Optimism dives yet again in the UK’s financial services sector

By Terry Irwin |
Categories: Economy, Financial services
Tagged With: , , , , ,

Optimism in the financial services sector fell for the fourth consecutive quarter at the start of 2018, surpassing the gloom that enveloped the sector during the financial crisis. That was the overall finding of the latest Financial Services Survey by the Confederation of British Industry (CBI) and PwC.

The quarterly survey of 81 firms found that optimism about the overall business situation in the financial services sector fell again, having declined in eight out of the last nine quarters. Sentiment in banking continued to deteriorate, in line with recent quarters, while the mood among investment managers also deteriorated, for the first time in over a year. Sentiment was broadly unchanged in most other sectors.

More encouragingly, overall business volumes continued to expand in the three months to March, with the pace of growth picking up from the previous quarter. However, conditions again varied across the financial services sector. Solid growth in business volumes was reported in insurance and banking, whereas finance houses saw a sharp drop in volumes. For building societies, volumes were roughly unchanged, in line with a generally weaker performance over the previous year, while growth stalled in investment management. Looking ahead, overall business volumes are expected to expand at a steady pace over the coming three months, with solid growth anticipated for the majority of subsectors (though not insurance).

Despite the uncertainty facing the sector, employment across financial services rose in the quarter to March, having stalled in the previous two quarters. And against a backdrop of strengthening profitability, firms plan to increase headcount further in the three months to June.

“No escaping the rather large elephant in the room”

CBI Chief Economist Rain Newton-Smith commented: “Financial services firms have performed well over the last three months, with business volumes and employment on the up and beating expectations.

“But there is no escaping the rather large elephant in the room. Optimism has been flat or falling for over two years now – that’s nine quarters – something not seen since the Financial Crisis.

“The Brexit transition that has been agreed between the UK and the EU will give financial services firms more reason to pause contingency plans, and to invest in the UK, but the Government must push energetically for the protection, maintenance and development of our world-beating financial services sector.

“Looking to the longer term, it’s clear that the sector needs to work hard to ensure the workforce has the digital skills necessary for maintaining the UK’s competitive edge, as well as to attract a younger, more diverse group of people and the very best international talent.”

Brexit is just one of many factors

According to Andrew Kail, Head of Financial Services at PwC, “We are seeing a contradiction between a consistent trend of strong financial performance and weak levels of confidence about the future. The key question is: what looms that is worrying companies in the sector?

“Brexit, with its transition timeframe now agreed, is just one of many factors financial services organisations are having to deal with. While 31 December 2020 is a welcome extension on 31 March 2019, it may not be sufficient to prevent companies planning for a hard Brexit until the shape of the landscape after 2020 becomes clearer.

“Add to Brexit the high levels of competition, changing consumer preferences and behaviours, rapidly developing technological changes, the need to aggressively manage costs, and new regulation, collectively, it is denting confidence about the future.

“While there are clear challenges, the sector is still full of opportunity for those businesses who keep a sharp focus on customers’ needs and provide high quality products and services, while embracing digital technology across all channels.”

Uncertainty about demand still a brake on investment spending

Investment intentions for the year ahead cooled a little over the three months to March, continuing the previous quarter’s trend. Financial services firms plan to raise spending on marketing and IT, although the pace of growth in IT spending is expected to slow. Firms also expect to cut back in other areas of capital spending, notably land and buildings.

Firms cited a broad range of reasons to invest, including efficiency improvements, statutory legislation and regulation, and to provide new services and reach new customers. The main brake on investment spending remains uncertainty about business prospects and demand. Similarly, two thirds of firms saw the level of demand as a brake on business expansion.

In the long term, firms see a broad range of challenges in recruiting talented workers, but are most keenly aware of the need for digital skills, with the ability of education providers to meet the changing needs of the sector seen as a significant challenge to the UK retaining its place as a global financial centre.

Across the economy more broadly, the CBI expects growth to remain subdued over the coming quarters, in line with 2017 performance. For more detail, see the CBI’s December economic forecast.

Key findings from the survey

  • Optimism in the financial services sector dropped substantially again, the eighth quarter of declining sentiment in the last nine quarters (the exception was the first quarter of 2017, when sentiment was flat) – surpassing two years of negative sentiment. This marks the longest period of flat or falling sentiment since the global financial crisis of 2008, and no material increase in optimism for almost three years.
  • 7% of firms said they were more optimistic about the overall business situation compared with three months ago, while 24% were less optimistic, giving a balance of -17% (compared with -22% in the quarter to December).
  • 33% of firms said that business volumes were up, while 11% said they were down, giving a balance of +22% (up from +7% in the quarter to December).
  • Looking ahead to the quarter to June, business volumes are expected to expand at a steady pace: 23% of firms expect volumes to rise next quarter, and 3% expect them to fall, giving a balance of +20%.

Incomes, costs and profits:

  • Overall profitability improved significantly in the three months to March, with 44% of firms reporting that profits had increased and 11% saying they had fallen, giving a balance of +33%. An improvement on December (+15%), this also exceeded expectations (+19%).
  • Income from fees, commissions and premiums rose (+3%), and growth is expected to quicken marginally in the quarter ahead (+6%).
  • Income from net interest, investment and trading also increased (+5%), but this is not expected to be sustained in the next three months (+2%).
  • Total operating costs rose (+27%), but average costs also edged up (+17%). Both total costs and average costs are expected to rise next quarter (+32% and +12% respectively).

Employment:

  • 30% of financial services firms said they had increased employment, while 22% said that headcount had fallen, giving a rounded balance of +9% (with employment having dropped in the previous quarter, a balance of -5%) – exceeding flat expectations (0%).
  • Numbers employed are expected to grow robustly (+24%) next quarter.

Investment over the next 12 months:

In the year ahead, financial services firms expect increases in spending on IT and marketing, but to cut back on other forms of capital spending:

  • IT: +37% (a drop from +61% in the quarter to December)
  • marketing: +31% (a drop from +40% in the quarter to December)
  • vehicles, plant and machinery: -17%
  • land and buildings: -28%.

The main reasons for authorising investment are cited as:

  • to increase efficiency/speed (56% of respondents)
  • statutory legislation and regulation (52%)
  • to provide new services (50%).

The main factors likely to limit investment are cited as:

  • Uncertainty about demand or business prospects (51% of respondents).
  • Inadequate net return (48%).
  • Shortage of labour, including managerial and supervisory staff (25%).

Business expansion over the next 12 months:

The most significant potential constraints on business growth over the coming year are:

  • level of demand (64% of respondents)
  • competition (60%)
    • 94% of firms see competition coming from within their own sector of financial services
    • 71% see competition coming from new entrants
    • 50% see competition coming from other sectors of financial
  • statutory legislation and regulation (43%).

Talent challenges to UK’s position as a leading global financial centre:

  • Respondents were asked to rank the most significant talent challenges that must be overcome for the UK to remain a leading financial centre, with 1 being the most significant and 5 being least. Average scores were as follows:
    • need to adapt to digital skills (2.6)
    • ability of education providers to meet changing needs (3.2)
    • lack of attractiveness to a younger, more diverse workforce (3.5)
    •  ability to attract and import the best international talent (3.5)
    • how to make better use of different talent channels such as apprenticeships (3.7).

Does your business have the skilled personnel needed to maintain a competitive edge? For advice on recruiting top talent, email me or call me on 020 7099 2621.

Share this