‘Perfect storm’ of events hits optimism among financial services firms

Rain Newton-Smith
Rain Newton-Smith

The first quarter of 2016 has seen optimism fall for the first time in over three years among financial services firms as a result of financial market instability and uncertainty of the global economic environment, according to the Confederation of British Industry (CBI) and PwC.

The latest CBI/PwC Financial Services Survey found that 29 per cent of those questioned within the industry, which employs an estimated 100,000 people in Scotland, said they felt less optimistic about the business environment in the three months to June. Although 13 per cent of firms were more optimistic, the net balance was -16 per cent.

Banks, securities traders and investment management firms were the most pessimistic of those questioned, while sentiment in other sectors such as insurance either improved or was stable.

This was despite business volumes continuing to increase at a good rate with the exception of investment managers where volumes have experienced a fall.

Despite a fall in total operating costs, growth in profitability slowed last quarter, the survey found. The trend across both business volumes and profitability is expected to continue in a similar vein going forward, the global accountant said.

Overall, employment has risen despite the continued cuts to headcount in banking. Looking forward employment is expected to be flat over the next quarter.

Respondents to the survey showed continuing concern over the increasingly competitive marketplace and the level of demand.

Firms told PwC that in response they continue to look to reduce costs and invest in technology to improve efficiencies.

Banking remains a notable exception to those negative projections, with business volumes having been broadly stable for the past year-and-a-half, and no change expected over the next quarter.

Profitability expanded at the weakest pace for two years in the three months to June, although profits growth is expected to accelerate next quarter.

Costs edged higher reflecting increases in a majority of sectors.

Looking ahead to the next quarter, firms do not expect to raise charges amid the strongest competitive pressures for nine years.

Rain Newton-Smith, CBI chief economist, said: “There’s a mood of caution among financial services firms with the vote on our EU membership rapidly approaching and global economic waters still choppy.

“When talking to financial services firms, it’s clear that the low interest rate environment, increasing competition and regulatory pressure continue to weigh on profitability.

“But after a volatile start to the year there are some positive signs, with business volumes continuing to expand and overall employment levels holding up.”

Andrew Kail
Andrew Kail

Andrew Kail, UK financial services leader at PwC, said: “The UK now stands at the crossroads of continued EU membership – the outcome will be keenly awaited by financial services firms.

“Financial services are vitally important for the UK economy - generating jobs, income, investment and exports. Finance and insurance generated £65bn in export earnings for the UK last year, nearly £2,500 per UK household, PwC analysis has shown.

“Technological advances are proving to be game changers, and increasing competition is causing industry heavyweights to overhaul how they respond to changing customer needs.

“We are also seeing a flattening of the landscape as banks, asset managers and insurers converge.

“The lack of key skills must be addressed, but institutions should use this as an opportunity to evolve as opposed to a millstone that has to be carried.”

Key findings of the latest CBI/PwC Financial Services Survey:

  • Optimism in the financial services sector fell for a second consecutive quarter in the three months to June – 13% of firms were more optimistic, 29% were less optimistic, giving a balance of -16% (-21% in March 2016).
  • Overall, business volumes continued to rise at a healthy rate – 46% of firms said volumes were up, 24% said they were down, giving a balance of +22%. The outlook for next quarter was similar (+21%).
  • Firms reported employment as broadly stable in the last quarter – 23% said headcount had risen, 20% said it had fallen, giving a balance of +3%.
  • Incomes, costs, profits:

    • Overall, 28% of firms reported that profits had increased and 20% said they had fallen, giving a balance of +8%, weaker growth than in the previous quarter (+13%).
    • Income from fees, commissions and premiums grew at a similar pace to the previous quarter (balance of +23%) with further, albeit slower, growth expected in the quarter ahead (+11%).
    • Income from net interest, investment and trading income was flat (-1%), with little change expected over the next quarter (-3%).
    • Total operating costs rose (balance of +14%), having decreased over the previous quarter (balance of -12%). Costs are expected to increase further in the next quarter (+17%).
    • Employment:

      • Employment levelled off last quarter (balance of +3%), having risen in the three months to March (+15%). Numbers employed are expected to rise again next quarter (+15%), though not in banking, where numbers employed are expected to remain flat.
      • The latest employment data from the ONS show that employment in financial and insurance activities (workforce jobs measure) dipped during the second half of 2015 to end the year at 1.141 million. Based on the relationship with the survey data, employment is forecast to recover by 5000 during the first three quarters of 2016, to stand at 1.146m by the end of Q3. This would imply that employment would still be 2,000 lower than a year earlier.
      • Training expenditure grew at a faster pace (+31%) than expected (+20%) in the quarter to June, but growth is expected to slow next quarter (+9%).
      • Investment over the next 12 months:

        In the year ahead, financial services firms expect to increase IT and marketing capital spending at a faster pace, and expect to scale back other capital spending at a slower pace than previously:

        • IT – balance of +46%, from +42% in March 2016
        • Marketing – balance of +19%, from +7% in March 2016
        • Land and buildings – balance of -9%, from -20% in March 2016
        • Vehicles, plant and machinery – balance of -10%, from -19% in March 2016.
        • Promoting efficiency (72% of firms) and regulatory compliance (70%) were the most important motivations for investment, while the share of firms investing to reach new customers fell to its lowest level for two-and-a-half years (33%). Inadequate net returns (60%) and demand uncertainty (60%) were the most important brakes on investment – demand uncertainty rose to the highest level in three-and-a-half-years (73% in September 2012).

          Business expansion over the next 12 months:

          The most significant potential constraint on business growth over the coming year is competition (88% of firms), with the share of firms citing this factor rising to the highest since June 2007 (89% in June 2007). Against this backdrop, the balance of firms saying cross-selling to existing customers would be a more important source of growth over the year ahead was well above average, with interest in M&As and strategic partnerships also increasing.

          • Competition (cited by 88% of respondents)
            • 97% of firms see competition coming from within their own sector of financial services (98% last quarter)
            • 59% see competition coming from other sectors of financial services (up from 53% last quarter).
            • 54% see competition coming from new entrants (up from 35% last quarter).
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