Financial services firms most upbeat about outlook in 17 years says CBI survey
OPTIMISM in the financial services sector surged in the three months to September, as firms reported they were the most upbeat about their overall business situation for almost 17 years, according to the latest CBI/PwC Financial Services Survey.
Employment also grew, although at varying rates across different sub-sectors. But business volumes fell unexpectedly, mainly in the banking sector, reported the survey.
The headline fall in volumes was driven by falling business with industrial and commercial companies and overseas customers. Volumes were stable with private individuals, which was disappointing given expectations of growth, while business with financial institutions was the only area to grow.
Nevertheless, profitability rose for the fourth consecutive quarter, as companies managed to offset the fall in business volumes by widening spreads. This reflected gains in a majority of sub-sectors, including banking. Looking ahead, business volumes are expected to recover strongly in the next quarter and, with costs likely to fall, profitability is set to increase further.
Financial services firms also expect to add more jobs in the next three months, although at a slower rate than in this quarter. Stronger demand, changing business strategies and regulatory compliance were identified as major drivers of recruitment.
Stephen Gifford, CBI director of economics, said: “With optimism rising and jobs and profitability growing, this is an encouraging quarter for the financial services sector, despite a fall in business volumes in banking.
“Firms are expecting positive momentum to carry into the next three months, alongside a strong recovery in business volumes, which will boost profits further.
“Financial services companies are less worried than they were about a potential lack of demand, but dealing with regulation is increasingly weighing on plans for business expansion.”
Commenting on the banking sector, Iwan Griffiths, PwC’s northern financial services leader, said: “Banks’ optimism is increasingly buoyant despite seeing a slight seasonal blip in commercial and industrial volumes. Activity and profitability are expected to grow as the economy recovers, and investment in new products and infrastructure is increasing.
“A reduction in industrial and commercial business down to the quiet summer was expected and is not an indication of a long-term trend. Regulation continues to be the sector’s greatest source of uncertainty, particularly as UK macroeconomic concerns start to fall away.
“We expect the full effect of the UK’s economic recovery to be reflected in bank performance in the coming months, and their solid profitability is supported by predicted cost reductions and increasing focus on growth.
“In Yorkshire, growth in employment across most sub-sectors of the financial services industry clearly demonstrates our ongoing ability to attract high quality players and that we are ‘open for business’. We need to maintain this momentum and showcase these successes more.”
Companies plan to spend less on land & buildings and vehicles, plant & machinery over the next 12 months. However, firms expect to spend more on IT, with around two fifths of firms saying they would increase spending to combat cybercrime. However, more than a third of respondents (38%) said a shortage of finance was likely to limit capital expenditure, the highest level since December 2008 (41%).
The level of demand has lessened as a constraint on business expansion in the year ahead, falling to its lowest level since 2008 (60%). But statutory legislation and regulation continues to be a burden on financial services companies, with almost three quarters (71%) citing it as a likely brake on their business – the highest proportion since March 2011 (76%). More than half of firms said that dealing with the new twin regulators (the Prudential Regulatory Authority and the Financial Conduct Authority) had already contributed to an increase in costs.
