Financial services firms remain upbeat as profitability improves
Optimism in financial services rose strongly in the three months to March and profitability improved in most sectors, according to the latest CBI/PwC Financial Services Survey.
However, despite overall business volumes continuing to increase, the pace of growth was the slowest in a year. Volumes were flat in banking and building societies, with the latter stabilising following a sharp fall last quarter.
Income from commissions, fees and premiums and from net interest, investment and trading both rose solidly this quarter, offsetting the increase in costs to deliver another robust rise in profits.
However, overall employment in financial services fell for a second quarter, weighed down by banks downscaling their activities. In contrast, employment in other sectors either rose or was broadly stable.
Financial services firms expect to reduce investment in land & buildings, vehicles, plant & machinery, and marketing over the next twelve months. However, firms in most sectors continue to plan strong increases in IT spending.
The main drivers of capital expenditure authorisations over the year ahead are the need to increase efficiency/speed and to provide new services. Companies reported that they would be focusing their growth strategies on retaining and cross-selling to existing customers, more than acquiring new ones.
Rain Newton-Smith, CBI director of economics, said:
“This quarter was a mixed picture for the financial services sector. Firms remained upbeat as profits held up, despite weak growth in business volumes in some sectors, especially banking.
“The overall headcount in financial services fell for a second consecutive quarter, driven by banks cutting staff as they make their business operations leaner, refocusing activities as a result of new capital rules and regulatory requirements.
“Despite continuing strong growth in optimism, this survey was conducted before the Budget, so it’s possible that yet another change to the bank levy may have dented the upbeat outlook in the sector.
“Firms plan to cut their marketing spend and increase their IT investment over the next year, as they focus on increasing efficiency and selling to existing customers, rather than trying to win new business.”
Kevin Burrowes, UK financial services leader at PwC, said:
“UK banks are reporting growing confidence, steep revenues growth and increasing profitability, despite an unexpected stagnation in business volumes. Banks are more positive about credit risk, as the value of non-performing loans is expected to remain low in the next quarter. Additionally, industry commentators do not expect interest rates to rise in the near future.
“Looking at the UK’s regulatory environment, banks are most concerned about cost and proportionality. Even so, the sector currently has a good grip on its regulatory agenda, and regulation is seen as less of an obstacle to growth than at any point last year.
“Banks’ spending priorities for the next year are focused on improving IT infrastructure and cyber security. Growth is seen to come from cross-selling to existing customers and attracting new domestic customers. Banks are also building new digital platforms to remain competitive and respond to changing customer needs.”
Key findings:
– 59% of financial services firms said they were more optimistic than three months ago, while 9% said they were less optimistic, giving a balance of +50% – the strongest since December 2013 (+68%)
– 31% said business volumes increased, while 7% said they fell, giving a balance of +24%
– Next quarter 37% of firms expect business volumes to increase, while 3% expect them to decrease, giving a balance of +34%.
Incomes, costs and profits:
– 60% of firms said that profits increased, while 11% said they decreased, giving a balance of +49%
– Income from fees, commissions and premiums increased in the three months to March (+46%). It is expected to grow even more strongly next quarter (+60%)
– Income from net interest, investment or trading income also grew last quarter (+36%), and is expected to grow at the same rate next quarter (+36%)
– Total operating costs increased (+13%), following a fall last quarter (-8%). They are expected to increase again in the three months to June (+18%).
Employment:
– 23% of financial services firms said they had increased employment, while 46% said headcount had fallen, driven by the banking sector. This dragged the overall balance down to -24%, marking the second consecutive quarter of falling employment (-9% in the last survey).
– 26% of firms expect to increase their headcount next quarter, while 39% expect numbers employed to fall, giving a balance of -13%
– The latest data from the ONS showed that employment in financial & insurance activities (workforce jobs measure) fell for a second quarter running in the final three months of 2014, edging down by 1,000, to 1.120 million.
– Based on the survey results, employment in financial & insurance activities is forecast to dip by a further 4,000 in Q1 and 2,000 in Q2, to stand at 1.115m by the end of June 2015.
The next 12 months:
– In the year ahead, financial services firms plan to invest less in land & buildings (-35%), vehicles, plant & machinery (-38%) and marketing (-10%). All three balances are at their lowest in over two years: September 2012 (-40%), December 2012 (-39%) and December 2011 (-10%) respectively
– Inadequate net return on proposed investment was cited as the main factor likely to limit investment (71%)
– However, firms still plan to increase their investment in IT (+72%) in the next twelve months
– The main reason for expected capital expenditure authorisation is to increase efficiency/speed (+89%) – the highest since March 2010 (also +89%)
– Regarding their growth strategies for the year ahead, firms place increasing importance on retaining existing customers (+57%) and cross-selling to existing customers (+51%).
