14 April 2020
Financial services optimism fell in the three months to March, and firms expect a sharp decline in business ahead, according to the latest CBI/PwC Financial Services Survey.
The quarterly survey of 103 firms, which was conducted between 2-26 March, found that business volumes, profitability, and employment are all tipped to fall over the next quarter. Investment plans for the year ahead have also deteriorated. Optimism about the overall business situation in financial services fell sharply in the three months to March, albeit at a slower pace than some of the drops seen over 2019. Furthermore, the value of non-performing loans also ticked up sharply in the past quarter.
Business volumes were broadly unchanged in the three months to March (+1%). Conditions were mixed by sub-sector; volumes fell in banking but remained unchanged in building societies and investment management. Meanwhile, volumes rose in finance houses, life insurance, general insurance and insurance broking. Nevertheless, expectations for the next quarter are for a marked decline in volumes (-30%), the weakest predictions in a year.
Meanwhile profitability fell slightly in the three months to March (-4%), but the picture was once again mixed by sub-sector: profits fell in banking and life insurance, but grew in finance houses, insurance broking, general insurance and investment management. Next quarter, profitability is expected to fall overall (-15%).
Rain Newton-Smith, CBI Chief Economist, said:
“The bulk of the survey took place before social distancing measures were ramped up, but there were already signs of the Covid-19 pandemic leaving its mark. Expectations for business volumes and headcount weakened, non-performing loans rose sharply, and financial firms are planning heavy cuts to investment in the year ahead.
“Financial services are already playing an essential role in helping companies with their cashflow, through channelling funds from the government’s support schemes. But like other businesses, they’ve also been struck by staff shortages and changes to how they operate. As a result, alleviating capacity pressures and streamlining how firms access government support through our financial institutions is vital. With the peak of the economic impact to come, equipping the sector to deliver for business is crucial in supporting the growth recovery beyond the pandemic.”
Andrew Kail, Head of Financial Services at PwC, said:
“The Covid-19 pandemic is one of the most significant tests of operational resilience the FS sector has seen. The need to move to full workforce remote working, on a global scale for many, has significantly tested business continuity plans. The response by the industry has largely been a success. The need to maintain vital customer services in a technically and regulatory compliant manner has seen organisations act at their most agile and responsive.
“The FS sector must continue to work with customers, the government and the regulators to help the economy recover in the best possible shape. Services it provides across banking, insurance and asset management are central to the sustainability of the corporate sector and millions of people.
“Our financial services firms are upholding the ultimate responsibility as they continue to treat customers fairly while galvanising their own businesses and the workers they employ.”
Employment fell (-9%) at the fastest pace in a year (-21%), driven by the banking sector. Headcount is set to decline at a much faster pace next quarter (-37%), the weakest expectations since March 2009.
Marketing spend is set to be cut back in the year ahead, to the greatest degree since June 2009 (-32%). Investment intentions also deteriorated for other areas – IT spending is expected to increase (+20%), but to the least extent since 2012, while spending on land & buildings (-49%) and vehicles, plant and machinery (-28%) is expected to be cut back sharply, both to the greatest extent since December 2017.
- Optimism in the financial services sector declined. 12% of firms said they were more optimistic about the overall business situation compared with three months ago, while 53% were less optimistic, giving a balance of -41%
- Business volumes were broadly unchanged. 26% of firms said that business volumes were up, while 25% said they were down, giving a balance of +1%
- Looking ahead to the quarter to June, business volumes are expected to dip, with 7% of firms expecting volumes to rise next quarter, and 36% expecting them to fall, giving a rounded balance of -30%.
Incomes, costs and profits:
- Profitability fell slightly in the three months to March, with 24% of firms reporting that profits had increased and 27% saying they fell, giving a rounded balance of -4%
- Incomes from fees/commission grew slightly (+6%) but are set to fall next quarter (-20%)
- Income from net interest, investment and trading fell (-20%) and is expected to fall at the same pace next quarter (-20%).
- Total operating cost growth accelerated (+28%), while average costs fell (-16%). Next quarter, total costs growth is set to slow (+7%), and average costs are expected to be broadly unchanged (+3%).
- The value of non-performing loans rose significantly (+37%), at the fastest pace since September 2009. A somewhat slower rise is expected in the coming quarter (+28%)
- 30% of financial services firms said they had increased employment, while 39% said that headcount fell, giving a balance of -9%, the fastest decline in a year. Employment growth is set to fall more sharply in the next quarter (-37%).
Investment over the next 12 months:
Over the year ahead, financial services firms expect to raise spending on IT and training, though plans for IT investment were at their lowest in over seven years. Firms also expect to cut capital spending on land and buildings, and vehicles, plant & machinery, with plans for both the weakest since December 2017. Marketing investment is also set to be cut, to the greatest extent since March 2009:
- IT: +20% (from +32% in December 2019)
- Land and buildings: -49% (from -5%)
- Vehicles, plant and machinery: -28% (from -6%)
- Marketing: -32% (from +7%)
The main reasons for authorising investment were:
- To increase efficiency/speed (61% of respondents)
- Statutory legislation and regulation (39%)
- To provide new services (23%)
The main factors likely to limit investment were:
- Inadequate new return (34% of respondents)
- Uncertainty about demand/business prospects (29%)
- Shortage of finance (22%),
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 (80% of respondents)
- Competition (47%)
- Statutory legislation & regulation (36%)