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Lowest optimism since 2011

China and Brexit fears create ‘perfect storm’ for financial sector

Concerns over China and a possible Brexit has seen optimism among firms in the financial services sector fall at the fastest rate since 2011.

Banking and investment management has seen the sharpest deterioration in sentiment – while optimism among building societies and in the insurance sector was broadly flat, according to the latest CBI/PwC survey.

Financial market instability, competition from within the sector and macroeconomic uncertainty were identified as the top three challenges facing financial services over the coming year.

Nevertheless, business volumes continued to expand at a solid pace, while profitability improved, albeit at the slowest pace for almost two years.

Employment in financial services increased last quarter, but is expected to remain flat in the next three months, with increases in the insurance and building society sectors offset by another sharp fall in headcount in banking.

Rain Newton-Smith, CBI Director for Economics, said: “Concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services.

“As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.

“Investment intentions for IT remain resilient, but spending plans are being scaled back in other areas. Investments are increasingly motivated by the need to promote efficiency, while uncertainty about demand appears to be holding additional investment spending back. Increasing competition in the sector was cited as a key threat to business expansion by over two thirds of firms over the next 12 months.”

Kevin Burrowes, UK financial services leader at PwC, said: “This quarter’s survey findings tell us that the cloud forming across the sector is getting darker.  As previously predicted, the lack of opportunities to generate revenue has shifted the focus of financial services companies to how they make their business models more efficient or effective – no easy task in such an unpredictable climate.

“Firms will have to play ‘business black jack’ and decide the merits of whether they ‘stick’ ‘twist’ or ‘fold’. With uncertainties over the EU Referendum and global economy, the next quarter will be a challenging one for the financial services sector. Banks in particular are highlighting what a difficult position they find themselves in.

“In the challenger bank sector, there is a serious concern as to whether competition with the established players can be maintained over a longer period. The market could see some consolidation as new entrants continue efforts to woo customers from the incumbent banks.

“Despite the pessimistic mood in the sector, it is very encouraging to see that many financial services organisations are planning to up their game around talent attraction and diversity.”

Key findings:

  • Optimism in the financial services sector fell at the fastest pace for over four years – 14% of firms were more optimistic, 35% were less optimistic, giving a balance of -21% (versus -24% in December 2011)
  • Overall, business volumes rose at a decent pace – 44% of firms said volumes were up, 18% said they were down, giving a balance of +26%, outpacing expectations, and the outlook is for a similar expansion next quarter (+22%)
  • Firms reported a modest rise in employment in the last quarter – 37% said headcount had risen, 22% said it had fallen, giving a balance of +15%, with robust increases across many sectors, though not in banking (-20%).

Incomes, costs, profits:

  • Overall, 40% of firms reported that profits had increased and 27% said they had fallen, giving a balance of +13%, suggesting that profitability grew at a slower pace than in the previous quarter (+42%)
  • Income from fees, commissions and premiums rose for the first time in over a year (balance of +22%) with a further modest increase expected in the quarter ahead (+8%)
  • Income from net interest, investment and trading income dipped (-19%), the sharpest fall since September 2012 (when it was -29%). Little change is expected over the next quarter (-7%)
  • Total operating costs fell (-12%), having risen steadily over the previous four quarters. Costs are expected to edge down a little further next quarter (-4%).

Employment:

  • Employment growth recovered last quarter (balance of +15%), following a decline in the three months to December (17%) but numbers employed are expected to remain stable next quarter (balance of 0%)
  • The latest employment data from the ONS show that employment in financial & insurance activities (workforce jobs measure) fell by 7k for the fourth quarter of 2015, to 1.141 million. Based on the relationship with the survey data, employment is forecast to recover by 2k during the first half of 2016, to stand at 1.143m by the end of Q2. This would imply that employment would still be 9k lower than in mid-2015
  • Training expenditure grew at a slower pace (+18%) than was expected (+36%), but spending is likely to continue to rise in the next quarter (+20%).

The next 12 months:

In the year ahead, financial services firms expect to scale back non-IT capital spending, while Information Technology and marketing spending is set to rise at a slower rate:

  • IT (+42%)
  • Marketing (+7%)
  • Land and buildings (-20%)
  • Vehicles, plant & machinery (-19%)

The main reasons for authorising investment are cited as:

  • Increasing efficiency/speed (cited by 78% of respondents)
  • Statutory legislation and regulation (51%)
  • Reaching new customers (47%)
  • Providing new services (46%)
  • For replacement (41%)
  • To expand capacity (24%)

The main factors likely to limit capital authorisations are cited as:

  • Uncertainty about demand or business prospects (cited by 54% of respondents)
  • Inadequate net return (53%)
  • Shortage of labour including managerial & supervisor staff (38%)
  • Cost of finance (19%)
  • Shortage of finance (11%)

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

  • Competition (cited by 67% of respondents)
  • 98% of firms see competition coming from within their own sector of financial services – slightly up on last quarter’s survey (87%)
  • 53% see competition coming from other sectors of financial services (up from 44% last quarter).


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