Sentiment, volumes and profits all deteriorated markedly in the financial services sector, with various indicators at their weakest since before and during the financial crisis of 2008, according to the latest CBI/PwC Financial Services Sector.
The quarterly survey of 83 firms found that optimism about the overall business situation in the financial services sector plunged sharply, falling at the quickest pace since September 2008. This decline was broad-based across sub-sectors (except general insurers), but particularly acute for banks and building societies. Optimism has now been flat or falling for 15 consecutive quarters, amounting to nearly four years in total.
Overall business volumes fell further, at the fastest pace since September 2012, but conditions varied significantly across financial services sub-sectors. The greatest drag on growth came from the banks (which saw volumes drop at the sharpest pace since March 1991) and finance houses. Meanwhile, insurance brokers and investment managers saw robust growth. Looking ahead, overall business volumes are set to fall at a sharper pace next quarter.
With volumes declining, profits also fell, at the quickest pace since June 2009. However, the sub-sector breakdown showed some variation. Profitability in finance houses and building societies fell, and the banking sector saw the quickest decline since December 2010. Insurance brokers saw strong profits growth, while investment management profitability grew slightly. Overall profitability is expected to drop even further in the three months ahead, the weakest expectations since June 2015.
Meanwhile, in a positive sign, employment across financial services grew at the fastest pace in over a year, although growth is expected to slow over the next quarter. Headcount in banking grew at the fastest pace since December 2006.
Rain Newton-Smith, CBI Chief Economist, said:
“Quarter after quarter after quarter, optimism continues to drop in the financial services sector. Add to that the dive in volumes and profits over the last three months, and it’s clear something has to change.
“The sector is the jewel in the crown of the UK’s world-leading services industry. While it’s encouraging that investment plans have improved, the threat of a ‘no deal’ Brexit is hitting confidence.
“The Government cannot ignore the voice of this bellwether of the domestic economy and one of the UK’s most important globally competitive sectors. No ifs, no buts, the Government must heed the call to avoid a ‘no deal’ Brexit, and secure an ambitious deal with our largest trading partner.”
Andrew Kail, Head of Financial Services at PwC: said:
“The deep concerns across the financial services industry, driven by the UK’s unresolved political position, cannot be downplayed. As sentiment has taken a further slump this quarter, we’ve observed a drop-off in plans to launch new products and services as firms batten down the hatches in expectation of a turbulent few months.
“Businesses will be reducing spending on training in the short term, as the focus moves from specialist skills to contingency planning.
“Yet, the resilience of the sector is encouraging in certain areas. Employment numbers have swelled in Q3, most likely in response to an increase in regulation requirements. Pragmatism and resilience are set to be the watchwords as the industry maintains its role as a key cog of growth for the UK economy.”
Looking to the year ahead, investment intentions have improved in the sector. Spending on IT continues to expand at a historically strong pace, while investment in land and buildings, training and marketing are all set to grow. Spending is set to remain the same for vehicles, plant and machinery. Investment is largely motivated by the desire to increase efficiency and speed (the joint highest since March 2015), with concerns about return on investment the predominant brake on spending.
Asked whether they are actively managing climate change risks, around 85% of financial services firms are currently doing so or plan to do so. Asked what the greatest negative impact on their business would be over the next year, firms ranked regulation as the number one concern, followed by Brexit and technology.
Incomes, costs and profits:
Investment over the next 12 months:
Over the year ahead, financial services firms expect increases in spending on IT, land and buildings, marketing and training, and to keep capital spending flat for vehicles, plant and machinery:
The main reasons for authorising investment were:
The main factors likely to limit investment were:
Business expansion over the next 12 months:
The most significant potential constraints on the level of business over the coming year are:
Climate change risks:
Asked whether they are actively managing climate change risks in their business, financial services firms said:
Negative impacts on business:
Asked what would likely have the greatest negative impact on their business over the next year, firms said:
01 October 2019
Notes to Editors:
The September 2019 Financial Services Survey was conducted between 14th August and 13th September. 83 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 +20%).
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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