By Claire West

The UK financial services sector saw activity grow strongly for the third quarter in a row, in the three months to March, according to a new survey published today.

Firms considered the level of their business is only slightly below normal, the best result since the financial crisis began in September 2007, according to the latest
CBI/PwC Financial Services Survey.

Asked how their business volumes fared in the three months to March, 33% said that volumes rose and 11% said they fell.

The resulting balance of +22% exceeded firms’ expectations (+15%), and was only slightly below the balances of +27% and +28% recorded in the preceding two quarters. Growth in business is anticipated to pick up a little further in the coming three months (+30%).

Business volumes grew across the sub-sectors, apart from banking, where volumes were stable, and finance houses where they fell.

Business grew across each of the customer groups. Growth was particularly strong for business with private individuals, as volumes rose at the fastest pace since December 1996.

Growth was slower for business with industrial & commercial companies, financial institutions and overseas customers. Business is expected to grow across all the customer groups again over the next three months.

Both the value of fee, commission and premium income and the value of income from net interest, investment and trading rose at the fastest rate since March 2007 in the past three months. Slightly faster rises are anticipated next quarter.

Ian McCafferty, CBI Chief Economic Adviser, said:

“A third quarter of strong volume growth shows the financial services recovery is building strength. It is particularly good news that firms consider their level of business to be only slightly below normal, for the first time since the financial crisis began in 2007.

“While business with private individuals has again shown the fastest growth, business with companies also shows some signs of improvement. Firms’ profitability has improved due to higher incomes and another big drop in the value of non-performing loans.”

Total operating costs (excluding costs of funds) increased at the fastest pace since September 2007, the second consecutive rise in costs after a two-year period of reductions. Average operating costs per transaction rose slightly, ending an eighteen-month sequence of falling costs. Both types of cost are predicted to rise again next quarter.

Average spreads narrowed for the first time in a year, and at the fastest pace since June 2007. Firms expect them to be stable next quarter.

For the second quarter running, firms have had success in bringing down the value of non-performing loans, once again at the fastest pace since December 1996.

Despite the cost pressures and narrowing of average spreads, a combination of rising incomes and the fall in the value of bad debts led firms’ profitability higher in the past three months, and at the fastest rate since December 1993. A similar improvement is expected in the coming quarter.

Numbers employed fell for the second quarter in a row. Staff turnover also rose, and is expected to be only marginally higher next quarter. Staff costs, as a proportion of total costs, are expected to fall further next quarter.

Firms are planning to invest more over the next 12 months across land and buildings, and information technology. Plans for investment in marketing in the coming year are seeing their biggest boost since December 1993.

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

The largest proportion of firms since the survey began in 1989 says that statutory legislation and regulation is likely to limit their ability to raise levels of business over the next 12 months.

Concern over a further worsening in financial markets fell back in this survey, following a noticeable spike last time.

However, the vast majority of respondents still think that ‘normal’ financial market conditions will only resume beyond a six month period.

Analysis by sector


Banking saw little change in business volumes over the past three months, but reported that they were normal, which comes after three full years of well below normal levels of activity. Bankers saw a steep decline in the value of non-performing loans (NPLs), relatively stable costs (despite a fall in numbers employed), and they plan to invest more in the year ahead, particularly on IT and marketing. Their profitability increased strongly after having fallen in the previous quarter.

Building Societies

Unlike banks, building societies’ business grew for the third quarter in succession but continues to be regarded as well below normal levels. Societies managed to increase profits through growth in incomes as well as business volumes, but expect total costs and NPLs to head higher next

Finance houses

Business volumes in total and with private individuals fell unexpectedly, leading to higher average costs per transaction and a fall in profitability this quarter.

Andrew Gray, UK banking leader at PwC, said:

“There is encouraging evidence that the banks are adjusting expectations in line with what constitutes the ‘new normal’. Despite a strong round of annual results, they are increasingly realistic about the challenges ahead - particularly in terms of demand and regulatory obstacles. While they report near normal business levels for the first time since 2007, their actual activity is way below that seen before the financial crisis.

“Income levels and business volumes are stubbornly flat. Yet, profitability is increasing strongly as declining average spreads are offset by steady costs and declining non-performing loan values. Other indicators are mixed. For example, while headcounts are falling, advertising spend and technology investment are growing.

“Building societies appear to be adjusting their expectations downwards. This is because revenues and spreads look set to come under pressure from intense competition in the UK mortgage and savings markets. Profits are likely to be weakened by growing operating costs and deterioration in non-performing loans over the next few months.”

Life insurance

Business volumes increased for the fifth consecutive quarter, and the level of business was regarded as above normal to the greatest degree since September 2007. In conjunction with flat total costs, the growth in business caused average costs per transaction to fall steeply again for the sixth quarter in a row. Values of new business and premium income advanced also, and the overall combination of factors lifted profits further.

General insurance

General insurers reported moderate growth in business volumes, but spread well across all four customer categories. Costs were kept stable, and profitability increased moderately, in line with last quarter’s prediction.

Insurance brokers

Brokers increased their profitability further this quarter, and at a faster rate. Profitability has now grown in each of the past three quarters, as has broker bullishness to invest more in the year ahead on IT systems and marketing expenditure. Major motives are to increase efficiency, to reach new customers and provide new services.

Mark Stephen, UK insurance leader at PwC, said:

“Encouraged by increasing business volumes and profitability, general insurers are looking to invest again in staff, marketing and IT. Reaching new customers will be vital to general insurers’ growth plans and companies are investing heavily to attract new business.

“Cost drivers are mixed. Regulatory spend is increasing as insurers gear up for Solvency II implementation. While headcount is on the up, insurers are struggling to recruit the skilled managerial staff they were hoping to bring on board.

“The continued low growth rates and intense competition in the UK market is forcing insurers to explore new growth avenues and continue to push for new international business. The coming quarter will look quite different as the impact of this quarter’s natural disasters is felt.

“Life insurers have benefited from strong levels of new business and improving profitability as the sector continues to keep a tight control of its costs. Attracting new customers is now the primary focus, as life insurers strive to win new business and strengthen distributor relationships before the Retail Distribution Review comes into force.”

Investment Management

This sector employed more people and its total costs advanced, yet growth in both volumes of business and the value of incomes (from commissions, fees, trading, interest and investments) boosted profitability further. The concurrent uplifts in employment, costs and profits now stretch back over seven quarters. Firms also plan to ramp up their marketing spending in particular in the coming year, and to invest more on IT systems and land and buildings.

Securities Trading

Volumes grew quite strongly, and the level of business was seen as “almost normal”. Firms also saw a lift in both main types of income, and a small fall in average costs per transaction. Profitability advanced very strongly for the second successive quarter, and numbers employed grew further. The latter has now expanded in each of the last six surveys.

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

“Investment managers' sentiment is reaching new heights buoyed by growing business volumes, commission values and overall profitability. Investment managers are far more upbeat than their counterparts in other parts of the financial services industry. Headcount and operating costs are increasing in tandem with growing revenues and this looks set to continue as the sector feels very confident about its future. A cautionary note is the concern the investment managers have over the growing threat of regulation, which they see as a potential limitation to business growth.

“Securities traders have benefited from improved revenues and profitability but, in the face of regulation and anticipated new market entrants, they are forecasting a slowdown in growth over the next quarter. Predictions for retail activity also seem to be dropping off.”