- The Financial Conduct Authority(FCA) requesting further information about overdraft pricing from firms
- Lloyd's Banking Group announces new ambition to accelerate working with customers, government and the market to help reduce the carbon emissions it finances by more than 50% by 2030
- Which? says banks are refusing to reimburse fraud victims-Joe Bloemendaal of Mitek comments
- EBA publishes amendment to its 2018 guidelines on fraud reporting under the revised Payment Services Directive(PSD2)
- PIMFA welcomes the International Regulatory Strategy Group(IRSG) report on ‘The Architecture for Regulating Finance after Brexit: Phase II’
- Starling Bank voted as Britain’s Best Bank 2019 in a poll run by CompareBanks.co.uk
- Juniper Research new study assesses that that global number of roaming subscribers will reach 1.1 billion by 2024 expired
- Open banking platform Tink and BNP Paribas have announced an extension of their partnership in Europe expired
- Alpha Terminal appoints Hall as Head of Support at London Office expired
- Magnus Financial Group earns a spot in the 2019 RIA Channel Top 100 Wealth Managers Ranking expired
- PZU in cooperation with Goldman Sachs Asset Management launches two new passive sub-funds expired
- Signature Private Finance successfully complete £16.8m management buyout expired
14th January 2020
CBI/PwC quarterly review indicates optimism improving at fastest pace since June 2015
Volumes in the UK financial services sector are expected to return to growth next quarter, marking the strongest expectations since March 2018, with profits set to stabilise as a result, according to the latest CBI/PwC Financial Services Survey.
The quarterly survey of 94 firms, conducted before the 2019 General Election, found that optimism about the overall business situation in financial services rose for the first time in twelve quarters, and at the fastest pace since June 2015. Sentiment was mixed by sector, with the headline improvement driven by investment management, insurance broking and general insurance. Optimism was flat in banks and building societies, and fell in finance houses and life insurance.
However, the overall conditions in the three months to December remained tough. Business volumes fell further, at the fastest pace since September 2012, marking a full year in which volumes have not risen. The greatest drag on growth came from the banking sector and investment management. Nevertheless, looking ahead, overall business volumes are expected to return to growth, marking the strongest expectations since March 2018.
Profits continued to fall, at the quickest pace since June 2009 last quarter, but with some variation by sub-sector. Profitability continued to deteriorate at a sharp pace in banking, while profits also fell in life insurance and insurance brokers. However, general insurance and investment management saw strong growth in profits, while building societies and finance houses saw no change. In the three months to March, overall profitability is expected to stabilise.
Meanwhile, employment growth in financial services remained solid and far above the long-run average, with general insurance the only sub-sector that reduced headcount last quarter. Employment growth is expected to pick up over the next quarter.
Rain Newton-Smith, CBI Chief Economist, comments “It’s great that optimism has risen following four-and-a-half years of dire sentiment, with financial services firms also suggesting that an end to falling business volumes and profitability may be in sight.
However, the sector isn’t quite out of the woods yet. Against the backdrop of another fall in business and profits, Brexit uncertainty continues to drag on investment plans, and concerns over labour shortages have spiked.
As the UK begins a new future outside the European Union, the Government must do everything it can to support and stimulate one of the UK’s most globally competitive sectors, so that expectations of an upturn can come to pass–both over the next quarter and beyond.”
Andrew Kail, Head of Financial Services at PwC, added “The stirrings of optimism represent a significant turnaround given the flat and falling optimism that has beset the past four years. An uptick in hiring, investment in systems, and better profit expectations for the first three months of the new year are driving the positivity in the sector, following the general election.
However, this year in particular, firms will need 20/20 vision in order to maximise performance. Not least as there is still work needed to bring clarity on Brexit transitional arrangements.
Encouragingly, PwC has already observed firms responding to the current environment of long-term low interest rates, intense competition and continuing regulation by resetting strategy, changing their business models, and investing in technology and their people.”
Looking to the year ahead, investment intentions have deteriorated. Spending plans on IT and marketing remain positive, though less so than in the three months to September–in particular, IT investment intentions were the weakest in seven years. Investment in land and buildings, and vehicles, plant and machinery is set to be cut back. Nevertheless in all three areas, spending plans were in line or above their long-run average.
Investment is largely motivated by the desire to increase efficiency and speed. However, concern over labour shortages rose prominently as a perceived brake on spending, to its highest in one-and-a-half years.
Asked where they see competition coming from in the next 12 months, firms stated almost unanimously that their own sub-sector of financial services is the most likely source of competition, followed by new entrants. They also rated customer switching behaviour as the main constraint on customer acquisition and retention in the year ahead, followed by technology and regulation. Additionally, the cost of acquiring new customers is set to continue rising strongly.
According to the CBI’s December economic forecast, UK economic growth looks set to improve gradually from 2020, on the assumption that Brexit uncertainty diminishes, and negotiations over the future UK-EU relationship progress. GDP is forecast to grow by 1.2% in 2020 after estimated growth of 1.3% in 2019), with a somewhat brighter outlook for 2021, with growth picking up to 1.8%.
Key findings are:
-Optimism in the financial services sector improved slightly, ending fifteen consecutive quarters in which sentiment has mostly declined
-19% of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 11% were less optimistic, giving a balance of +8%, the fastest pace of growth since June 2015(+32%)
-10% of firms said that business volumes were up, while 28% said they were down, giving a balance of -18%, the sharpest fall since September 2012 (-19%)
-Looking ahead to the quarter to March, business volumes are expected to return to growth, with 33% of firms expecting volumes to rise next quarter, and 20% expecting them to fall, giving a rounded balance of +14%.
Incomes, costs and profits:
-Profitability continued to decline in the three months to December, with 16% of firms reporting that profits had increased and 26% saying they fell, giving a balance of -10%, the fastest fall since June 2009(-23%)
-Income from fees, commissions and premiums was flat(-2%), but is set to grow over the quarter ahead (+12%)
-Income from net interest, investment and trading declined (-10%) but is expected to be unchanged over the next three months (+3%)
-Total operating costs rose modestly(+6%), while average costs fell(-11%). Next quarter, total costs are expected to be unchanged +2%), and average costs are set to fall at a similar pace (-9%).
-21% of financial services firms said they had increased employment, while 4% said that headcount fell, giving a balance of +17%, slightly slower growth compared with the previous quarter(+23%)
-Employment growth is set to pick back up next quarter (+23%).
Investment over the next 12 months:
Over the year ahead, financial services firms expect to increase spending on IT and marketing and training, though plans for IT investment have weakened to their lowest in seven years. Firms also expect to cut capital spending on land and buildings, and vehicles, plant and machinery:
-IT: +32% (from +56% in September 2019)
-Land and buildings: -5% (from +7%)
-Vehicles, plant and machinery: -6% (from +1%)
-Marketing: +7% (from +25%)
-Training: +27% (from +14%).
The main reasons for authorising investment were:
-To increase efficiency/speed(60% of respondents)
-To provide new services(45%)
-To reach new customers(40%).
The main factors likely to limit investment were:
-Uncertainty about demand/business prospects (39% of respondents)
-Shortage of labour (36%), where citations rose to their highest since June 2018.
Business expansion over the next 12 months:
The most significant potential constraints on the level of business over the coming year are:
-Level of demand (59% of respondents)
-Statutory legislation & regulation(55%)