Sentiment among financial services firms improved for the first time in three quarters, yet the latest CBI/PWC survey reveals a mixed picture on activity across the sector.
The quarterly survey, conducted between 1-19 September with 133 respondents, found that business volumes were broadly unchanged over the past three months, following a sharp fall in the quarter to June.
Growth in the majority of subsectors was offset by declines in general and life insurance. Looking ahead, business volumes are expected to grow slightly, with only banking and insurance broking anticipating a fall.
However, the value of non-performing loans continued to rise and profitability declined slightly. The picture by sub-sector was mixed: the drop in profits was driven by banking, finance houses and building societies , only partly offset by growth in insurance and investment management.
Numbers employed fell, albeit at a slower pace compared with the previous quarter. Headcount is set to be cut back again, but at a slightly slower pace once again.
Meanwhile, planned capital expenditure on non-IT investment for the year ahead remains negative. Uncertainty about demand is the key factor weighing on investment intentions, cited by the highest proportion of businesses in eight years.
Rain Newton-Smith, CBI Chief Economist, said: “While it is reassuring to see business volumes begin to stabilise in a sector so vital for the UK’s recovery, financial services isn’t out of the woods just yet.
“Plans to cut jobs and investment point to a period of adjustment as firms come to terms with the new normal brought about by the pandemic. Covid also appears to be driving a longer-term appraisal of business models, driving disruption and new ways of working.
“Alongside this, firms are still grappling with uncertainty around the outcome of negotiations with the EU. Securing a deal with the UK’s biggest trading partner will be essential for reaching data adequacy and equivalence agreements for financial services.
“Against the backdrop of COVID, common sense and compromise must drive politicians on both sides to protect both goods and services trade between the UK and EU.”
Andrew Kail, PwC Head of Financial Services, said: “Financial services organisations have shown themselves to be resilient during a challenging past six months, but now is the time to reconfigure their strategy and focus on changing customer needs. Digital transformation and the talent to support this are critical.
“As the new questions in our survey highlight, some organisations have already embraced this while others need to find ways to speed up their transformation. We will be tracking progress in future surveys and it will be fascinating to see the results.”
New questions have been added to the Financial Services Survey, to better understand topics ranging from disruption to upskilling.
Perhaps unsurprisingly, the biggest drivers of disruption for FS businesses over the year ahead are COVID-19 and macroeconomic developments. There is also evidence of some more structural drivers of disruption too, with over half of respondents citing regulation, acceleration in digital technology, change in customer behaviours and political developments.
Most firms are responding by implementing new technologies, or adapting existing tech capabilities. A large proportion are also looking to offer new products or services to customers and reduce costs. Operational resilience was cited as the top priority in future business strategy and transformation plans followed by cyber security, advances in technology and COVID-19.
Nearly all financial services businesses anticipate a greater need for skills in technological proficiency over the next five years, and three quarters believe problem solving or cognitive skills will be needed. To meet these needs, firms are upskilling existing staff and seeking more agile ways of working. Most expect to automate standardised or repetitive tasks over the next five years, in response to growing digitisation and new technologies.
The COVID-19 pandemic has brought about a greater shift towards remote working for financial services firms, with three quarters of firms looking to reappraise office space and, relatedly, building capacity of IT systems.
A majority of financial services firms are reviewing their current office space requirements, particularly in insurance, finance houses and banking.
Most of this seems to be driven by a desire to redefine or reconfigure use of existing office space and/or reducing office space. Almost half of financial services firms stated that most of their staff can feasibly work remotely.
- Optimism improved compared with the previous three months, for the first time in three quarters (+9%)
- Business volumes stabilised in the three months to September (+1%), following a sharp drop in the quarter to June (-52%). Next quarter, volumes are tipped to grow (+8%), marking the strongest expectations in a year.
- Average spreads grew (+16%), following five quarters of decline. Spreads are expected to grow again next quarter (+10%).
- The value of non-performing loans continued to grow (+17%), but at a slower pace than in Q1 and Q2 (+37%). The rate of growth is tipped to accelerate next quarter (+38%).
- Profitability fell slightly in the three months to September (-5%), with profits set to be unchanged next quarter (0%).
- Employment fell in the quarter to September (-21%), but at a slower pace than the previous three months (-37%). Numbers employed are expected to fall again next quarter (-17%).
- Non-IT investment is set to be cut back over the next 12 months (Land and buildings: -32%, Vehicles, plant and machinery: -19%). IT investment is expected to be higher relative to the previous year, with plans in line with their long-run average (+35%).
- Uncertainty about demand is the top factor weighing on investment (cited by 64% of companies), to the greatest extent since September 2012.
- The biggest drivers of disruption for FS businesses over the year ahead are COVID-19 (83%) and macroeconomic developments (75%). Over half of respondents cited changes in regulation (59%), acceleration in digital technology (59%), political developments (57%) and change in customer behaviours (54%).
- The majority of firms are responding to business disruption by implementing new technologies within their business, or adapting existing tech capabilities (88%). A large proportion are also looking to offer new products or services to customers (69%) or to reduce costs (63%).
- Operational resilience was cited as the top priority in future business strategy and transformation plans (86%) followed by cyber security (77%), advances in technology (77%) and COVID-19 (76%).
- Nearly all financial services businesses anticipate a greater need for skills in technological proficiency in the next five years (98%), and three quarters also believe problem solving or cognitive skills will be needed (75%).
- To meet these needs, financial firms are upskilling existing staff (74%) and looking at greater agility in ways of working (68%).
- 87% expect to automate standardised or repetitive tasks over the next five years, in response to growing digitisation and new technologies.
- The COVID-19 pandemic has brought about a greater shift towards remote working for financial services firms (cited by 88% of companies), with 76% of firms looking to reappraise office space and, relatedly, 71% building capacity of IT systems.
- 74% of financial services firms are reviewing their current office space requirements, particularly in general & life insurance, finance houses and banking. Most of this review seems to be driven by a desire to redefine or reconfigure use of existing office space (cited by 67% of companies), and/or reducing office space (62%).
- Almost half of financial services firms (48%) stated that most of their staff (i.e. between 91% to 100% of their staff) can feasibly work remotely.