Growth in financial sector although life insurance struggles

BUSINESS volumes in the financial services sector have continued to grow strongly in the three months to June, a new report claims.

The latest CBI/PwC Financial Services Survey also suggests optimism levels with the industry improved during the period.

However, it said the life insurance sector was the one exception, with business volumes shrinking and optimism falling.

The survey said that 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 those responding to the survey 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.

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.

The figures may not include the 2,000 job losses announced by Direct Line as it looks to streamline it UK operations.

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.”

He warned that reacting to regulation would continue to eat into investment budgets and constrain business expansion for some time to come and he said firms were 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.

Kevin Burrowes, PwC’s UK financial services leader, said: “Banking confidence continues to grow, increasing at the fastest rate since 2000.  The banks’ upbeat mood is supported by many factors including a strong rise in business volumes and strong activity with commercial and retail customers.  This may not mean that credit appetite is growing, but it certainly implies an improvement in economic performance.

“After allowing costs to rise in the first quarter of the year, banks are renewing their focus on efficiency and staff numbers are beginning to fall again.  Retail and commercial non-performing loans are also predicted to decline during the coming quarter. “