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‘Talent war’ likely as finance sector growth hits 7-year high

  • Competition for staff in financial services is rising
  • Clarity over Scottish constitution expected to prompt further growth 

Banks and other financial services firms are facing a ‘war for talent’ as competition from new rivals free of legacy issues cranks up demand for skilled staff.

New figures today from employers’ body the CBI and accountancy firm PwC reveal that growth in the sector is at a seven-year high and profitability is rising at its fastest rate since March 2011.

Profitability bounced back after the previous quarter’s contraction, and business volumes are predicted to grow strongly again in the next quarter, partly because uncertainty over Scotland’s future has been eased by the referendum vote.

Firms are now seeking out new customers and new business and a battle for key staff could prompt salaries to rise.

But firms fear more legislation and red tape and reckon the growing competition will also be among the constraints on business over the coming year.

The survey of 109 firms operating across the sector was carried out between August 18th and September 4th, just ahead of the Scottish referendum on independence.

Rain Newton-Smith, director of economics at the CBI, said:  “Much of the fall-out from the financial crisis is now working its way out of the system.

“With competition one of the top concerns for the coming year, the sector could be moving to a new phase in the recovery where firms are feeling more assured about the level of demand, and are now shifting their gaze to competing for new customers and business. This is reflected in their expectation that sales to new customers will be the main driver of growth in the coming quarter.”

But worries about the impact of legislation at home and from Europe, such as new capital requirements and the prospect of a financial transaction tax, are also increasingly weighing on the sector.

Newton-Smith added: “However, with strong broad-based growth, financial services firms are relatively upbeat about future prospects, despite some big geo-political risks that remain on the horizon.”

Kevin Burrowes, UK financial services leader at PwC, said the 100th CBI/PwC survey, “painted a picture of improving confidence and profitability.”

He said: There is an increasing focus on new services and technology-enabled growth. Time will tell if established banks are underestimating their need for digital capabilities as we see a continued influx of new entrants without the chains of legacy systems, meaning that tougher competition is an increasing concern. There are hints of a new ‘war for talent’ and tighter monetary policy in 2015 could also pose a challenge.”

Firms saw a return to hiring following last quarter’s unexpected fall in headcount, but this is expected to stabilise in the next quarter. Taking into account long-run trends, the latest survey results suggest that employment in financial & insurance activities is forecast to stand a little above 1.152 million by the end of Q4 2014, or 28,000 higher than at the end of 2013.

Investment intentions are mixed with more spending directed to marketing and information technology for the year ahead, but investment in vehicles, plant and machinery is still due to be scaled back.

Growth in optimism about the overall business situation has been easing since the start of the year which is attributed to uncertainty about the outcome of the Scottish referendum – which fell after the survey period – and the situation in the Middle East and Ukraine. However, optimism has still risen at an above average pace.

Here are the key findings:

60% of firms said that business volumes were up, while 11% said they were down, giving a balance of +49%, the strongest reading since 2007 (+51%)

Looking ahead to the next quarter, 63% of firms expect business volumes to increase, while 8% say they will decrease, giving a balance of +55%, which is the strongest expectation for growth since June 2010 (+63%)

21% of financial services firms said they felt more optimistic about the overall business situation compared with three months ago, while 7% said they were less optimistic, giving a balance of +14%, compared with +28% in June.

Incomes, costs and profits:

Overall profitability bounced back from the fall last quarter, with 60% reporting a rise, and 8% a fall, giving a balance of +52%, the fastest growth since March 2011 (62%). A similar rate of growth is expected next quarter (+53%).

Income from fees, commissions or premiums fell unexpectedly in the three months to September (-27%) at the fastest rate since March 2009 (-53%). That disappointed expectations of growth (+12%) and fee/commission income is expected to fall again in the coming quarter (-22%)

Income from net interest, investment or trading rose more strongly than expected (+34%) and is predicted to see similar growth in the coming quarter (+35%)

Average spreads remained broadly stable (+4%) with little change expected in the next three months (+2%)

Total operating costs spiked sharply (+53%), raising at the fastest pace since the survey began (in December 1989), which also pushed up average operating costs per transaction sharply (+43% – again, the fastest rise on record).

Employment:

24% of financial services firms said they increased employment, while 7% said that it had decreased, giving a balance of +17%, an improvement on last quarter’s unexpected fall (-12%)

Firms expect headcount to stabilise next quarter (+2%).

The next 12 months:

Investment prospects are mixed among financial services companies, with firms planning to increase their marketing and IT spend over the next 12 months but scale back on vehicles, plant & machinery:

-Marketing (+26%)

-IT (+65%)

-Land and buildings (+15%)

-Vehicles, plant & machinery (-4%).

-The main reasons for investment are cited as:

-Statutory legislation and regulation (70%)

-Providing new services (68%)

-Increasing efficiency/speed (44%).

The main factors likely to constrain business over the next year:

-Statutory legislation and regulation (80% up from 70% in June)

-Competition (75% up from 53% in June)

-Level of demand (37% down from 62% in June).

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