Sentiment and volumes are deteriorating sharply in the financial services sector, with various indicators at their lowest since the Financial Crisis of 2008, according to the latest CBI/PwC Financial Services Survey.
The quarterly survey of 84 firms found that optimism about the overall business situation in the financial services sector plunged sharply, falling at the quickest pace since December 2008. Optimism has now been flat or falling for over three years.
Business volumes fell for a second consecutive quarter, and at the fastest pace since September 2012. Conditions varied across financial services sectors, with the greatest drag on growth coming from the investment management sector, where volumes fell at the fastest pace since December 2008. Meanwhile, the majority of other sectors reported flat or modest growth, with the exception being insurance brokers, who reported robust growth. Looking ahead, expectations for overall business volumes for the next quarter are the weakest since September 2008.
Employment across financial services fell at the quickest pace in four years, driven predominantly by a sharp decline in headcount in the banking sector. Meanwhile, headcount grew or was flat in all other sub-sectors. Overall employment growth is expected to recover over the next quarter.
However, there were some positive signs in the survey. With cost pressures easing, profits in the sector as a whole saw their strongest growth in a year, driven by the banking and insurance sector. Profitability is expected to pick-up further over the three months ahead.
Looking to the year ahead, financial services firms continue to plan higher spending on IT and marketing (with the strongest expectations since June 2015), but expect to cut back in other areas of capital spending. Investment is largely motivated by the desire to provide new services, with concerns about inadequate net returns on investment the predominant brake on spending.
Across the broader economy, underlying conditions are subdued as Brexit uncertainty causes many households and businesses to hold back on spending.
Rain Newton-Smith, CBI Chief Economist, said: “The alarm bells ringing at the state of optimism in the financial services sector have now reached a deafening level. Not only has it plummeted at the fastest rate since the depths of the Financial Crisis, it has been falling or flat since the EU referendum. Additionally, business volumes and employment have fallen over the last quarter.
“Brexit is now a national emergency. No Deal has to be clearly ruled out, then MPs must finally compromise and deliver a solution that protects jobs, livelihoods and communities across the UK. It is in absolutely nobody’s interest for the uncertainty to drag on, and continually chip away at our economy and financial services sector.”
Andrew Kail, Head of Financial Services at PwC, said: “Optimism has declined at the fastest rate since 2008. This is obviously cause for concern but the wider business story the industry is telling is one of resilience – a powerful endorsement from an industry which remains a cornerstone of the UK economy.
“Three strong themes stand out in the survey: Brexit, people, and future investment. Despite the continuing uncertainty, these businesses are embracing disruption and reinventing themselves to be ready for growth in a post-Brexit environment including developing leaner, more specialised workforces.
“They are ramping up spending on training, technology and marketing, which suggests among other things, more workforce automation.
“However, it remains to be seen whether our FS businesses will retain their current global footprint as political negotiations play out. Clarity, certainty and communication are vital if the UK is to protect its position as the leading financial centre.”
- Optimism in the financial services sector dropped at the fastest pace since December 2008 (-45%), the twelfth quarter of declining sentiment in the last thirteen quarters (the exception was the first quarter of 2017, when sentiment was flat)
- 10% of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 53% were less optimistic, giving a balance of -43% (compared with -24% in previous quarter)
- 10% of firms said that business volumes were up, while 22% said they were down, giving a balance of -12% (a slightly faster fall than in the previous quarter (-7%))
- Looking ahead to the quarter to June, business volumes are expected to fall further, with the weakest expectations since September 2008 (-31%): 16% of firms expect volumes to rise next quarter, and 46% expect them to fall, giving a balance of -30%.
Incomes, costs and profits:
- Overall profits growth picked up in the three months to March, with 47% of firms reporting that profits had increased and 26% saying they fell, giving a balance of +21%. An improvement on December 2018 (+4%), this was the strongest growth in profitability in a year (+33% in March 2018)
- Income from fees, commissions and premiums fell (-9%), but growth is expected to recover over the quarter ahead (+14%)
- Income from net interest, investment and trading also declined (-6%) with a similar fall expected in the next three months (-5%)
- Total operating costs fell (-14%), while average costs grew at a faster pace (+11%). Next quarter, total costs are expected to fall at a faster pace while average costs are set to be unchanged (-26% and +1% respectively).
- 17% of financial services firms said they had increased employment, while 38% said that headcount fell, giving a balance of -21%
- Employment growth is set to pick up next quarter (+17%).
Investment over the next 12 months :
Over the year ahead, financial services firms expect increases in spending on IT and marketing, but to cut back on other forms of capital spending:
- IT: +69%
- Marketing: +51% (the strongest expectations since June 2015 – +58%)
- Vehicles, plant and machinery: -7%
- Land and buildings: -10%
The main reasons for authorising investment were:
- To provide new services (74% of respondents, highest since June 2010)
- For replacement (70%)
- Statutory legislation and regulation (68%)
- To increase efficiency/speed (43% – the lowest on record)
The main factors likely to limit investment were:
- Inadequate net return on proposed investment (78% of respondents)
- Uncertainty about demand or business prospects (39%)
- Shortage of labour, including managerial & supervisory staff (26%).
Business expansion over the next 12 months:
The most significant potential constraints on business growth over the coming year are:
- Level of demand (75% of respondents)
- Statutory legislation & regulation (69%)
- Competition (31%).