By Daniel Hunter

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.