Financial services business volumes fall unexpectedly - CBI/PwC
Fall in business volumes and income expected to be temporary
Business volumes and income fell unexpectedly in the three months to September, driving the first fall in profitability since June 2009.
Of the 104 companies that responded to the CBI/PwC survey, 30% saw business volumes rise, and 49% reported a fall. The resultant rounded balance of -19%, represents the first fall in business volumes since June 2009 (-28%).
This reflected falling business volumes with financial institutions (-19%) and private individuals (-11%), while volumes continued to grow with industrial and commercial companies (+25%) and overseas customers (+12%). However, firms expect growth in business volumes to resume next quarter (+12%).
The overall level of business in the financial services sector was considered to be substantially below normal (-44%), to the greatest extent since March 2010 (-54%). Sentiment about the overall business situation also deteriorated for the second quarter in a row (-12%) and at a similar pace to the last quarter (-13%).
Despite expectations of further strong rises, incomes from both fees, commissions and premiums and from net interest, investment and trading fell (-15% and -29% respectively). But growth is expected to resume next quarter (+24% and +11% respectively).
Meanwhile, average spreads widened further this quarter (+22%), but this did not offset the rise in average operating costs per transaction (+12%), the sharp increase in non-performing loans (+28%) or falling incomes. This meant that profits declined marginally (-6%), after consistent quarter-on–quarter growth since September 2009.
Numbers employed in the financial services sector fell unexpectedly (a balance of -22% compared with an expectation of +15%), and the strongest fall since March 2011 (-23%). Employment is expected to fall again in the next quarter (-9%).
Regulation drives investment plans
Businesses plan to spend significantly less over the next 12 months on land and buildings (-40%) and on vehicles and plant & machinery (-33%). However, expenditure is planned to increase in marketing (+10%) and IT (+14%),
The need to address the burden of statutory legislation and regulation was again a key driver behind business costs and capital expenditure plans over the coming year. Around a net three quarters of respondents planned to increase their expenditure on regulatory compliance (+76%), while a similar proportion also cited regulation as the main driver behind capital expenditure plans (76%) - the highest response for this question since the question was first asked in 2004.
Uncertainty about demand was the factor most likely to limit companies’ investment expenditure (73%), the highest response since December 2009. The proportion of firms saying that statutory legislation and regulation was likely to limit the level of business increased to 60%.
Matthew Fell, CBI Director for Competitive Markets, said:
“The financial services sector has faced a tough quarter, with sales volumes unexpectedly falling and average costs rising, thus denting profits. Sentiment about the business situation also continued to fall.
“Nevertheless, companies expect this recent weakness in activity to be temporary, and anticipate that growth in business volumes and incomes will return to positive territory next quarter.
“However, uncertainty about demand, heightened by the need to fully resolve the ongoing Eurozone crisis, and the looming US fiscal cliff, means that firms are scaling back their investment intentions for the coming year and reducing headcount.
“Meanwhile financial services firms continue to allocate more resources to deal with the increasing burden of new legislation and regulation, like Solvency II for insurers and Capital Requirements for banks – a trend which is expected to continue for some time to come.”
Analysis by sector
Banking saw business volumes fall over the past three months for the first time in a year. Banks also reported that business volumes were below normal. The fall in business was entirely due to lower business with financial institutions, while business with companies actually increased. Numbers employed fell for the second consecutive quarter but banks managed to widen their spreads, keep total and average costs stable, and so managed to increase profitability despite a rise in non-performing loans. There is near universal expectation that more will be spent complying with regulations in the year ahead.
Societies’ volume of business grew for the third quarter running and income from fees and commissions also grew. Societies experienced a narrowing of spreads but offset this with falling average costs per transaction, so that profits were little changed.
Business volumes grew, lifted by business with companies rather than that with individuals, which fell. But the level of business was regarded as significantly below normal. Firms plan to reduce their IT investment spending a little in the year ahead.
Kevin Burrowes, UK Banking Leader at PwC, said:
“The outlook for banking is dominated by concern about weak demand, seen as the greatest threat to growth and the leading barrier to investment, and the growing costs of regulation.
“It is promising that commercial business is growing again, which reflects the banks’ increasing efforts to meet social and economic expectations by increasing their lending to businesses. Growth in retail banking has come to a halt as the banks focus more on commercial than consumer lending.
“The Bank of England’s announcement of Funding for Lending has had a perceptible impact on building societies’ mood, and some societies are feeling slightly more positive about the outlook for their business. It represents a welcome opportunity for the societies to get around the challenges of deposit and wholesale funding and begin to slowly grow their balance sheets.
“Regulation remains the greatest source of uncertainty for building societies. These concerns, together with continuing pressure on spreads and profitability, are encouraging the societies to keep their operating costs under control. If Funding for Lending does relieve some of the pressure on societies’ margins, it could allow the sector to commit more capital to marketing, product development or infrastructure improvements.”
Business volumes increased for the eleventh consecutive quarter, and at the strongest rate since June 2011.There was also a third consecutive significant increase in the value of new business. However, there was no real restoration of premiums paid after downward pressure in the quarter to June, and the impact on profits has been negative as a result of strongly growing total and average costs. Life insurers are nevertheless expanding their employment, and plan stronger investment on marketing and IT in the coming year.
General insurers saw a fall in business volumes and felt the level of business to be below normal. Premium income was a little lower, and a gentle rise in total costs translated into a larger one for average costs that helped to push down profitability. The trend in the value of insurance claims during the past year was up, and firms expect this to be the case next year as well.
Brokers’ business volumes, employment and profitability increased and all three are predicted to do so again next quarter. Brokers also plan to invest more in the year ahead on IT systems and marketing expenditure
Mark Stephen, UK Insurance Leader at PwC, said:
“Life insurance volumes are booming as firms are continuing to chase business aggressively prior to the introduction of the Retail Distribution Review (RDR). 96% of respondents reported higher total costs, the highest in six years.
“As the requirements of Solvency II and RDR drives up headcount, and the shortage of actuarial talent drives up wages, insurers will have to develop simpler, more transparent products with lower management charges to capitalise on volume growth.
“For general insurers, volumes and premiums have declined again, confounding hopes of a sector recovery anytime soon.
“Uncertainty over demand and business prospects is seen as a barrier to investment by 91% of respondents and is hurting volumes - this is not just a feature of current performance, but a hangover from the economic downturn.”
Firms were more optimistic than three months ago. Growth in the volume of business was a little slow, and concentrated with financial institutions, but is expected to accelerate next quarter and spread to private individuals as well. The value of incomes (from trading, interest and investments) grew marginally, but again, income growth is predicted to be faster next quarter. Profitability increased for the third quarter in a row. Firms also plan to invest more on IT systems, and marketing in the year ahead.
Securities firms were less optimistic than three months ago and rated the level of business as below normal. Volumes fell for the fourth successive quarter and rather faster than expected. Business with private individuals fell at the fastest pace since December 2008. The lower business volumes turned a marginal decline in total costs into a rise in average costs per transaction, and drove a sharp decline in profitability. The value of incomes from fees, commissions, trading and interest and investments were also lower during the quarter.
Pars Purewal, Asset Management partner at PwC, said:
“Interest in the possibilities of M&A and other strategic alliances is growing as securities trader’s revenues are falling fast.
“A weak M&A market and historic lows of capital issuance have both contributed to decline in fee income. This coupled with a noticeable cost per transaction rise, has led to some headcount reductions.
“The clear implication is that the sector needs to do far more to reduce costs to a sustainable level. 2013 may see consolidation eliminate some overcapacity from the securities market.
“Investment managers remain the most optimistic sector in financial services, buoyed by the prospect of stronger fee income and improved profitability.
“The desire to reach new customers is seen as a much more important driver of capital investment than regulation. This is not only at odds with the rest of the industry, it is also inexplicable given the range of new regulation facing investment managers.”
Note to Editors:
1. Full survey results can be obtained on subscription by contacting email@example.com. Accredited journalists can obtain a full copy of the survey by contacting: firstname.lastname@example.org.
2. The survey was conducted between 20 August and 6 September 2012, there were 104 respondents. The survey began over 21 years ago in December 1989.
3. A balance is the difference between the percentage of firms reporting an increase and those reporting a decrease
4. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK, as well as representation in Brussels, Washington, Beijing and Delhi, the CBI communicates the British business voice around the world.
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