Financial services activity jumps
ACTIVITY in the financial services sector is growing at its fastest rate for almost three years, new research suggests.
However, according to the latest CBI/PwC Financial Services Survey firms are still unhappy with the rate of growth and the figures – which show the sector at its busiest since September 2007 – disappointed many.
The survey shows the sector saw its fourth consecutive quarter of improving profitability, though firms expect this to level off during the next three months.
Concern about the impact of regulation and legislation on future business remains high, with a large proportion of firms expecting to spend more on compliance in the coming 12 months.
Asked how their business volumes fared in the three months to June, 38% said that volumes rose and 29% said they fell. The resulting balance of +9% is the most positive since September 2007, but was far weaker than expected.
In the next three months, a balance of 63% expects a rise in business volumes, the most positive expectation since December 1993 (+65%).
While banks were the only sector to see business volumes fall in the past three months, building societies’ and general insurers’ volumes were largely flat.
Life insurers, finance houses and securities traders saw healthy increases in volumes, investment managers’ business grew slightly and insurance brokers saw volumes grow for the first time since March last year.
Business increased across all the customer groups. It grew at the fastest rate since June 2007 for industrial & commercial companies, financial institutions and private individuals, with a record rate for overseas customers.
While the value of income from fees, commissions and premiums rose (a balance of +17%) at the fastest rate since March 2007 (+23%), the value of income from net interest, investment and trading fell a little (-11%). This disappointed expectations of a small increase, however firms expect both types of income to grow in the coming three months.
John Cridland, CBI deputy director-general, said: “The modest pick-up in activity in the financial services sector in the past three months fell short of expectations. But firms hope that activity will strengthen over the coming quarter and are now planning to expand their staff numbers.
“This survey was conducted when financial markets were feeling the intense strain from fears over euro area sovereign debt and, for the first time in over a year, a notable minority of firms were worried that the risk of further market deterioration is high.
“A high proportion of firms are worried about the impact of prospective regulation on their business, and many remain concerned that red tape will hamper growth prospects in the year ahead. Firms have also become more worried about increased competition within the sector, particularly from new entrants and from overseas.”
Total operating costs (excluding costs of funds) fell faster than expected, at the highest rate since December 1993. Average operating costs per transaction fell at a record pace (-51%), which will have been helped by the modest rise in business volumes.
Spreads widened markedly (a balance of +39%) contrary to expectations of a narrowing in spreads.
The trend of falling costs, this quarter’s modest volume growth and the widening of spreads contributed to the fourth consecutive quarterly rise in profitability, with the balance of +20% the highest since June 2006 (+28%). Next quarter, firms expect this to level off, however, with a net expectation of +3%.
Numbers employed continued to fall, but only modestly (a balance of -6%) and slightly slower than expected. Firms now expect staff numbers to increase next quarter and, if this materialises, it will be the first increase since December 2007.
Investment plans for IT are broadly flat for the next 12 months, while the balance for those planning to spend more on marketing in the coming year has risen to +53%, the highest in 10 years.
The highest proportion of firms since March 2009 said that both increasing their share of international markets and forming strategic alliances would be an important part of their growth strategy in the next 12 months.
The number of firms saying they are concerned about the impact of statutory legislation on their ability to expand in the next 12 months remains high (62%), following the previous quarter’s record level of concern (74%).
The percentage of firms believing there is a high likelihood of further deterioration in financial markets has risen to 23%, the highest proportion since the first quarter of 2009.
Firms in the insurance sector are particularly pessimistic and in most sectors the majority does not expect normal financial conditions to return in the next six months.
