Financial services sector’s activity stabilises in second quarter

Optimism in the financial services sector stabilised in the second quarter of 2018 following sharp falls over the previous two quarters.

The latest CBI/PwC Financial Services Survey found that optimism about the overall business situation in the financial services sector showed no improvement, having fallen in all but one quarter since the beginning of 2016. Sentiment was unchanged in banking, building societies and investment management, but improved in finance houses and general insurance.

Overall business volumes were flat. While building societies reported that volumes rebounded, after falling in the previous quarter, volumes were unchanged in banking, and grew at a fairly tepid pace in general insurance and investment management. Looking ahead, overall business volumes are expected to pick up marginally over the coming three months.

Employment across the financial services sector as a whole increased for a second consecutive quarter, at the fastest pace for a year. The only sector cutting back headcount was building societies, reflecting weaker activity and profitability.

Overall employment is expected to rise further over the coming quarter. Investment intentions for the year ahead improved, with marketing budgets increasing, and investment in IT anticipated to rise at the fastest pace in over three years, motivated by a mixture of new service provision, efficiency improvements and regulatory compliance. With demand uncertainty diminishing, the share of firms investing to provide new services was the highest in three years.

Rain Newton-Smith, CBI chief economist, said: “Despite fairly subdued growth last quarter, it’s good to see financial firms stepping up hiring and investment, with digital technologies and new services seen as the best way to grow in a fiercely competitive environment.

“The UK’s financial services is the jewel in the crown of the British economy, and is an engine for growth in other parts of the economy across the country. Yet it’s impossible to ignore the fact that three years have now passed since we’ve seen any significant improvement in overall sentiment in financial services.

“In order for the sector to continue to attract investment and create jobs in the run up to Brexit and beyond, the Government must work hard with Brussels to agree a unique agreement that develops the sector after Brexit.”

Andrew Kail, head of financial services at PwC, said: “Optimism amongst financial services has remained subdued and growth in business volumes has weakened. Profitability was also stable, following strong growth over the last year. There is a hive of activity among firms bedding in sweeping regulatory requirements including GDPR and PSD2. Businesses expect regulatory spending to continue increasing over the next 12 months. It is currently marked as their most important barrier to growth.

“Reflecting on GDPR, 67% of financial services firms feel confident and 29% very confident about meeting the practical demands of the regulation, which captures the significant time and investment companies have made.

“Brexit continues to drive uncertainty amongst sector players, from the smaller operators to the market leaders. Location planning, people movements and client retention remain at the top of the agenda, despite the extra time afforded by the transition period. Firms are expecting further progress to be made at the negotiation tables of Brussels and Westminster.”

Profits in the sector as a whole were largely flat in the quarter to June, with the lending sectors in particular (banks, building societies, finance houses) seeing minimal or no growth, although parts of the insurance sector and investment management saw profits improve. Overall profitability is expected to grow only moderately in the three months ahead.

The broader economic backdrop for financial services is likely to remain challenging in the year ahead, says the report, with UK economic growth expected to remain subdued due to weak consumer income growth and investment being held back by ongoing uncertainty.