Sentiment in the financial services sector deteriorated in the three months to June, but business conditions – such as volumes, profits and hiring – saw robust improvement, according to the latest CBI/PwC Financial Services Survey.
The quarterly survey of 94 firms has found that optimism about the overall business situation fell, having been unchanged in the previous quarter. Optimism has now declined in five out of the last six quarters. However, this sentiment last quarter was not universal: while banks and life insurers felt less optimistic than three months earlier, finance houses, insurance brokers and investment managers felt more optimistic.
Meanwhile, financial services firms built on the healthy growth in business volumes seen in the first quarter of 2017, reporting another quarter of robust expansion, driven largely by demand from private and corporate clients. Growth was broad-based across sectors, with only building societies reporting no increase in volumes after almost two years of uninterrupted growth. Overall business volumes are expected to rise further over the next quarter, albeit at a slower pace.
Rising business volumes, combined with a slight fall in average costs, saw a second successive quarter of improving profitability. Profitability is expected to rise further in the next three months, though at a more moderate pace. Employment also rose solidly, and is expected to continue to grow at a healthy pace in the next quarter.
The financial services sector is at the forefront of adopting new technologies to gain customer insights, with almost two thirds actively investing in operational data analysis and almost half actively investing in process automation. In addition to securing the best Brexit deal for the UK, firms believe the Government’s top priorities should be reducing the cost of regulatory compliance and ensuring tax stability.
Rain Newton-Smith, CBI Chief Economist, says: “The robust performance of financial services firms over the last quarter gives us a good dose of summer cheer. Volumes continue to expand strongly, profits are up and more people are being hired in a thriving part of the British economy. Even better, that is all set to continue over the next three months.
“But there are mixed messages coming from the sector. Whilst business activity is holding up strongly, optimism took another dive, which likely reflected a mix of Brexit uncertainty and concerns that financial market conditions could tighten.
“It’s encouraging to see financial services firms continuing to seek out future opportunities, and staying ahead of the curve when it comes to investment in new and innovative technologies.”
Andrew Kail, Head of Financial Services at PwC, says:“The counterweight of short-term performance against medium-term outlook explains the sentiments expressed by financial services companies this quarter.
“Currently the financial services sector is performing well in both business volume terms and underlying profitability. However, another quarter of falling optimism points to an industry harbouring concerns about the future. The UK will continue to be a leading financial centre, but political uncertainty and the ongoing wait for an agreed Brexit blueprint are fuelling more questions about companies’ futures and the performance of the wider economy.
“In response, firms continue to fine tune their contingency plans, which include options for establishing operations in the EU27 and ensuring they are adequately resourced.
“More widely, the sector continues to respond to the impact of digital advances in the way they serve their customers and they run their business. We are seeing plans in this area accelerate markedly.”
Looking to the year ahead, financial services firms intend to cut back on spending on marketing, land and buildings, and vehicles, plant & machinery. But spending on IT is forecast to grow at its fastest for two and a half years, and firms see IT as more important to business growth than at any time since 2009.
Concerns over a deterioration in financial market conditions remain elevated. Nearly a fifth of firms believe there is a high likelihood conditions will worsen over the next six months, with a further two thirds seeing a medium likelihood.