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Financial services optimism falls at fastest rate since the financial crisis

Sentiment and volumes are deteriorating sharply in the financial services sector, with various indicators at their lowest since the financial crisis of 2008, according to the latest CBI/PwC Financial Services Survey.

The quarterly survey of 84 firms found that optimism about the overall business situation in the financial services sector plunged sharply, falling at the quickest pace since December 2008. Optimism has now been flat or falling for over three years.

Business volumes fell for a second consecutive quarter, and at the fastest pace since September 2012. Conditions varied across financial services sectors, with the greatest drag on growth coming from the investment management sector, where volumes fell at the fastest pace since December 2008. Meanwhile, the majority of other sectors reported flat or modest growth, with the exception of insurance brokers, who reported robust growth. Looking ahead, expectations for overall business volumes for the next quarter are the weakest since September 2008.

Employment across financial services fell at the quickest pace in four years, driven predominantly by a sharp decline in headcount in the banking sector. Meanwhile, headcount grew or was flat in all other sub-sectors. Overall employment growth is expected to recover over the next quarter.

However, there were some positive signs in the survey. With cost pressures easing, profits in the sector as a whole saw their strongest growth in a year, driven by the banking and insurance sector. Profitability is expected to pick-up further over the three months ahead.

Across the broader economy, underlying conditions are subdued as Brexit uncertainty causes many households and businesses to hold back on spending. 

“The alarm bells ringing at the state of optimism in the financial services sector have now reached a deafening level," warned Rain Newton-Smith, CBI chief economist. "Not only has it plummeted at the fastest rate since the depths of the financial crisis, it has been falling or flat since the EU referendum. Additionally, business volumes and employment have fallen over the last quarter.

Brexit is now "a national emergency," Newton-Smith added. "No Deal has to be clearly ruled out, then MPs must finally compromise and deliver a solution that protects jobs, livelihoods and communities across the UK. It is in absolutely nobody’s interest for the uncertainty to drag on, and continually chip away at our economy and financial services sector.”

Andrew Kail, head of financial services at PwC, however, pointed out that, although optimism has declined at the fastest rate since 2008, "the wider business story the industry is telling is one of resilience."

“Three strong themes stand out in the survey: Brexit, people, and future investment," he said. "Despite the continuing uncertainty, these businesses are embracing disruption and reinventing themselves to be ready for growth in a post-Brexit environment including developing leaner, more specialised workforces. They are ramping up spending on training, technology and marketing, which suggests among other things, more workforce automation."

However, he added that it remains to be seen whether the UK's financial services businesses will retain their current global footprint. He said that clarity, certainty and communication are vital if the UK is to protect its position as the leading financial centre.


The statistics 

Key findings:

  • Optimism in the financial services sector dropped at the fastest pace since December 2008 (-45 per cent), the 12th quarter of declining sentiment in the last 13 quarters (the exception was the first quarter of 2017, when sentiment was flat).
  • Ten per cent of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 53 per cent were less optimistic, giving a balance of -43 per cent (compared with -24 per cent in the previous quarter).
  • Ten per cent of firms said that business volumes were up, while 22 per cent said they were down, giving a balance of -12 per cent (a slightly faster fall than in the previous quarter (-7 per cent))
  • Looking ahead to the quarter to June, business volumes are expected to fall further, with the weakest expectations since September 2008 (-31 per cent): 16 per cent of firms expect volumes to rise next quarter, and 46 per cent expect them to fall, giving a balance of -30 per cent.

Incomes, costs and profits: 

  • Overall profits growth picked up in the three months to March, with 47 per cent of firms reporting that profits had increased and 26 per cent saying they fell, giving a balance of +21 per cent. An improvement on December 2018 (+4 per cent), this was the strongest growth in profitability in a year (+33 per cent in March 2018).
  • Income from fees, commissions and premiums fell (-9 per cent), but growth is expected to recover over the quarter ahead (+14 per cent).
  • Income from net interest, investment and trading also declined (-6 per cent) with a similar fall expected in the next three months (-5 per cent).
  • Total operating costs fell (-14 per cent), while average costs grew at a faster pace (+11 per cent). Next quarter, total costs are expected to fall at a faster pace while average costs are set to be unchanged (-26 per cent and +1 per cent respectively).

Employment:

  • 17 per cent of financial services firms said they had increased employment, while 38 per cent said that headcount fell, giving a balance of -21 per cent.
  • Employment growth is set to pick up next quarter (+17 per cent).

Investment over the next 12 months:

  • Over the year ahead, financial services firms expect increases in spending on IT and marketing, but to cut back on other forms of capital spending.

The most significant potential constraints on business growth over the coming year are:

  • Level of demand (75 per cent of respondents).
  • Statutory legislation and regulation (69 per cent).
  • Competition (31 per cent).

This article was first published in March 2019.