By Daniel Hunter
According to the latest CBI/PwC Financial Services Survey, activity in the sector rebounded strongly in the three months to March, with a robust rise in business volumes and an increase in profits.
Profit growth was driven mainly by a further widening in spreads and an increase in income from fees, commissions and premiums. But the pace of growth was slower than expected, in part because of a surprise rise in costs, particularly staff costs, following an unexpected rise in employment.
Financial services companies said they were more optimistic about their overall business situation and business volumes and profits are both expected to grow again in the next quarter. However, regulation and compliance costs are likely to remain a drag on business.
“This has been a strong quarter for the financial services sector, with robust growth in business volumes, an increase in profitability and upbeat investment intentions," Matthew Fell, CBI Director for Competitive Markets, said.
“Concerns over the lack of availability of professional staff have eased since January and overall employment rose unexpectedly this quarter.
“But recent problems in Cyprus risk reigniting concerns about Eurozone stability. At the same time, regulation and compliance are still likely to be significant drags on business throughout this year.”
- 48% of firms said business volumes increased and 17% reported a fall, giving a balance of +32%
- Business volumes grew in all customer categories: industrial & commercial (+20%), financial institutions (+12%), private individuals (+16%), overseas customers (+8%)
- 39% expect business volumes to increase next quarter while 12% expect them to fall, giving a balance of +27%
- Income from fees, commission or income rose (+18%)
- Income from net interest, investment or trading was fairly flat (+3%)
- Total costs increased (+13%), driven by a rise in staff costs (+12%)
- Average spreads widened (+7%)
- 34% of firms said profits increased and 15% reported a fall, giving a balance of +19% - not as strong rise as expected (+38%). Profits are expected to increase again next quarter (+14%)
- 35% of firms reported a rise in employment and 16% a fall, giving a balance of +19% - a similar increase is expected next quarter (+18%)
- Based on the correlation of the CBI’s survey data with the ONS, Financial Services sector employment is expected to have increased by 2,000 in the three months to March and is expected to increase again next quarter, by 2,000
- Investment intentions for the next twelve months were particularly strong for IT (+36%) and marketing (+25%). Investment expenditure plans also improved sharply for land & buildings and plant & machinery, with expenditure in both categories now expected to be little changed over the next year (+4% and -4% respectively)
- Concerns about the level of demand dropped back as a factor likely to limit the level of business over the year ahead (cited by 64% of respondents from 90% last quarter), as did concerns about the availability of professional staff (11% of respondents from 32%)
- Regulatory compliance is expected to be an increasing burden in the coming year, limiting the level of business (23% of respondents) and adding to costs (a balance of +61% expect to increase regulatory spend over the next twelve months, compared with +49% last quarter)
- Financial services firms said they planned to launch more new products and services in the year ahead to drive business growth (+36%).
Analysis by sector:
Sentiment around the outlook improved among banks for a second consecutive quarter. Business volumes rose at a strong pace, for a second quarter, in line with expectations, and the level of business was considered to be only slightly below normal. Profitability rose for a fourth consecutive quarter, driven by rising volumes, growth in income, and only a modest appreciation in costs. Investment intentions strengthened across all categories. Statutory legislation and regulation was regarded as the factor most likely to act as a limit on business over the year ahead. Banks expect a further improvement in business volumes over the next three months.
Optimism rose at its fastest rate in seven years as growth in business volumes surpassed expectations. Profitability rose strongly for the second successive quarter, boosted by a rise in income values. Numbers employed also increased faster than expected. Business volumes are predicted to grow more moderately over the coming three months.
Business volumes, profitability and headcount all rose over the last three months, and optimism rose at its fastest rate since June 2010. Growth in business volumes is expected to accelerate in the three months ahead. Furthermore, investment plans for the year ahead are significantly stronger than they have been in recent quarters.
“The banks’ return to confidence continues, although the improvement is less marked than in the previous quarter," Steve Davies, PwC Partner, Retail & Commercial Banking, said.
"Business is expected to improve across retail, commercial and financial segments and headcount has begun to grow again. This implies a general improvement in confidence which would benefit the banks, the broader financial services industry and the economy as a whole.
“On a more cautious note, the possibility of inadequate returns is prompting a significant number of banks to hesitate over their investment plans. The banks may be increasingly confident that their core businesses have been put onto a stable and profitable footing, but the sector remains dependent on its own customers’ financial confidence.”
Business volumes fell sharply over the last three months, for the first time since December 2009, particularly with private individuals. This led to a decline in profitability, disappointing expectations of a strong rise, partly counterbalanced by falling average costs. Numbers employed fell at the strongest rate since December 2010. Business volumes are expected to fall rapidly again next quarter.
General insurers saw an unexpected decline in business volumes and a fall in profits for the third quarter running — the latter was also compounded by a fall in incomes and reduced pricing power. Sentiment regarding the overall business situation also fell sharply. However, headcount increased at its fastest rate in two years and is expected to increase again next quarter, and business volumes are expected to grow next quarter.
Insurance brokers reported a rise in business volumes and profits in line with expectations. Numbers employed increased unexpectedly. Strong growth in business volumes and profits is expected next quarter.
“A fall in insurers’ confidence reflects a disappointing quarter for premiums and profitability," Jonathan Howe, PwC partner and UK insurance leader, said.
"Those general insurers surveyed do expect business to rally across personal and commercial lines in the coming months but life insurers expect volumes to continue to fall.
“Regulatory concerns have eased and general insurers have identified the launch of new products and services as their most important growth driver. There is growing interest in the potential of telematics and data mining. Firms’ increasing desires to improve their digital and mobile platforms are also visible in their plans for customer-focused IT investment.”
Business volumes saw the strongest rise since December 2010. Profitability increased for the fifth consecutive quarter, as growth in average commissions, fees and premiums accelerated and income values rose strongly. Volumes are expected to grow solidly again in the coming three months.
“Investment managers remain remarkably confident, thanks to good equity market performance and particularly strong retail business. Profitability continues to improve despite rising investment, marketing costs and headcount," Paula Smith, PwC partner and UK asset management leader, said.
“The wave of new regulation is the only cloud on the horizon where although concern about the impact has fallen slightly, a large number of investment managers plan to spend more on compliance during the coming year.”
Profitability rose for the first time in two years, as fees, commissions and premiums increased at their fastest rate since December 2010. Business volumes grew unexpectedly after five quarters of decline, and optimism rose strongly. Numbers employed also grew at a faster-than-average rate. Business volumes are expected to rise more moderately next quarter.
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