By Max Clarke

Activity grew strongly in the UK financial services sector for the second quarter in a row, in the three months to December, a new survey reveals today (Monday).

However, profitability did not increase as fast as expected, growing at the slowest pace for 18 months, and numbers employed in the sector fell at the fastest pace for 17 years, according to the latest CBI/PwC Financial Services Survey.

Asked how their business volumes fared in the three months to December, 50% said that volumes increased and 23% said they fell. The resulting balance of +27% is in line with firms’ expectation (+24%), and just below last quarter’s balance of +28%, which was the fastest since June 2007. A slower rate of growth in volumes is expected in the next three months (+15%).

Business volumes grew for all sub-sectors of financial services in the past quarter, apart from banking where volumes were flat. Life insurers saw a year of growth in 2010 for volumes of business and profitability. For investment managers, all respondents saw activity grow in the past three months.

Across each of the customer groups in the overall survey experience was mixed. For business with private individuals, volumes were higher than three months ago. Business with industrial & commercial companies was flat, and it fell slightly with financial institutions and overseas customers. In the coming quarter, growth in business activity is expected with all the customer groups, except financial institutions.

The value of fee, commission and premium income held steady in the past three months, disappointing expectations of a rise. However, the value of income from net interest, investment and trading fell in the past quarter and a further fall is expected in the coming three months.

John Cridland, CBI Director-General Designate, said:

"Activity in the financial services sector grew strongly over the second half of 2010. But firms see growth slowing over the coming three months, and expect another fairly moderate increase in profitability.

"Numbers employed have fallen significantly and investment plans have weakened since September. This probably reflects renewed cost control given little growth in incomes and slower growth in profitablity.

"Business conditions vary across financial services sub-sectors, however. Whereas the banks expect business volumes to remain subdued next quarter, securities traders and investment managers have fared much better and are continuing to take on staff.

"Growth in business with private individuals in the last quarter may well reflect households continuing to strengthen their finances. But looking ahead to the next quarter, commercial business is expected to increase significantly."

Total operating costs (excluding costs of funds) rose slightly in the past quarter ending a two-year sequence of cost reductions. Average operating costs per transaction fell, but at the slowest pace in one and a half years. Firms are predicting both areas of cost will fall, and average costs at a faster pace, next quarter.

Following two quarters of widening spreads, this quarter saw average spreads stay put (+2%), and there is a similarly flat expectation (-1%) for the coming three months.

With increased cost pressures, the lack of movement in spreads, and a fall in income from trading, interest and investments, firms’ profitability rose at a slower rate than in the past year. Slightly faster growth in profitability is predicted in the coming quarter.

Firms have had success bringing down the value of non-performing loans, at the fastest pace since December 1996.

However, numbers employed fell at the fastest rate since March 1993. This quarter’s balance of -48% was worse than expected -20%, and was reflected in the highest trend in staff turnover since the question was first asked in December 2006.

Staff costs, as a proportion of total costs, fell in the past three months at the fastest pace in the survey’s 21-year history (-57%).

Firms are planning to invest less over the coming 12 months, on land and buildings, vehicles, plant & machinery and IT. The percentage of firms saying shortage of finance is likely to limit capital authorisations over the coming year was well above average at 34%, the highest in six quarters.

The area where firms are planning to invest more is marketing, where a balance of +18% of firms say they expect to spend more in the coming year, though this figure is the weakest in a year.

In the next three months, the highest percentage of firms since the question was first asked in March 2009 expects growth will come from selling new products and acquiring new domestic customers.

Firms expect they will have to spend more on regulatory compliance in the coming year, with the highest balance recorded since this question was introduced in December 2006.

Concerns over a further worsening in financial markets have picked up in the latest survey, and more respondents now believe that normal financial conditions will resume only beyond a six month horizon.

Financial services firms have also become more concerned about their ability to raise funds over the coming year.

Analysis by sector:


The banking sector reported little change in business volumes over the past three months. Income values declined sharply, and spreads were flat. Furthermore, costs were also unchanged following heavy falls over much of the past two years. Taken together, this led to a sharp fall in profitability, and a similar decline is expected for the coming quarter.


Profitability rose strongly for the second consecutive quarter, driven by growth in business volumes and income values. Another increase in profits is predicted for the next three months.


Growth in business volumes and profitability eased on much stronger increases over the previous two quarters, but some pick-up in both is expected for the next three months.

Andrew Gray, UK banking leader at PwC, said:

"Despite subdued business levels, the banks are more confident than they have been at any point since 2005 in anticipation of stronger commercial demand. On the retail side, while banks are in good shape and able to lend more, actual demand is still faltering. Faced with weak demand for new mortgages and growing customer desire to pay down debt, banks will continue to find it difficult to raise margins — though they should benefit from reduced bad debts. While almost all banks expect compliance spend to climb this year, they intend to reduce overall costs putting headcount under continued pressure.

"Focus on balance sheet management as the sole priority seems to have come to an end, allowing more focus on market positioning and business retention. Falling activity with financial institutions suggests some banks are now able to be more self sufficient and have more stable longer-term funding and reduced reliance on the inter-bank market.

"Building societies fared better than expected at the end of last year with higher reported business volumes and stronger income levels. The most likely explanation for increasing profitability is the value of non-performing loans, which the market views as unlikely to continue. Responding to legislation and regulation is set to be an area of considerable uncertainty and cost, while increasing efficiency and replacing ageing infrastructure have been identified as other areas in need of investment. Unfortunately, continued funding and demand challenges mean the outlook for building societies remains challenging."

Life insurance

Both business volumes and profitability rose for the fourth consecutive quarter, the latter also underpinned by a sharp fall in costs. But despite this, optimism among life insurers fell for the first time since March 2009, possibly linked to a sharp fall in income from fees & commissions and a lack of growth in net interest/trading income.


While general insurers reported the fastest growth in business in five quarters, this was offset by a sharp fall in net interest, investment & trading income and no change in spreads, meaning that profitability overall fell on the previous quarter. But a rise in the latter is expected for the next three months.


Optimism rose at its fastest rate in a year, as insurance brokers reported a further strengthening in business growth. Coupled with a strong rise in income values and a sharp fall in average costs, this led to robust growth in profitability. But the latter is set to contract modestly in the next three months, with incomes expected to fall and business volumes predicted to be broadly flat.

Gavin Phillips, London market insurance leader at PwC, said:

"The past quarter has been a mixed bag for life insurers. While volumes of business are still reported to be climbing, the value of new business has disappointed. The sector’s ability to raise capital is a major concern and marketing budgets for 2011 appear to have been slashed. The focus on reducing operating costs has lead to a welcome rise in profitability, but headcount is reported to have fallen further and additional job cuts over the next three months are expected.

"Despite reporting the fastest growth in business volumes in five quarters, the outlook for the general insurance sector remains uncertain. The unfavourable pricing outlook and intensity of competition is still causing insurers concern. The value of claims has risen for the third quarter running and investment returns have continued to decline, adding further pressure to insurer’s profitability. However, insurers are one of the few sectors continuing to hire and numbers employed have increased for the second quarter running."


Despite an increase in average costs, a unanimous rise in business volumes and a robust increase in fee, commission & premium income meant that profitability grew strongly for the sixth consecutive quarter. However, plans for capital spending in the year ahead have generally weakened; in particular, investment managers plan to authorise less spending on IT relative to the past year, for the first time since June 2009.


Optimism rose for the first time in a year, as strong growth in business volumes and incomes and fall in average costs lifted profitability. Furthermore, plans for spending on marketing in the coming year are at their strongest since September 2000.

Pars Purewal, UK asset management leader at PwC, said:

"Investment managers have enjoyed another good quarter, as volumes of business, profitability and numbers employed have all increased. Due to the strong quarter, the sector is now looking to invest in distribution and develop new products and services. Regulatory compliance will also be a major driver of costs during 2011 as investment managers seek to comply with the range of new regulation that will hit the sector.

"Growing retail demand has given securities traders their best quarter of activity and revenue in over a year. Despite concerns about Ireland’s sovereign debt and the possibility of contagion, retail investors appear to be putting their concerns over the economy to one side and taking up equities. Securities traders are cautiously optimistic about the medium term outlook and are starting to increase marketing spend and capital investment plans. But levels of demand, the impact of regulatory reform and the availability of professional staff remain a concern."