Financial services business volumes continued to grow strongly and optimism improved in the three months to June, according to the latest CBI/PwC Financial Services Survey. The life insurance sector was the exception, with business volumes shrinking and optimism falling.
As expected, overall profits growth for the sector dipped slightly as a sharp fall in average operating costs and strong business volumes growth were offset by flat average commissions, fees and premiums.
Looking ahead, profitability is expected to rise strongly next quarter, with growth in business volumes accelerating and further predicted falls in average costs more than offsetting an expected fall in average commissions, fees and premiums.
Employment fell unexpectedly in banking and securities trading, and growth was weaker than expected in general insurance and investment management. After falling over the past three months, headcount across financial services as a whole is expected to grow very slightly next quarter.
However, around a third of respondents believe that labour shortages will constrain investment, while a similar proportion expect the availability of professional staff to limit the level of business over the next year.
Dealing with statutory legislation and regulation is cited as the biggest investment driver for financial services firms over the next 12 months.
Stephen Gifford, CBI Director of Economics, said:
"Financial services firms have seen another strong quarter of business growth and optimism continues to improve.
"Despite a fall in average costs, profitability has been dented by stagnant fees, commissions and premiums. But with business volumes continuing to grow and costs predicted to fall again, profits should rebound next quarter.
"Reacting to regulation will continue to eat into investment budgets and constrain business expansion for a good while yet. Firms are learning to manage relationships with two new regulators; banks are grappling with structural reforms and fresh capital requirements; and the Parliamentary Commission on Banking has proposed substantial changes on governance and internal controls.”
Based on the historical correlation between the CBI's survey data and the equivalent ONS data, overall financial services sector employment is expected to fall by 10,000 in the three months to June and is expected to increase slightly (by 1,000) in the following quarter.
Key findings:
- 50% of firms said business volumes increased and 16 % reported a fall, giving a balance of +34%.
- Business volumes grew in all customer categories: industrial & commercial (+38%), financial institutions (+5%), private individuals (+13%), overseas customers (+16%).
- 44% expect business volumes to increase next quarter while 2% expect them to fall, giving a balance of +42%.
- Average operating costs fell at their fastest pace (-23%) since September 2010 (-26%) and considerably faster than expected (-5%).
- Average commissions, fees and premiums were flat (+2%), compared with a rise (+13%) last quarter, and disappointed expectations of further growth (+21%).
- Average spreads widened slightly (+6%), as expected.
- 41% of firms said profits increased compared with 28% who said they decreased, giving a balance of +13%. Growth in profits is expected to accelerate sharply next quarter (+40%).
- Numbers employed fell over the past three months (-12%), following a rise in the previous quarter (+19%), disappointing expectations of further growth (+18%). A small increase is expected over the next three months (+5%).
- The availability of professional staff has rebounded as a factor likely to limit the level of business over the next 12 months (32%), after falling back in the previous quarter (11%).
- Investment intentions are mixed: spending plans on marketing expenditure (+23%) and vehicles, plant and machinery (-12%) are in line with long run averages; expenditure on land and buildings is below average (-28%); and expenditure on IT is well above (+60%).
- Regulation and compliance is expected to be the biggest driver of investment over the next year (72%), closely followed by increasing efficiency (71%) and the provision of new services (+68%).
- Business growth over the next three months is expected to come mostly from acquiring more domestic customers (+85%), followed by cross-selling to existing customers (50%).
- Investing in IT (+59%), is expected to be the most important element of growth strategies over the next 12 months.
Analysis by sector:
Banking
Optimism rose at one of the strongest rates on record, alongside robust growth in business volumes and income. The level of business was reported to be broadly normal for the first time in over two years.
Building societies
Building societies recorded the fastest growth in business volumes and profitability since December 2010. Numbers employed grew at their fastest rate since March 2011, and are expected to continue increasing over the next three months, but at a slower pace.
Finance houses
Business volumes rose for the fifth consecutive quarter, but at their slowest pace seen over this period to date. However, growth is expected to accelerate next quarter.
Kevin Burrowes, PwC’s UK financial services leader, said:
“Banking confidence continues to grow, increasing at the fastest rate since 2000. The banks’ upbeat mood is supported by many factors including a strong rise in business volumes and strong activity with commercial and retail customers. This may not mean that credit appetite is growing, but it certainly implies an improvement in economic performance.
“After allowing costs to rise in the first quarter of the year, banks are renewing their focus on efficiency and staff numbers are beginning to fall again. Retail and commercial non-performing loans are also predicted to decline during the coming quarter.
“There are a few notes of caution. Despite planning for customer acquisition and product development, banks still have doubts about continuing demand. They see new entrants as a growing threat, which is perhaps due to the Prudential Regulation Authority’s plans to relax capital and liquidity rules for new banks.”
Life insurance
Business volumes continued to fall strongly over the last three months, at the fastest pace since June 2009, and the level of business remained well below normal. However, volumes are expected to rise slightly in the next quarter.
General insurance
General insurers saw modest growth in business volumes. Profitability rose for the first time since March 2012. Numbers employed rose, and strong growth in business volumes is expected next quarter.
Insurance brokers
Business volumes were flat over the last quarter, contrary to expectations of a strong rise. However, robust growth in volumes is anticipated next quarter.
Jonathan Howe, PwC’s UK insurance leader, said:
“The general insurance sector reported the strongest growth in optimism in two years – a marked turnaround from the previous quarter. As hoped, insurers have seen a welcome increase in corporate business. Although retail activity has remained steady, there are growing hopes that it will accelerate as the economy recovers.
“However, there is no denying the sector’s challenging revenue environment. Premium income has failed to meet expectations, suggesting that pricing remains under pressure. Investment income has also fallen for the fifth quarter in a row, reflecting the effects of exceptionally low bond yields.
“The sector has had the strongest increase in profitability since 2008 due to a number of factors including a fall in the value of claims. Expectations of a further decline over the summer suggest that the industry’s investment in claims management may finally be paying off.
“Life insurers’ confidence has fallen significantly this quarter with business continuing to contract in the wake of Retail Distribution Review and it is no surprise that profitability is seen as having reached its lowest point in four years. Firms are seriously concerned about weak demand, skills shortages, inadequate systems and the availability of capital.
“In their search for growth, life insurers are placing renewed emphasis on customer acquisition.”
Securities trading
Business volumes increased at a solid pace for a second consecutive quarter, though a small decline is expected next quarter. Firms expect to spend less on compliance in the year ahead, for the first time since the data began in 2006.
Investment management
Business volumes grew robustly, for the fourth-consecutive quarter. However, growth is predicted to ease over the next quarter, with expectations at their lowest since December 2011. Profitability rose at one of the fastest rates in the survey’s history.
Paula Smith, PwC’s UK asset management leader, said:
“Investment managers are more optimistic due to strong improvement in revenues and profitability, with the latter increasing for the sixth consecutive quarter. Firms continue to benefit from the comparative stability of financial markets, as well as the year-long recovery in equity values.
“Encouraged by this, investment managers continue to allow operating costs to climb, although the pace of growth appears to have slowed with employment levels being the highest since 2010.
“Despite the gradually improving clarity around supervisory changes, investment managers think regulation is the biggest obstacle to the sector’s growth. The proposed EU bonus cap is of particular concern with investment managers expecting the proposal to make staffing costs less flexible and increase difficulty in retaining talent.”
