Optimism in the financial services sector stabilised in the second quarter of 2018, following sharp falls over the previous two quarters. That’s according to the latest Financial Services Survey by the Confederation of British Industry (CBI) and PwC.
The quarterly survey of 100 firms found that optimism about the overall business situation in the financial services sector showed no improvement, having fallen in all but one quarter since the beginning of 2016. Sentiment was unchanged in banking, building societies and investment management, but improved in finance houses and general insurance.
Overall business volumes were flat. While building societies reported that volumes rebounded, after falling in the previous quarter, volumes were unchanged in banking, and grew at a fairly tepid pace in general insurance and investment management. Looking ahead, overall business volumes are expected to pick up marginally over the coming three months.
Overall employment expected to rise further
Employment across the financial services sector as a whole increased for a second consecutive quarter, at the fastest pace for a year. The only sector cutting back headcount was building societies (reflecting weaker activity and profitability). Overall employment is expected to rise further over the coming quarter.
Investment intentions for the year ahead improved, with marketing budgets increasing. Investment in IT is expected to rise at the fastest pace in over three years, motivated by a mixture of new service provision, efficiency improvements and regulatory compliance. With demand uncertainty diminishing, the share of firms investing to provide new services was the highest in three years.
Unique agreement needed
CBI Chief Economist Rain Newton-Smith commented: “Despite fairly subdued growth last quarter, it’s good to see financial firms stepping up hiring and investment, with digital technologies and new services seen as the best way to grow in a fiercely competitive environment.
“The UK’s financial services is the jewel in the crown of the British economy, and is an engine for growth in other parts of the economy across the country. Yet it’s impossible to ignore the fact that three years have now passed since we’ve seen any significant improvement in overall sentiment in financial services.
“In order for the sector to continue to attract investment and create jobs in the run up to Brexit and beyond, the Government must work hard with Brussels to agree a unique agreement that develops the sector after Brexit.”
Regulatory spending is “most important barrier to growth”
Andrew Kail, Head of Financial Services at PwC, said: “Optimism amongst financial services has remained subdued and growth in business volumes has weakened. Profitability was also stable, following strong growth over the last year. There is a hive of activity among firms bedding in sweeping regulatory requirements, including GDPR and PSD2. Businesses expect regulatory spending to continue increasing over the next 12 months. It is currently marked as their most important barrier to growth.
“Reflecting on GDPR, 67% of financial services firms feel confident and 29% very confident about meeting the practical demands of the regulation, which captures the significant time and investment companies have made.
“Brexit continues to drive uncertainty amongst sector players, from the smaller operators to the market leaders. Location planning, people movements and client retention remain at the top of the agenda, despite the extra time afforded by the transition period. Firms are expecting further progress to be made at the negotiation tables of Brussels and Westminster.”
Minimal or no growth in lending sector
Profits in the sector as a whole were largely flat in the quarter to June, with the lending sectors in particular (banks, building societies, finance houses) seeing minimal or no growth, although parts of the insurance sector and investment management saw profits improve. Overall profitability is expected to grow only moderately in the three months ahead.
The broader economic backdrop for financial services is likely to remain challenging in the year ahead, with UK economic growth expected to remain subdued due to weak consumer income growth and investment being held back by ongoing uncertainty.
Key findings from the survey
- Optimism in the financial services sector dipped marginally – the ninth quarter of declining sentiment in the last ten quarters (the exception was the first quarter of 2017, when sentiment was flat) and nearly three years since any significant improvement in sentiment since June 2015 (+32%) – but stabilised after two quarters of severe falls.
- 21% of firms said they were more optimistic about the overall business situation compared with three months ago, while 25% were less optimistic, giving a balance of -4% (compared with -17% in the quarter to March).
- 13% of firms said that business volumes were up, while 17% said they were down, giving a balance of -4% (down from +22% in the quarter to March).
- Looking ahead to the quarter to September, business volumes are expected to rise a little: 16% of firms expect volumes to rise next quarter, and 9% expect them to fall, giving a balance of +7%.
Incomes, costs and profits:
- Overall profitability was largely flat in the three months to June, with 16% of firms reporting that profits had increased and 12% saying they fell, giving a balance of +4%. Profits are expected to increase slightly faster next quarter (+11%).
- Income from fees, commissions and premiums was flat (-4%), but is expected to pick up in the quarter ahead (+12%).
- Income from net interest, investment and trading was also unchanged (-3%), although it is expected to dip in the next three months (-8%).
- Total operating costs stabilised (+4%), having risen sharply in previous quarters (+27% in March), as did average costs (-4%, from +17%).
- 29% of financial services firms said they had increased employment, while 5% said that headcount fell, giving a rounded balance of +24% – a rise on the previous quarter (+9%).
- Numbers employed are expected to continue to grow (+15%) next quarter.
Investment over the next 12 months:
In the year ahead, financial services firms expect significant increases in spending on IT and marketing:
- IT: +70% (the highest since March 2015 (+72%))
- marketing: +20%
- vehicles, plant and machinery: -9%
- land and buildings: +5%.
The main reasons for authorising investment are cited as:
- to provide new services (72% of respondents – the highest since December 2014 (+72%))
- to increase efficiency/speed (66%)
- statutory legislation and regulation (61%).
The main factors likely to limit investment are cited as:
- uncertainty about demand or business prospects (41% of respondents – the lowest since March 2015)
- shortage of labour, including managerial and supervisory staff (40%)
- inadequate net return (27%).
Business expansion over the next 12 months:
The most significant potential constraints on business growth over the coming year are:
- statutory legislation and regulation (60% of respondents)
- level of demand (42% – the lowest since June 2015 (+37%))
- competition (38%).
For more information about the survey data, or to discuss ways to maintain profitability after Brexit, email me or call me on 020 7099 2621.