Q1 2022 Results
The gathering optimism of 2021 has largely evaporated as financial services (FS) organisations face the fallout from mounting geopolitical instability, faltering business confidence and the rising cost of living. Agility, resilience and risk insight will be critical in steering through the uncertainty and disruption ahead. Purpose will also have a central role to play as FS organisations look at how to best support customers in the difficult times ahead, while sustaining vital investment in levelling up and the green transition.
“Financial services organisations are right to be careful and cautious as their resilience is once again put to the test. Some investment plans may therefore need to be reined in for now. But this isn’t the time to batten down the batches altogether. Banks, insurers and investment managers should be out there supporting customers and businesses in need. It’s also important to keep up investment in the insight and agility needed to respond quickly and decisively to changing market conditions.”
Sentiment within UK FS fell at the fastest pace since September 2019. Analysis by PwC on the UK Economic Outlook found this month that UK households will be £900 worse off this year, with the lowest earners facing a £1,300 hit.
FS organisations expect business volumes to remain flat and returns to fall over the coming three months, but investment in technology will continue to rise.
Following a decline in non-performing loan (NPL) rates over the past three months, banks expect them to increase over the coming quarter.
Retail and business banking are feeling the impact of rising inflation and uncertainty around consumer and business sentiment. Unlike 2020 and 2021, customers no longer have the support of furlough payments and access to emergency loans.
The potential challenges ahead are reflected in an expected rise in NPLs although there is an expectation of some increase in average spreads. Priorities remain to invest in technology, accelerate digitisation and adjust to changes in customer preference and behaviour.
“Once-in-a-lifetime ‘black swan’ events are now becoming an almost commonplace succession of ‘grey swans’. Today’s threat scenarios bring together both financial exposures and a complex array of non-financial risks stretching from sanctions and cyberattacks to failing to meet societal expectations. Managing these complex new realities demands a clear understanding of multiple risks, their interlocking impacts and the agile operational and decision making structures needed to respond. The opportunities to leverage digital capabilities remain key.”
The continued confidence among insurers stands out from the other FS sectors. Insurers anticipate significant increases in business volumes, but with a fallback in profitability.
General insurers have benefited to some extent from the dip in claims losses as people spent more time at home during the pandemic. But an even bigger boost has come from the step-up in digital transformation. The industry’s tech leaders can not only undercut competitors on cost, but also take advantage of sharper risk selection and pricing.
But the position may not be quite as strong as some insurers assume. The risk landscape is shifting as people get out and about more and asset prices become more volatile. The growing threat from cyberattacks and climate change could also ramp up claims losses. Further investment in talent and technology could prove critical in this uncertain ‘new normal’. The step-up in capabilities could also help pave the way for a new generation of insurance solutions built around proactive risk prevention and subscription services in areas such as property and equipment maintenance.
*Results in the above graphic relate to General Insurance
“Insurers can move forward from a position of strength, accelerating transformation and developing innovative new business models. Further investment in digitisation and automation can help to deliver the necessary capabilities. But people and skills are just as critical. This heightens the need for both upskilling and the purpose-led strategies that can help to attract prized talent.”
Investment managers can no longer rely on benign equity market conditions to sustain performance and growth. Factors ranging from the pressure on consumer spending to the rising cost of capital all point to volatility ahead.
As institutional investors go in search of fresh opportunities and yield, we’re likely to see further increases in private markets allocations. In turn, private markets managers face the challenge of how to sustain target returns amid today’s economic headwinds and high multiples. Within private equity portfolio companies, we’re seeing a resulting shift to longer and more active turnaround strategies. Among infrastructure funds, the search for value can be seen in the increase in core-plus investment in areas such as renewable energy and vehicle charging points.
Volatility and disruption are also spurring further growth in direct trading platforms and hybrid products such as smart beta and active ETFs. The need to keep pace is driving both acquisition and the investment in tech-enabled innovation.
“Gathering economic and financial market headwinds mean that delivering standout performance and growth is going to be much more challenging. But opportunities are opening up for investment managers with the capabilities to capitalise. The managers out in front are building the talent and technology needed to analyse and manage complex multi-asset portfolios. They’re also embedding ESG into the heart of their business and operating models.”
Two-thirds of FS organisations say that embedding environmental, social and governance (ESG) considerations into their business is a priority for their transformation plans.
FS organisations see two big challenges in achieving their Net Zero targets: defining the right plan and attracting the right talent.
FS organisations have demonstrated their commitment to helping customers and businesses through the turmoil of COVID-19. As we face further upheaval ahead, the industry’s commitment will be even more important in protecting jobs, sustaining financial wellbeing and delivering ESG priorities. This is the essence of purpose-led ‘responsible growth’.
“This is not a fad,” said Amanda Blanc, CEO of Aviva, discussing the growing business commitments on issues such as sustainability and diversity In an interview for PwC’s 25th Annual CEO Survey. “Top of our agenda is looking at how we are running the business, not just for today but for three years, five years, 10 years, 20 years’ time and beyond.”
From a commercial perspective, responsible growth offers opportunities to strengthen customer engagement and lifetime value. It can also move FS organisations to the forefront of fast-growth markets such as green finance, renewable energy and ESG-focused investing.
Put purpose at the centre of strategy and performance management. There may be resistance from some employees who see purpose and profit as incompatible. But in a sector facing changing stakeholder expectations and competition from nimble new entrants, responsible growth offers opportunities to establish deeper connections with customers. It can also inspire pride and loyalty among employees and boost your ability to attract the talent needed to drive growth.
Align purpose and digital transformation. The latest analytics allow you to tailor and target financial solutions more effectively. They also enable you to gain a better understanding of customers’ individual risk profiles and intervene before issues become irreversible.
Extend strategic horizons. Some aspects of purpose-led growth such as green bonds may be small as a proportion of revenue now. But they and are critical in attracting talent and sustaining stakeholder buy-in in the short-term, while also offering significant growth potential.
Banks will be judged on the way they respond to cost of living pressures and the challenges faced by businesses already tested by the impact of the pandemic. Their response to these challenges will shape public perceptions for a generation.
A new PwC study on responsible growth in banking highlights the importance of a proactive approach to financial wellbeing. Examples include informing customers about ways to improve their credit score and early identification and support for customers facing repayment difficulties. The results will boost customer loyalty and referrals.
The road to responsible growth would also see banks using their financial weight and powerful platforms to lead on ESG. This could include extending affordable credit to underserved and disadvantaged customers, proactively improving the financial wellbeing of customers, pricing for value and using their considerable platforms to lead on societal issues. Growth may prioritise lending to new segments in line with ESG principles, such as the financially excluded and SMEs, whereas a bank focused on diversifying funding may decide to launch green savings products.
Changing market conditions and stakeholder expectations have created opportunities for insurers that want to compete on more than just price. The potential differentiators include ESG strategy and performance at a time when insurers and their corporate clients are coming under increasing scrutiny from employees, customers and investors. Insurers are in a powerful position to influence client behaviour, cover the risks of transition and help anticipate and mitigate the risks of climate change.
How can insurers deliver? A recent PwC study highlights the importance of breaking the immensity of ESG down into understandable and actionable components. In turn, a PwC study on the road to responsible growth in insurance looks at how to align purpose-led strategies with data-enabled transformation in areas such as risk prevention and protection-as-a-service. Further openings include using the review of Solvency II as an opportunity to increase socially and environmentally conscious investment.
Alongside multi-asset strategies, ESG is the key growth opportunity for asset managers. With investment mandates increasingly focussed on ESG as well as financial performance, purpose-led growth is a commercial imperative rather than just a compliance issue. It now also extends beyond designated ESG funds to monitoring and influencing the strategies of all companies within the investment portfolio.
The big challenge is turning intention or commitments into action. Rather than leaving the social and environmental impacts of investments to a specialist ESG team or compliance vetting process, the investment managers out in front have a clear ESG strategy and are embedding ESG considerations throughout their operations and investment processes. This stretches from their risk management frameworks, product strategy and investment approach to corporate issues such as inclusion and diversity and managing their climate footprint.
Most FS organisations report being at least somewhat prepared for the mandatory Taskforce for Climate-Related Disclosures (TCFD) - though less than 30% believe they are very prepared.
FS organisations see devising the right plan as the biggest challenge to achieving their Net Zero targets.
In an unstable risk and business environment, short-term strategies may conflict with longer term priorities. In a clear case in point, FS clients and wider society need to secure affordable energy supplies in the midst of severe constraints. The results could run counter to FS organisations’ ESG investment criteria and strategies for Net Zero transition.
The pressure is heightened by the incoming TCFD requirements. This will focus scrutiny on both FS organisations’ corporate strategy and emissions related to their investments, loans and insurance coverage. The biggest dangers come from headline strategies that aren’t reflected in the realities on the ground or disclosures that risk being called out for ‘greenwashing’.
Energy security and emissions is just one of the many difficult choices ahead. As NPL rates rise, banks face the challenge of how to balance the need to control impairment with their social obligations to customers in need. Further dilemmas include how to pay sufficient bonuses to retain talent without attracting an outcry from customers struggling to make ends meet.
Upskilling and reskilling are central to retention. Not only can they help employees make the most of new technology, but also help them to feel valued and hence boost their loyalty, commitment and productivity.
Investment in upskilling and reskilling is also an important part of the social agenda within ESG. By helping employees to keep pace with technological change, more can be retained and the investment can also help to build skills within disadvantaged communities.
The most common workforce priorities for the year ahead are high levels of employee engagement and retaining talent.
Most FS organisations are at the analysis or planning stages of their reskilling journey. Only around one in ten has moved into the implementation phase.
Your business can’t grow and meet customer needs without capable and motivated employees. But competition for prized talent has rarely been more intense. While Q1 may have seen a slight lull in workforce turnover within FS, as employees waited to receive their bonuses, the door will start revolving again once the pay-outs are banked.
Pay can only get you so far in the competition for talent – it’s an expectation rather than a differentiator. As the UK findings from PwC’s 25th Annual CEO Survey highlight, purpose is critical in attracting and retaining talent. Globally, PwC research reveals that more than 80% of employees now prefer to support or work for companies that care about the same issues as they do, such as diversity, sustainability and social inclusion.
What’s more, research suggests that rather than a ‘great resignation’, the UK is experiencing a ‘great reshuffling’ as employees seek out organisations that enable them to fit work into their lives rather than the other way around. Opportunities for hybrid and remote working are part of this. However, quite a few employees, including many younger ones, prefer to come into the office most or all of the time. Restructuring fatigue is also a factor for employees who’ve endured round after round of cost-cutting and reorganisation.
Give your HRD as much say in setting strategy and budgets as your CFO, CRO and CIO - especially when key people are both critical and in short supply .
Listen to your employees and adapt accordingly. Neither ‘walking the floor’ nor talking to a small section of your workforce is enough to know what they really think. Forward-looking organisations are using the experience monitoring techniques they developed for customers to understand their employees’ sentiments and preferences.