Activity in the UK financial services sector increased slightly over the past three months, continuing the rally of the previous quarter, but the modest growth was less than expected and firms expect volumes of business to fall in the coming quarter, a new survey revealed today (Monday).
Business volumes rose a little in the three months to December, and firms’ profitability also increased, helped by cost reductions and increased spreads, according to the latest CBI/PwC Financial Services Survey.
However, firms do not expect growth in business volumes to continue over the coming three months and do not anticipate improving profitability, despite further cost reductions.
Asked how their business volumes fared in the three months to December, 32% said that volumes rose, while 28% said they fell. The resulting balance of +4% is slightly lower than September’s +7%, and less than expected (+16%). A balance of 13% of firms expects a reduction in business volumes over the coming quarter – the most negative expectation since December 2008 (-25%).
Banks and securities traders do not expect the growth in business volumes they have seen over the past three months to be maintained in the coming quarter.
Looking across the customer groups, the slight upturn in business with private individuals seen in the past quarter (balance +6%) is not expected to continue into the next (-9%). Poor conditions in lending to industrial & commercial companies and financial institutions continued over the past three months, and only a very slight improvement is expected in the next.
The value of fee, commission and premium income rose by less than expected (a balance of +4% against +22%). The value of net interest, investment and trading income fell unexpectedly (-27% against +9%). Firms expect falls in both types of incomes in the next three months, with the lowest ever balance for expected interest, investment and trading income in the survey’s 20-year history (-54%).
Ian McCafferty, CBI Chief Economic Adviser, said:
"The bounce in UK financial services activity over the past six months is not expected to last as we enter 2010. Firms see their business volumes falling back again, with no further improvement in profitability over the next three months.
"On a more positive note, financial services firms’ confidence in the general business situation has continued to increase, profitability improved and a much slower reduction in numbers employed was seen in this survey. Job losses are also expected to be minimal in the coming quarter."
Business sentiment improved for the third quarter in a row, with a balance of +31% of firms more optimistic about the general business situation than in September.
Total operating costs (excluding costs of funds) fell for a balance of 38% of firms, the most since the March survey. The greatest balance of firms (-39%) since June 1992 (-39%) expect that total costs will fall in the coming quarter. Average operating costs per transaction fell, with the balance of -33% the fastest rate since June 2005 (-37%).
Spreads widened significantly (balance of +42%) and at the sharpest rate since June 2008 (+51%). Combined with the trend in costs, this contributed to a second successive quarterly rise in profitability (balance of +14%). However, profitability is expected to be flat in the coming quarter.
Contrary to expectations, numbers employed fell only slightly, with a balance of -3% the least negative since December 2007 (+13%). Employment is expected to be broadly flat again in the next three months (-2%). Staff costs as a proportion of total costs rose (+5%) for the first time since December 2007 (+23%).
Firms’ capital investment plans for the next 12 months are negative, although expenditure on marketing is expected to be higher for the first time since March 2008.
Uncertainty about demand continues to rise as an obstacle for investment, with 76% citing it the greatest since September 1992 (83%). Cost of finance was mentioned by the highest proportion of firms in the survey’s history (30%).
The factor firms thought most likely to prevent business expansion over the coming year was level of demand, mentioned by the largest percentage (89%) since March 2003 (93%). Competition has increased considerably as a factor, cited by the highest number (78%) since June 2007 (89%), as has statutory legislation and regulation (56% is the highest since March 2004).
Firms are becoming increasingly more confident that there will be no further deterioration in financial markets, with 58% giving it a low probability in December, up from 49% in September. However, more now think that the UK is less competitive as a financial centre (79% compared to 66% in September).
Analysis by sector
Banking
Business volumes rose for the first time since September 2007 during the latest survey period, however growth is not expected to be sustained next quarter due primarily to a fall in business with private individuals. Profitability rose strongly, unexpectedly and for the first time since September 2007 as spreads widened, costs were reduced and income values rose. Income values are expected to fall again next quarter, however, resulting in a broadly flat trend for profitability.
Building societies
Building societies reported a rise in optimism about the general business situation for the first time since March 2007. Although business volumes and values continued to fall in the three months to December, firms expect broadly flat trends at the start of next year. The trend in employment stabilised, following sharp falls recorded in the previous four surveys.
Finance houses
There was a record fall in business volumes at finance houses during the three months to December, driven by a survey-record decline in business with industrial and commercial companies. The decline in business volume confounded expectations of growth, and firms now predict further declines in the coming three months. However, a marked widening of spreads and sharp reduction of total costs meant that profitability still increased as expected.
John Hitchins, UK banking leader, PricewaterhouseCoopers LLP, said:
“Banks are continuing their run of confidence as business volumes and income levels have grown. However, the sector’s short term outlook is less encouraging. Activity and revenues are expected to decline over the coming quarter, predictions for demand remain weak and an uncertain regulatory future continues to temper the banks growing confidence with caution. On a positive note, the sector reports growing headcount for the first time in two years and average spreads have increased.”
“Building societies have experienced a sharp upswing in sentiment, the most decisive improvement since 2006. Although the sector has also been encouraged by rising average house prices and headcount reductions have been put on hold, recovery is not yet underway. There is no sign yet of any growth in customer demand, and while profitability may have stabilised it is not expected to increase.”
Life Insurance
Life insurance companies saw a rise in new business values for the first time in over two years, although other income values fell unexpectedly resulting in a sharp reduction in profitability. Business volumes fell sharply across the board, with the exception of overseas customers. Although average spreads rose by the greatest extent on record, average fees, commissions & premiums fell at a record rate. The net result was a reduction in profitability that was more pronounced than had been expected.
General Insurance
Optimism in the general insurance market rose for a fifth successive quarter, despite further falls in business volumes, values and profitability. The declines were, however, broadly as expected with the exception of interest, investment or trading incomes which suffered a much heavier fall than anticipated.
Insurance Brokers
Business confidence among insurance brokers rose at its fastest rate since September 1993, as business volumes didn’t fall as expected and profitability rose much faster than had been anticipated. The decline in employment gathered pace during the latest quarter; however a reversal is predicted in early 2010 with positive expectations recorded for the first time in almost two years.
Andrew Kail, UK insurance leader, PricewaterhouseCoopers LLP, said:
“The run of confidence insurers have enjoyed for the past five quarters will be more difficult to sustain. The potential increase in the cost of claims, weaker investment returns and the lack of rate hardening has driven the more gloomy short-term outlook. As a result, headcount reduction and a cut in operating expenses seem firmly on insurers' agendas for 2010. The sector has also reported low investment plans for regulatory compliance, which is at odds with efforts the industry is making to meet the requirements of Solvency II.
“Although the life insurance sector reports an increase in optimism, this seems to be pinned on a hope of a future recovery in demand rather than short-term reality. The sector continues to report persistently weak customer demand for its core products and this is leading to a strong focus on cost reductions. Concern remains around the cost of compliance as the sector continues to focus on Solvency II implementation and other regulatory challenges.”
Securities traders
Business volumes and profitability continued to rise over the past three months, however increases were not as strong as in September and firms expect falls in both next quarter. Employment rose unexpectedly, and strongly, following the sharp decline recorded in the previous survey. Securities traders now expect to increase expenditure on marketing and IT quite significantly in the coming 12 months.
Investment management
Profitability rose rapidly for the second quarter running, supported by strong growth in business volumes and fee, commission and premium income. Average fee, commissions and premiums rose for the first time in over a year, while average spreads were flat. Employment rose for a third quarter in succession, and staff costs as a percentage of total costs were up. Training expenditure has been flat for three successive surveys, but is expected to rise quite significantly next quarter.
Pars Purewal, UK asset management leader, PricewaterhouseCoopers LLP, said:
"Securities traders' confidence has continued to grow but they are now taking a more measured view of their business prospects. The short-term outlook for revenues is muted, and though there are signs of a fresh drive to recruit new customers and increase headcount, however, the sector’s optimism remains tinged with caution. Concerns about future levels of demand remain strong, and the debt standstill requested by Dubai World during the survey period is a reminder of the potential for further financial shocks and their capacity to unsettle securities markets.
"Investment managers continue to take confidence from the recovery in equity markets and are enjoying a welcome period of relative stability. The sector has witnessed a resurgence in customer demand and retail and foreign activity is expected to strengthen further still. With revenues on the rise, the cost-cutting agenda which dominated the thoughts of many investment managers in early 2009 may be losing some of its impetus. Instead, the sector is increasingly focused on developing new products and in the short term at least, respondents are hoping to achieve organic growth through selling additional products to existing customers."