CBI/PwC report points to renewed optimism in FS sector

The volume of business in the financial services sector grew for the eighth quarter running, at well above the average pace, in the three months to March, according to the latest CBI/PwC Financial Services Survey.

This growth is reflected in the first rise in optimism among financial services firms (+32%) in a year and an unexpected increase in employment in the sector (a balance of +19%). Companies also plan to invest more in IT over the next year.

Of the 95 financial firms that responded, 44% saw volumes rise in the quarter to March, and 21% reported a fall. The resulting balance of +23% was well above the long-run average (+12%) and driven primarily by business with private individuals. In the coming quarter, companies expect growth to accelerate somewhat (+34%), again mostly coming from business with individuals.

The rise in incomes was driven by fee, commission, or premiums (+13%), with the value of net interest, investment or trading remaining flat (+3). Meanwhile, average spreads widened further this quarter (+11%), building on already solid growth in the previous quarter (+43%).

The growth in income more than offset the impact of the sharp increase in total costs, allowing profitability to rise more rapidly than in the previous three quarters (+21%).

Numbers employed in the financial services sector rose unexpectedly (a balance of +19% compared with an expectation of -18%). A similar increase is expected in the next quarter (+20%).

Financial services firms resumed investment in both marketing (+16%) and information technology (+47%) in the three months to March, after a slack period last quarter. Spending intentions for IT were the strongest in a year, as financial services companies looked to increase efficiency.

As has been the case over the last year, companies continue to cite uncertainty about demand (+55%) and inadequate net return (+46%) as the factors most likely to limit capital expenditure over the next twelve months. The number of firms highlighting the shortage of labour as a significant constraint increased this quarter (+35%).

Level of demand (75%) and competition (52%) continued to be the two most significant factors likely to constrain business expansion in the coming twelve months.

Ian McCafferty, CBI chief economic adviser, said: “Financial services sales volumes and income continued to rise this quarter, putting the sector’s recovery on a firmer footing.

“Optimism levels and business investment intentions have also improved, in contrast to last quarter as some of the worst risks around the euro area crisis have eased.

“The unexpected rise in employment is a further encouraging sign for the sector. But with the current level of business regarded as below normal, conditions still remain challenging for financial firms.”

Analysis by sector

Banking
Banks reported a notable rise in optimism, with business volumes expanding for a second consecutive quarter, and a similar rate of growth expected in the three months ahead. However, total costs rose sharply over the past three months. Despite growth in business volumes and income values, the rise in costs prevented any growth in profitability. Numbers employed rose unexpectedly and firms expect to add to headcount further in the next quarter. Banks plans for expenditure on IT are higher than average. Statutory legislation and regulation is widely cited as an investment motive.

Building societies
Building societies were considerably more optimistic about their overall business situation compared to the last quarter. Business volumes grew at the fastest pace since June 2011 this quarter, despite predictions that volumes would remain broadly flat. However, the level of business was seen as below normal. The volume of business is predicted to be broadly flat in the coming quarter. Building societies plan to increase IT expenditure in the coming year, with increasing efficiency/speed, replacement, and statutory legislation and regulation given as the main reasons.

Finance houses
Optimism among finance houses increased over the last three months. Business volumes fell strongly over the last quarter, and finance houses reported the level of business as below normal. However, a solid rise in volumes is expected next quarter. Numbers employed fell in the three months to March and headcount is set to fall further over the next quarter. Expenditure on IT is set to increase in the year ahead relative to the past 12 months. Increasing efficiency/speed and replacement were the main reasons given, followed by reaching new customers.

Kevin Burrowes, UK financial services leader at PwC explained: “More positive economic data and a slightly more stable environment in the eurozone mean that banks are much more confident about their sector. This confidence is translating into recruitment with many banks reporting that they plan to increase headcount over the coming months. Banks are also planning to invest in their businesses, particularly in their digital offerings, and customers should reap the rewards of this.

"The picture is not so rosy for building societies which, while displaying more confidence than in the last quarter, are still concerned about asset quality and the impact of the regulatory burden. However, the relatively high level of home loan approvals in December and less turmoil in the eurozone mean that confidence among building societies is higher than in the last quarter.

“There are still choppy waters to be navigated and, as ever, stringent cost and risk management will be key.”

Life insurance
Business volumes increased for a ninth consecutive quarter, with further growth expected in the next three months. Income expanded modestly, but stronger rates of growth are forecast. Life insurers reported an unexpected rise in profitability and optimism about the business situation rose marginally. There was a rise in headcount and a further increase is expected. Investment intentions are reported to be above average.

General insurance
Optimism amongst general insurers rose very modestly over the three months to March. Business volumes expanded slightly for the second consecutive quarter, although more slowly than expected, and growth is expected to accelerate over the next quarter. Profitability rose strongly over the past three months and is expected to rise robustly in the next quarter. Average commissions, fees and premiums paid rose at their fastest rate since December 2010 and are expected to rise at a similar pace next quarter.

Insurance brokers
Optimism amongst insurance brokers rose in the three months to March. Business volumes fell for the third consecutive quarter albeit at a slower pace than in the previous two quarters. However, volumes are expected to grow strongly in the three months to June. Overall profitability rose for the first time in a year, albeit modestly, and is expected to rise again next quarter at a slightly faster pace. Insurance brokers are planning to spend more on IT in the year ahead, driven by a need to increase efficiency/speed and by replacement.

Mark Stephen, uk insurance leader at PwC, said: “There are a number of reasons for general insurers to be feeling positive as business levels are growing, price increases are starting to come through and claims growth is slowing at last. This positive backdrop has given insurers the confidence to start hiring again – a welcome reversal after two quarters of headcount reductions. However, the commercial sector is an area of concern as business has fallen to disappointing levels.

“Strong rises in customer demand and levels of new business has finally ended life insurers’ run of pessimism. This positive backdrop is allowing life insurers to invest heavily in IT, marketing and performance measurement to ensure they are well placed to respond to the upcoming retail distribution review and the challenges it will bring. Life insurers are also looking to boost staff numbers, although there are concerns over the availability of professional staff due to the range of investment and regulatory projects companies are tackling.”

Investment management
Business volumes rose strongly over the past three months, defying expectations of a small decline. Volumes are expected to rise at an even faster pace in the quarter ahead. Investment managers were significantly more optimistic about the business situation than they were three months ago, and profitability rose at its strongest in a year. Firms’ plans for expenditure on IT are now well above their long run average, although the proportion of firms citing uncertainty about demand as a constraint on investment is the highest since September 2009.

Securities trading
Business volumes in securities trading declined in the three months to March, and a further fall is expected next quarter. Income fell, defying expectations of growth. Profitability declined for the fourth successive quarter, despite a fall in total operating costs, as shrinking business volumes drove up average costs. Numbers employed dropped after nine consecutive quarters of growth and headcount is expected to fall again next quarter. The level of demand and competition are the main factors likely to inhibit business expansion over the next year. Overall, investment is expected to be broadly flat over the coming year, although a slight rise in IT expenditure is planned.

Pars Purewal, UK investment management leader at PwC, said: “Investment managers have shown much more confidence in their sector compared with recent quarters. Growth in investment management is expected although continued cost reduction programmes across the sector mean that further headcount reductions are likely. Investment managers also need to look to the regulatory changes on the horizon and factor these into their plans and business models.

“Falling levels of business and higher costs per transaction mean that security traders have reported very downbeat predictions in the sector. The long-term outlook is negative among traders and concern about the impact of upcoming regulatory changes could depress this even further. It therefore seems likely that further job losses are inevitable.”

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