Activity in UK financial services grew in the last three months at the fastest rate since September 2007. But this growth was much lower than expected and firms still considered levels of business to be well below normal, a new survey reveals today (Monday).
The financial services sector saw its fourth consecutive quarter of improving profitability, though the latest CBI/PwC Financial Services Survey shows firms expect this to level off in the coming three months.
Concern about the impact of regulation and legislation on future business remains high, with a large proportion of firms expecting to spend more on compliance in the coming 12 months.
Asked how their business volumes fared in the three months to June, 38% said that volumes rose and 29% said they fell. The resulting balance of +9% is the most positive since September 2007, but was far weaker than expected. In the next three months, a balance of 63% expects a rise in business volumes, the most positive expectation since December 1993 (+65%).
While banks were the only sector to see business volumes fall in the past three months, building societies’ and general insurers volumes were largely flat. Life insurers, finance houses and securities traders saw healthy increases in volumes, investment managers' business grew slightly and insurance brokers saw volumes grow for the first time since March 2009.
Business increased across all the customer groups. It grew at the fastest rate since June 2007 for industrial & commercial companies, financial institutions and private individuals, with a record rate for overseas customers.
While the value of income from fees, commissions and premiums rose (a balance of +17%) at the fastest rate since March 2007 (+23%), the value of income from net interest, investment and trading fell a little (-11%). This disappointed expectations of a small increase, however firms expect both types of income to grow in the coming three months.
John Cridland, CBI Deputy Director-General, said:
“The modest pick-up in activity in the financial services sector in the past three months fell short of expectations. But firms hope that activity will strengthen over the coming quarter and are now planning to expand their staff numbers.
“This survey was conducted when financial markets were feeling the intense strain from fears over euro area sovereign debt and, for the first time in over a year, a notable minority of firms were worried that the risk of further market deterioration is high.
“A high proportion of firms is worried about the impact of prospective regulation on their business, and many remain concerned that red tape will hamper growth prospects in the year ahead. Firms have also become more worried about increased competition within the sector, particularly from new entrants and from overseas.”
Total operating costs (excluding costs of funds) fell faster than expected, at the highest rate since December 1993. Average operating costs per transaction fell at a record pace (-51%), which will have been helped by the modest rise in business volumes.
Spreads widened markedly (a balance of +39%) contrary to expectations of a narrowing in spreads.
The trend of falling costs, this quarter’s modest volume growth and the widening of spreads contributed to the fourth consecutive quarterly rise in profitability, with the balance of +20% the highest since June 2006 (+28%). Next quarter, firms expect this to level off, however, with a net expectation of +3%.
Numbers employed continued to fall, but only modestly (a balance of -6%) and slightly slower than expected. Firms now expect staff numbers to increase next quarter and, if this materialises, it will be the first increase since December 2007.
Firms’ investment plans for information technology are broadly flat for the next 12 months, while the balance for those planning to spend more on marketing in the coming year has risen to +53%, the highest in 10 years.
The highest proportion of firms since March 2009 says that both increasing their share of international markets and forming strategic alliances will be an important part of their growth strategy in the next 12 months.
The number of firms saying they are concerned about the impact of statutory legislation on their ability to expand in the next 12 months remains high (62%), following the previous quarter’s record level of concern (74%).
The percentage of firms believing there is a high likelihood of further deterioration in financial markets has risen to 23%, the highest proportion since the first quarter of 2009. Firms in the insurance sector are particularly pessimistic and in most sectors the majority does not expect normal financial conditions to return in the next six months.
Analysis by sector
Banking
Profitability rose for a third successive quarter, supported by strong growth in fee/commission income, falling costs and a marked widening of spreads. While business volumes contracted for a second successive quarter, a strong rebound is predicted over the next quarter. A solid rise in headcount is also expected over the next three months.
Building Societies
Business volumes for building societies were unchanged in the past three months and are expected to remain flat over the quarter ahead. Profitability increased slightly, but by less than expected. While investment in marketing is expected to be much higher in the next year compared to the last, nearly all respondents expect to reduce staff numbers in the three months ahead.
Andrew Gray, UK Financial Services Consulting Leader, PricewaterhouseCoopers LLP, said:
“The generally upbeat outlook for banks of growing revenues and profitability is currently being overshadowed by the looming threat of regulation on the sector. While banks may be confident in their own business models, they are unsettled by their operating environment; where regulatory shake-up, levels of future demand, competition from new entrants and political intervention are weighing heavily on their minds. Legislation and regulation is now seen by the banks as their largest limitation on business development and as a result, cross-selling to existing customers remains the focus for growth.
“The picture remains challenging for building societies as they face weak demand for their core products and a challenging funding environment. The increase in volumes reported during the first quarter has now stalled and levels of business remain below normal. Funding remains an issue for the sector and is seen as a major limitation on business. Added to this, competition for retail deposits remains fierce forcing the sector to look for new ways to raise loss-absorbing equity. On a more positive note, the value of non-performing loans is expected to decline for the first time since the end of the housing boom.”
Finance Houses
Business volumes increased rapidly in the three months to June, supported by particularly strong growth among financial institutions and private individuals. Profitability rose strongly bolstered by a sharp fall in average costs. While headcount was stable over the past quarter, growth is expected over the next three months.
Life Insurance
Volumes of business increased rapidly for the second consecutive quarter, with growth spread across all categories of customers. Overall volumes are expected to expand at a similar rate in the three months ahead. Profitability rose strongly for a second successive quarter supported by a sharp widening in average spreads and a further fall in costs.
General Insurance
While optimism increased markedly in the three months to June, overall profitability fell for a third quarter in a row and another fall is anticipated in the three months ahead. Business volumes were generally unchanged last quarter but a slight increase is expected in the three months ahead.
Insurance Brokers
Although business volumes were reported to have risen for the first time since March 2009, profitability, which had previously risen for five quarters in a row, fell slightly as fee/commission income values contracted. A further decline in profitability is expected in the next three months.
Andrew Kail, UK Insurance Leader, PricewaterhouseCoopers LLP, said:
“Optimism seems to have returned to the general insurance sector as volumes of business and customer demand have been relatively stable. However, there are a number of dark clouds on the horizon, most notably an expected decline in premium income, driven by downwards pricing for commercial lines of business, and an upwards trend for claims values. Profitability has declined for the third quarter in a row as higher customer churn, weaker investment returns and a tougher claims environment puts profitability under pressure. As plans for domestic growth remain weak, many insurers will be looking to international markets to drive growth during the year ahead.
“Life insurers seem to be emerging from their recent difficult period. Levels of new business are rising quickly, demand is persistently strong and profitability is staying on an upward track. However, despite the new-found optimism, the regulatory landscape, including Solvency II and the Retail Distribution Review, has the potential to put a brake on business levels. As such, life insurers are increasingly looking overseas for growth, rather than focusing on domestic markets or product innovation.”
Securities Trading
While optimism fell for a second consecutive quarter, business volumes increased, driven by trade with private individuals. Overall profitability contracted sharply for a second quarter in a row, despite a marked fall in total and average costs. Headcount rose strongly for the third consecutive quarter.
Investment Management
Profitability grew at the fastest rate since June 2006, exceeding expectations of a slight contraction. However, a sharp contraction is expected in the quarter ahead as income values are anticipated to fall while costs are expected to increase. Business volumes increased only marginally, falling short of expectations and after four consecutive increases, optimism was broadly unchanged.
Rob Mellor, UK Financial Services Tax and Hedge Fund Leader, PricewaterhouseCoopers LLP, said:
“Investment managers have had a good quarter, as fee incomes have increased and the sector is reporting strong levels of profitability. Unfortunately, predictions for the coming months are not as positive, with fee income expected to fall and operating costs likely to increase. The cost of regulation is also climbing, as the sector works hard to comply with UCITS IV and the AIFM Directive. On a more positive note, demand for skilled staff is increasing.
“Confidence among security traders is falling as volumes of business and levels of income have not matched expectations. Overall profitability has been disappointing, and the Greek debt crisis and continuing investor concern over the fiscal positions of other European states has meant a particularly volatile few months for security traders. The real uncertainty surrounding how the European sovereign debt crisis will develop and its knock-on impact is a worrying concern for the sector. However, despite their declining confidence, securities traders continue to report growing levels of headcount.”