Posted: 04/04/17 by PwC LLP
Sentiment in the UK’s financial services sector stabilised in the three months to March, having deteriorated throughout 2016, according to the latest CBI/PwC Financial Services (FS) Survey.
- Sentiment in financial services sector stabilised in first quarter of 2017, having deteriorated in 2016
- 33% of firms are more optimistic about the overall business situation
- Business volumes saw healthy growth in first quarter of 2017
- Combatting cybercrime is growing priority for financial services firms, with over four fifths planning to invest in preventative technology and IT systems
- Employment rose for a second consecutive quarter with further increase expected in next quarter
The quarterly survey of 98 firms found healthy growth in business volumes in the first quarter of 2017, expanding at a faster rate than expected in the previous survey. Building societies and investment managers in particular reported a solid expansion of activity. However, growth in overall business volumes is expected to slow over the coming three months, suggesting firms remain cautious over the outlook.
Optimism about the overall business situation continued to vary across sectors, but was broadly stable, following four consecutive quarters of declining sentiment - the longest period of falling sentiment since the global financial crisis of 2008.
Building societies, life insurers, insurance brokers and investment managers all felt more optimistic than the previous quarter, while finance houses and general insurers felt less optimistic.
Carl Sizer, financial services leader in the Midlands, said:
“The survey shows sentiment has now stabilised amongst firms, but clearly the economic and political backdrop is affecting how businesses feel about the future. In the short-term, firms are still managing to make good returns despite the current uncertainty of the trading environment.
“With the triggering of Article 50 this week, the Midland’s financial services industry will need to start activating contingency plans to deal with life outside membership of the EU. As negotiations begin and transitional arrangements emerge these plans will need to adapt to ensure companies respond to protect and evolve their business models.”
The rise in business volumes drove robust growth in profits, in line with expectations, although profitability is expected to improve more moderately in the quarter ahead. Employment rose in the three months to March, for a second consecutive quarter, and a more solid increase is expected in the next quarter.
Combatting the threat of cyber-crime is a growing priority for financial services firms, with over four fifths planning to invest in preventative technology and IT systems, and to test their defence and response mechanisms over the year ahead.
Turning to the pressing issue of diversity, more than two thirds of businesses already have formal succession plans and leadership programmes and over half have appointed a senior executive responsible for diversity and inclusion.
Carl Sizer concluded:
“The Midlands’ financial services sector will have to demonstrate its resilience in the current environment to cope with intense competition, technological advancements, the war for talent, regulatory change and planning for Brexit. The level and pace of change may feel unprecedented, but invariably businesses are still doing well while having to work harder and smarter to achieve the same outcomes.”
- Optimism in the financial services sector was broadly stable, following four consecutive quarters of declining sentiment (the longest period of falling sentiment since the global financial crisis of 2008)
- 33% of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 29% were less optimistic, giving a balance of +4% (compared with -35% in the quarter to December)
- 34% of firms said that business volumes were up, while 17% said they were down, giving a rounded balance of +18%. This compares with +2% in December
- Looking ahead to the quarter to June, growth in business volumes is expected to slow somewhat: 23% of firms expect volumes to rise next quarter, and 14% expect them to fall, giving a balance of +9%.
Incomes, costs and profits:
- Overall profitability rose significantly in the quarter to March, with 43% of firms reporting that profits had increased and 10% saying they fell, giving a rounded balance of +33%. This was up from -1% in December
- Income from fees, commissions and premiums rose (+17%), but growth is expected to slow over the quarter ahead (+6%)
- Income from net interest, investment and trading held up better (+6%) than expected (-18% in December), with a further rise expected next quarter (+8%)
- Total operating costs rose a little (+5%), while average costs were unchanged (-2%). Although total costs are expected to rise next quarter (+8), average costs are expected to decline (-10%).
- 30% of financial services firms said they had increased employment, while 19% said that it had decreased, giving a balance of +11% (rising from +7% last quarter)
- Numbers employed are expected to see a more solid increase next quarter (+25%), with headcount expected to increase in all sectors except insurance brokers (-31%).
Investment over the next 12 months:
In the year ahead, financial services firms expect to increase IT and marketing spending, and to cut back slightly on other forms of capital spending:
- IT: +46% (down from +58% in December)
- Marketing: +11% (down from +14% in December)
- Land and buildings: -4% (-5% in December)
- Vehicles, plant and machinery: -11% (-2% in December)
The main reasons for authorising investment are cited as:
- To increase efficiency/speed (73% of respondents)
- Statutory legislation & regulation (68% of respondents)
- To expand capacity (61% of respondents)
The main factors likely to limit investment are cited as:
- Inadequate net return (52% of respondents)
- Uncertainty about demand or business prospects (49%)
- Shortage of labour, including managerial & supervisory staff (37%)
- Shortage of finance (27%).
Business expansion over the next 12 months:
The most significant potential constraints on business growth over the coming year are:
- Statutory legislation & regulation (cited by 68% of respondents) – the highest since September 2014 (68%)
- Level of demand (67%) – the highest since September 2015 (77%)
- Competition (56%)
- 95% of firms see competition coming from within their own sector of financial services
- 50% see competition coming from new entrants (down from the Survey high seen in December (71%))
- 39% see competition coming from other sectors of financial services.
Regulatory compliance, diversity and cyber security:
- Asked about what measures they expect to have in place to tackle cyber-crime over the next year:
- 84% of financial services firms (and 100% of building societies) expect to invest in preventative technology and IT systems
- 83% and 82% of firms (and 100% of building societies) expect to engage in penetration testing and test their incident response mechanisms, respectively
- 72% of firms plan to invest in cyber security training and awareness programmes
- 67% of firms (and 100% of building societies) expect to employ expert security personnel
- Asked about what steps they had taken to increase diversity in senior roles:
- 71% of firms have formalised succession plans and leadership programmes.
- 52% of financial services firms (and 69% of banks) have already appointed a senior executive responsible for diversity and inclusion
- 47% of firms already conduct regular reviews of promotion rates (70% in banking)
- 43% of firms have established a business case for boosting diversity, with a further 17% planning to do so
Asked about the risk that regulatory compliance costs could divert funding away from other investment projects, firms rated the following as the most likely to lose out:
- Transformation of business operating model (balance of +25% reporting that funds were likely to be diverted, compared with the share seeing this as unlikely)
- Digitisation of front-end channels to the customer (+19%)
- Technology (including business platforms & applications) (15%)
- New product development (11%).