By Claire West
Activity in the UK financial services sector grew in the last three months at the fastest rate since June 2007, although this growth was much slower than was expected, a new survey reveals today (Monday).
For the fifth quarter in a row, profitability improved in the financial services sector, and is expected to continue growing over the next three months, according to the latest CBI/PwC Financial Services Survey.
The CBI also announced that the latest Financial Services Survey has been reclassified and re-weighted to bring the data in line with the latest UK and European Commission official classification systems. This permits easy comparison with other economic indicators. Overall, the trends over time between the results generated under the new system and those under the previous classification and weighting are very similar.
Asked how their business volumes fared in the three months to September, 37% said that volumes rose and 9% said they fell. The resulting balance of +28% is the most positive since June 2007 (+51%), although it fell short of expectations (+63%). A similar pace of growth is expected next quarter, by a balance of +24% of firms.
Business volumes rose across all sub-sectors of financial services in the past three months, apart from general insurance, which saw a modest fall in activity. Banks’ volumes increased after two quarters of decline, but at a slower pace, as expected, and building societies saw the fastest rise in volumes since March 2008, helping to achieve a near unanimous rise in profitability.
Overall, business grew across all customer groups, apart from business with financial institutions, where there was a modest decline. The strongest growth was seen in business with overseas customers, with the highest balance of firms since September 1999 describing this level of business as above normal.
The value of fee, commission and premium income rose only slightly in the past three months, while the value of income from net interest, investment and trading was broadly flat. While the former is expected to pick up in the coming three months, the latter is expected to fall.
Ian McCafferty, CBI Chief Economic Adviser, said:
“Activity picked up in the financial services sector in the last three months at a pace not seen since before the credit crunch. Although this growth was slower than hoped, it did help firms’ profitability to rise further.
“There is ongoing concern that prospective regulation may hold back business expansion in the coming year, but financial services firms have become more worried that weak levels of demand will dampen growth prospects.”
Total operating costs (excluding costs of funds) continued to fall, but at a much slower pace than in the previous quarter. Average operating costs per transaction also fell, but this was slower than expected. However, firms expect average operating costs per transaction to fall at a more rapid pace over the next quarter.
For the second consecutive quarter, spreads widened markedly (a balance of +34%), although expectations are for a lesser widening in the coming three months.
On the back of falling costs, faster growth in business volumes and the widening of spreads, a rise in profitability was recorded for the fifth quarter in a row. The balance of +23% is the highest since June 2006 (+28%). Next quarter, firms expect a similar growth in profitability.
Numbers employed rose in the sector for the first time since December 2007, and the balance of +12% was broadly in line with expectations (+14%). However, a decline in headcount is expected again next quarter (-20%).
Expenditure on training rose in the last three months, with the highest balance of firms since September 2007 saying their spending increased. It is expected to be broadly flat next quarter, however.
Firms’ investment plans for the next 12 months are the most positive since December 2007 for information technology (IT). Investment plans for land & buildings and vehicles, plant & machinery have also improved, rising above their long-run averages, though are not as strong as IT.
Shortage of finance is cited as likely to limit capital authorisations over the coming year by the least number of firms since September 2008, and the cost of finance as a concern edged lower.
The number of firms worried that statutory legislation will limit business expansion in the year ahead remains significant, but has fallen back further since the record high in March.
Following a spike in June, the proportion of firms believing there is a high likelihood of further deterioration in financial markets has fallen back to 10%. Concern has receded particularly in the insurance-related sectors. In all sectors, the majority does not expect normal financial conditions to return in the next six months, with the exception of investment management.
Analysis by sector
After falling over the previous two quarters, business volumes rose in the three months to September driven by an increase in business with industrial & commercial companies and overseas customers. Spreads continued to widen sharply and both total and average costs continued to fall. However, this failed to lift profitability, which was unchanged after three quarters of growth.
Profitability rose for nearly all respondents in the three months to September, underpinned by strong growth in both business volumes and net interest, investment & trading income and a sharp widening of spreads. While business volumes are set to be flat over the next three months, profitability is expected to rise again.
Andrew Gray, UK banking leader, PricewaterhouseCoopers LLP, said:
“While the banks are broadly in good shape, business is still constrained by the economic environment. Increases in demand are coming from the corporate sector, although the retail sector is subdued. Concerns about demand are contributing to uncertainty with banks continuing to focus on cross-selling as a source of growth. That said, costs and non-performing loans are under control and profitability is expected to rise.
“Competition is at the forefront of bank leaders’ minds and while new entrants do not rank as a high-level threat, renewed focus on product development and the marketing mix suggest a shake-up of market shares is anticipated. Regulation and the spend on compliance it necessitates remain a big concern for the banks — we’ll see the impact of Basel III proposals over the next quarter. While the capital requirement proposals are less stringent than some expected, they do place significant financial demands on the banks —which will have consequences for pricing, business models and strategy.
“Building societies are committed to customer retention on both sides of the balance sheet in response to continued funding and demand challenges. By trimming operating and headcount costs while investing in distribution and marketing they are seeking to future proof their businesses as far as possible.”
An increase in business with industrial & commercial companies boosted overall volumes over the past three months. Income values also rose, with fee, commission and premium income seeing particularly strong growth. As a result, profitability continued to rise rapidly.
Optimism regarding the overall business situation rose solidly, as profitability rose rapidly for the third consecutive quarter, driven by particularly strong growth in business volumes and fee, commission & premium income.
Profitability rose modestly, driven by a widening of spreads, and a somewhat faster rise is expected over the next three months. Business volumes fell unexpectedly, but a rise is anticipated over the coming quarter.
Both business volumes and income from fees, commissions & premiums rose at the fastest pace since March 2009. As a result, profitability rose unexpectedly, after a small decline in the previous quarter. Headcount grew at its fastest for two-and-a-half years, and investment intentions for the year ahead have strengthened noticeably.
Mark Stephen, insurance partner, PricewaterhouseCoopers LLP, said:
“The general insurance sector has returned to profit for the first time in a year and a further rise is expected over the next three months. Companies are also hiring again, with many predicting their headcounts to increase further. However, it is not all good news for the sector; premium rates, particularly in commercial lines, are under pressure and volumes of business have fallen. There are also concerns about competition from within the sector and as a result general insurers are shifting their focus away from international growth plans towards attracting domestic customers.
“Life insurers have enjoyed a strong quarter as overall business volumes, profitability and the value of fee, commission and premium income grew strongly. Confidence has returned to the sector and companies are expecting business volumes to continue on this upward trend. Over the next three months, life insurers will continue to focus on attracting new customers, rationalising their product set and launching new products and services.”
Profitability rose strongly for the fifth consecutive quarter, underpinned by ongoing growth in business volumes — indeed, business both in total and with overseas customers was well above normal for the third quarter running. Numbers employed rose for the sixth consecutive quarter and the proportion of firms citing an expansion of capacity as a reason for capital spending over the coming year was the highest since June 2007.
Business volumes rose only slightly over the past three months, falling short of the strong expectations in the previous quarter. But, spreads were widened for the first time since December 2008 and both total and average costs fell once again, stimulating the first growth in profitability this year. However, an anticipated rise in costs over the next three months has led to expectations for a marginal decline in profitability.
Pars Purewal, UK asset management leader, PricewaterhouseCoopers LLP, said:
“Buoyed by relative stability in the equity markets, growth in business volume and higher than expected fee income, investment managers are continuing their recent run of confidence. Business with financial, personal and overseas investors has reportedly expanded and this growth is expected to continue through to the end of 2010 at least.
“Many firms based their projections for this year on a FTSE 100 Index average of around 5,000 points and, with the index staying above this level so far, their revenues are over budget allowing operating expenses to grow. This optimism is evidenced by hiring plans, with most firms reporting growing staff numbers and a strong recognition of the difficulty of recruiting staff with risk management, finance and compliance skills.
“Preparations for the raft of regulation facing the industry are also front of mind and a source of considerable concern.
“Expectations of demand from all customer segments in the coming quarter are modest at best among security traders. This has prompted much stronger interest in achieving growth through new products and services — particularly those designed to help clients manage new regulatory pressures and requirements. With demand prospects limiting growth and economic uncertainty affecting strategic planning, the outlook for the sector remains unclear.”