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Business volumes in the financial services sector declined at the quickest rate on record, according to the latest CBI/PwC Financial Services Survey. Profitability and employment also saw sharp declines in the three months to June, due to COVID-19 disruption.

The quarterly survey of 111 firms, conducted between 1st-18th June, showed that optimism about the overall business situation in financial services fell for a second consecutive quarter, albeit at a slower pace than the three months to March.

Business volumes plunged at a record pace in the three months to June, driven by declines in all sub sectors. Financial services firms stated that volumes were on average 12% below those in “normal” conditions (i.e. in the absence of a pandemic). With volumes dropping, spreads continuing to narrow, and non-performing loans rising again, profitability nosedived at the fastest rate since the financial crash. The fall was broad-based across all sub sectors, with only general insurance seeing profits rise.

Additionally, employment fell at the quickest rate since 2010, in line with expectations. This reflected falls in all sub-sectors except building societies and general insurance, where numbers employed were unchanged. Firms also reported that spending on training fell at the fastest pace on record.

Prospects for the quarter and year ahead are expected to be similarly bleak. Despite business volumes expected to stabilise, profitability is set to drop at a similar pace in the next three months, while the fall in employment is tipped to accelerate slightly.

Meanwhile, investment intentions for the year ahead remained negative. Spending on marketing is set to be cut back to the greatest extent since 2009, while expenditure on land and buildings and vehicles, plant and machinery is also expected to be reduced once again. IT spending is tipped to increase only very slightly, marking the weakest expectations since December 2011. Uncertainty about demand was cited as the main factor limiting investment, picking up from the last couple of surveys.

Rain Newton-Smith, CBI Chief Economist, yesterday said:

“Financial services have not escaped the fallout of the coronavirus pandemic. Employment, profitability and volumes all fell sharply, with the outlook similarly bleak for the quarter ahead – underlining the need for the Chancellor to restore confidence among lenders, businesses and consumers.

“Government intervention so far has saved countless jobs, yet anxious months for many still lie ahead. Alongside this, it’s important to recognise the central role the financial services sector has played in getting support to firms in need at speed, while dealing with absences and new ways of working. The focus on rescuing viable firms cannot slip while the UK looks to recovery – the further rise in non-performing loans in our survey suggests that many firms remain in distress.

“Ultimately, preserving and creating jobs should form the centrepiece of the Chancellor’s update, with details on further targeted wage support, a new jobs programme and more funding for future skills in areas such as digital, low carbon and health.”

Andrew Kail, Head of Financial Services at PwC, yesterday said:

"While the financial services sector has been hit less hard than industries such as retail it is no surprise to see levels of optimism decline. Business volumes and margins have inevitably fallen as customer demand has waned. Financial services firms have the weighty responsibility of continuing to serve the needs of key stakeholders including customers, employees and shareholders while working closely with the government to drive the economy.

"The industry has the opportunity and, arguably, the responsibility to evolve itself with refreshed, digitally enhanced and more cost-effective business models. This will allow the sector to generate the returns and the platform to help boost and recapitalise the UK's finances. However key roadblocks - such as the stalemate on a Brexit trade deal for the sector – will need to be resolved."

Key findings:

• Optimism in the financial services sector deteriorated. 20% of firms said they were more optimistic about the overall business situation compared with three months ago, while 45% were less optimistic, giving a balance of -25%
• Business volumes fell at the fastest rate on record. 10% of firms said that business volumes were up, while 62% said they were down, giving a balance of -52%
• Looking ahead to the quarter to September, business volumes are expected to stabilise, with 26% of firms expecting volumes to rise next quarter, and 29% expecting them to fall, giving a balance of -3%.

Incomes, costs and profits:

• Profitability fell in the three months to June, with 13% of firms reporting that profits had increased and 53% saying they fell, giving a balance of -40%. Next quarter, profitability is expected to fall at a similar pace (-37%)
• Incomes from fees/commission fell sharply (-40%), but is set to stabilise next quarter (-1%)
• Income from net interest, investment and trading fell (-48%) and is expected to decline again next quarter, albeit at a slower pace (-13%).
• Total operating costs fell sharply (-41%), while average costs grew slightly (+5%). Next quarter, total costs are set to continue falling (-35%), and average costs are also set to decline (-12%).
• The value of non-performing loans grew at the same pace as the previous quarter (+37%), which marked the fastest rise since September 2009, and is expected to grow at a similar rate in the coming quarter (+40%)

Employment:

• 1% of financial services firms said they had increased employment, while 38% said that headcount fell, giving a balance of -37%. Employment is set to fall at a slightly faster pace next quarter (-41%), the weakest expectations since September 2008.

Investment over the next 12 months:

Over the year ahead, financial services firms expect to raise spending on IT only slightly, with plans for investment were at their weakest in eight-and-a-half years. Firms also expect to continue cutting capital spending on land and buildings, and vehicles, plant & machinery. Marketing spend is also set to be cut, to the greatest extent since June 2009:

• IT: +4% (from +20%)
• Land and buildings: -37% (from -49%)
• Vehicles, plant and machinery: -27% (from -28%)
• Marketing: -44% (from -32%)
• Training -51% (from +16%)

The main reasons for authorising investment were:

• To increase efficiency/speed (63% of respondents)
• Replacement (36%)

The main factors likely to limit investment were:

• Uncertainty about demand/business prospects (55% of respondents)
• Inadequate net return (36%)
• Shortage of labour (31%)

Business expansion over the next 12 months:

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

• Level of demand (50% of respondents)
• Competition (35%)

COVID-19 supplementary questions:

• On average, firms reported that business volumes were 12% below “normal” conditions (in the absence of a pandemic). However, volumes were much lower in building societies (37% down), general insurance (34% down) and finance houses (33% down)
• The average proportion of staff that have been furloughed was 8%.
• The majority of financial services firms did not feel that any further measures were needed to address funding challenges in their business (53%). However, 31% cited the need to extend business rates relief to all businesses, while the rest cited other measures (18%), other tax holidays (14%) and grant funding (14%).
• The majority of financial services firms stated that their business could feasibly remain operational under the requirements of social distancing in the workplace: totally feasible (31%), very feasible (46%), feasible (22%), not very feasible (1%), not at all feasible (0%).
• The key operational challenges facing financial services firms in restarting their businesses are workforce absences due to both school closures (42%) and transport difficulties (37%).
• 64% of financial services businesses are conducting or plan to conduct, conversations with landlords or managing agents around reviewing office space requirements.