Optimism wanes among financial services firms for second consecutive quarter – CBI/PwC

Growth in business volumes holds up

Optimism among firms in the financial services sector fell for the second consecutive quarter in the three months to June, amid stronger competition, rising uncertainty about demand and slowing profits growth, according to the latest CBI/PwC Financial Services Survey.

The quarterly survey of 111 financial services firms found that banks, securities traders and investment management firms were less optimistic about the general business situation than three months earlier, but sentiment in other sectors either improved or was stable.

Overall business volumes continued to rise at a healthy rate, in line with expectations, and the outlook is for a similar expansion next quarter. Banking remains a notable exception, with business volumes having been broadly stable for the last year-and-a-half, and no change expected over the next quarter. 

Profitability expanded at the weakest pace for two years in the three months to June, although profits growth is expected to accelerate next quarter. 

Costs edged higher reflecting increases in a majority of sectors. Interest and investment income remained unchanged, but rising business volumes and a modest increase in prices has supported revenues from fees and commissions. Looking ahead to the next quarter, firms do not expect to raise charges further amid the strongest competitive pressures for nine years. 

Rain Newton-Smith, CBI Chief Economist, said:

 

“There’s a mood of caution amongst financial services firms with the vote on our EU membership rapidly approaching and global economic waters still choppy.

“When talking to financial services firms, it’s clear that the low interest rate environment, increasing competition and regulatory pressure continue to weigh on profitability.

“But after a volatile start to the year there are some positive signs, with business volumes continuing to expand and overall employment levels holding up.”

Overall employment was stable in the quarter to June, after a modest increase in the three months to March. Headcount is predicted to increase a little further in the three months to September, reflecting hiring across the majority of sectors.

Investment intentions remain mixed: expected growth in marketing and IT budgets strengthened a little over the past quarter, but firms still plan to cut back other forms of capital spending, although the pace of decline has eased. However, the share of firms saying demand uncertainty could limit investment rose to a three-and-a-half-year high.

 

Andrew Kail, UK financial services leader at PwC, said:

 

“The UK now stands at the crossroads of continued EU membership – the outcome will be keenly awaited by financial services firms.

“Financial services are vitally important for the UK economy - generating jobs, income, investment and exports. Finance and insurance generated £65bn in export earnings for the UK last year, nearly £2,500 per UK household, PwC analysis has shown.

“Technological advances are proving to be game changers, and increasing competition is causing industry heavyweights to overhaul how they respond to changing customer needs.

“We are also seeing a flattening of the landscape as banks, asset managers and insurers converge.

“The lack of key skills must be addressed, but institutions should use this as an opportunity to evolve as opposed to a millstone that has to be carried.”

 

Key findings:

• Optimism in the financial services sector fell for a second consecutive quarter in the three months to June – 13% of firms were more optimistic, 29% were less optimistic, giving a balance of -16% (-21% in March 2016).
• Overall, business volumes continued to rise at a healthy rate – 46% of firms said volumes were up, 24% said they were down, giving a balance of +22%. The outlook for next quarter was similar (+21%).
• Firms reported employment as broadly stable in the last quarter – 23% said headcount had risen, 20% said it had fallen, giving a balance of +3%.

Incomes, costs, profits:

• Overall, 28% of firms reported that profits had increased and 20% said they had fallen, giving a balance of +8%, weaker growth than in the previous quarter (+13%).
• Income from fees, commissions and premiums grew at a similar pace to the previous quarter (balance of +23%) with further, albeit slower, growth expected in the quarter ahead (+11%).
• Income from net interest, investment and trading income was flat (-1%), with little change expected over the next quarter (-3%).
• Total operating costs rose (balance of +14%), having decreased over the previous quarter (balance of -12%). Costs are expected to increase further in the next quarter (+17%).

Employment:

• Employment levelled off last quarter (balance of +3%), having risen in the three months to March (+15%). Numbers employed are expected to rise again next quarter (+15%), though not in banking, where numbers employed are expected to remain flat.
• The latest employment data from the ONS show that employment in financial and insurance activities (workforce jobs measure) dipped during the second half of 2015 to end the year at 1.141 million. Based on the relationship with the survey data, employment is forecast to recover by 5000 during the first three quarters of 2016, to stand at 1.146m by the end of Q3. This would imply that employment would still be 2,000 lower than a year earlier.
• Training expenditure grew at a faster pace (+31%) than expected (+20%) in the quarter to June, but growth is expected to slow next quarter (+9%).

Investment over the next 12 months:

In the year ahead, financial services firms expect to increase IT and marketing capital spending at a faster pace, and expect to scale back other capital spending at a slower pace than previously:

• IT – balance of +46%, from +42% in March 2016
• Marketing – balance of +19%, from +7% in March 2016
• Land and buildings – balance of -9%, from -20% in March 2016
• Vehicles, plant and machinery – balance of -10%, from -19% in March 2016.

Promoting efficiency (72% of firms) and regulatory compliance (70%) were the most important motivations for investment, while the share of firms investing to reach new customers fell to its lowest level for two-and-a-half years (33%). Inadequate net returns (60%) and demand uncertainty (60%) were the most important brakes on investment – demand uncertainty rose to the highest level in three-and-a-half-years (73% in September 2012).

Business expansion over the next 12 months:

The most significant potential constraint on business growth over the coming year is competition (88% of firms), with the share of firms citing this factor rising to the highest since June 2007 (89% in June 2007). Against this backdrop, the balance of firms saying cross-selling to existing customers would be a more important source of growth over the year ahead was well above average, with interest in M&As and strategic partnerships also increasing.

• Competition (cited by 88% of respondents)
• 97% of firms see competition coming from within their own sector of financial services (98% last quarter)
• 59% see competition coming from other sectors of financial services (up from 53% last quarter).
• 54% see competition coming from new entrants (up from 35% last quarter).

Notes to Editors:

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.

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Visit the Great Business Debate website - a CBI led campaign to help build public confidence in business.

Media Contact:

CBI Press Office is available 24 hours a day on 0207 395 8239, or email: [email protected]. Follow the CBI (@CBItweets) on Twitter.

PwC press contact: [email protected] / 07531439437 and [email protected] / 07525925830