jobs far into the future.”

 

Paul Terrington, PwC Northern Ireland chairman and head of UK regions said that, despite the Brexit worries, employment in the sector was stabilising with both IT and marketing spend expected to increase.

 

“It’s clear that activity marches on, however, the financial services sector is at a crossroads. The way ahead is uncertain, particularly as Brexit negotiations are yet to be resolved. Co-ordinated action is required by the companies, government and regulators to ensure the continued future success of the industry and its customers.

 

“Specifically, the UK’s regions must also be given every opportunity to flourish as domestic and specialist financial services centres. Above all, efforts must be maintained to increase trust among customers.”

 

The survey found that the most important motivation driving investment in the quarter to September was the need to increase efficiency and ensure regulatory compliance, with spending on regulatory compliance predicted to increase at the fastest pace since the question was first asked in this Survey in 2006. The share of firms investing to provide new services also hit a two-and-a-half year high.

Considering the broader future of the financial services sector, firms see a need for action on a number of fronts to ensure that the UK remains a leading financial centre in 2025. In particular, maintaining the UK’s position as a leading FinTech and innovation centre is seen as a vital ingredient for the sector’s success, along with preserving access to talent and ensuring internationally focussed regulation.

The key findings in the latest survey were:

  • Optimism in the financial services sector fell slightly in the quarter to September, the sixth decline out of the last seven quarters. This marks the longest period of falling sentiment since the global financial crisis of 2008.
  • 12% of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 18% were less optimistic, giving a balance of -6%.
  • 28% of firms said that business volumes were up, while 15% said they were down, giving a rounded balance of +13%. This compares with +44% in June.
  • Looking ahead to the quarter to December, growth in business volumes is expected to accelerate: 34% of firms expect volumes to rise next quarter, and 7% expect them to fall, giving a balance of +27%.
  • Profits growth slowed in the quarter to September, with 27% of firms reporting that profits had increased and 14% saying they fell, giving a balance of +13%. This followed a balance of +35% in June.
  • Total operating costs rose significantly (+38%), with average costs also edging up (+6%, from -6% in June). Total operating costs are expected to continue to rise next quarter (+19%), but average costs are expected to be stable (-1%).
  • 28% of financial services firms said they had increased employment, while 29% said that it had decreased, giving a balance of -1% (down from +29% last quarter).
  • Numbers employed are expected to increase next quarter (+11%), with headcount expected to be stable in banks (-1%) and to fall in building societies (-13%), but to increase in all other sectors.

In the year ahead, financial services firms expect to increase IT spending at the fastest pace since March 2015, and to also step up other forms of investment, particularly marketing. Uncertainty about demand or business prospects, inadequate financial return and a shortage of labour, including managerial & supervisory staff, were given as the main factors likely to limit future investment.

Ends.

 

Notes to Editors:

About the survey

The September 2017 Financial Services Survey was conducted between 15th August and 1st September 2017. 94 firms replied.

A ‘balance’ is the difference in percentage points between the weighted percentage of firms answering that output is “up” and the percentage answering “down” (for example, if 30% of firms say that output is up, 60% that it is unchanged, and 10% that it is down, the balance statistic is +20pp).

Across the UK, the CBI speaks on behalf of 190,000 businesses of all sizes and sectors. The CBI’s corporate members together employ nearly 7 million people, about one third of private sector-employees. With offices in the UK as well as representation in Brussels, Washington, Beijing and Delhi, the CBI communicates the British business voice around the world.

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