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Business volumes return to growth - CBI/PwC quarterly financial services survey

The quarterly survey, conducted between 23rd November to 15th December with 137 respondents, found that business volumes grew in the three months to December, for the first time since September 2018 and at the fastest pace since June 2017.

The majority of sub-sectors saw growth, however life insurance saw a decline in volumes, and business volumes in insurance broking were unchanged. Looking ahead, volumes are expected to grow at a slightly quicker pace in the next quarter.

Corresponding with further business volumes growth, profitability grew at the fastest rate since March 2018, and is set to continue growing, albeit more slowly, in the three months ahead.

The outlook for headcount and investment is less positive, with the former due to be cut back once again, and firms planning to cut capital expenditure on non-IT investment heavily in the year ahead. Uncertainty about demand is the key factor weighing on investment intentions, cited by the joint-highest proportion of businesses in eight years.

Rain Newton-Smith, CBI Chief Economist, said:

“It’s good to see volumes and profits resume growth in the three months to December for financial services. Unfortunately, the health and economic picture has sadly deteriorated since with restrictions tightening again.

“The first step to supporting financial services firms is to ensure businesses across the economy can survive to fuel the recovery.

“Then the Budget can focus on creating a balanced economic recovery, stimulating much-needed business investment and tackling systemic challenges.

“Meanwhile, work must continue on using existing pathways with the UK Trade and Cooperation Agreement to reach better outcomes for the financial services, particularly on equivalence.”

Isabelle Jenkins, PwC Head of Financial Services, said: 

"Despite the challenges posed by the current crises, financial services firms have proved to be resilient, with optimism rising for the second consecutive quarter, no doubt due to the healthy business volumes we are seeing across the sector.

“However, this survey was conducted before the recent restrictions were introduced so optimism next quarter may be markedly different.

“Nevertheless, current growth in the sector will go some way in helping the economy withstand any shocks that may occur, especially as the value of non-performing loans continues to grow, albeit at a slightly slower pace.

“Finally, it's good to see firms reflect on the importance of digital transformation with nearly all financial services businesses anticipating a greater need for skills in technological proficiency over the next five years.

“Central to this will be ensuring that staff are supported to tackle this change and while some organisations have already embraced this, it's imperative that others find ways to speed up their progress.”

Disruption

The biggest drivers of disruption for FS businesses over the year ahead are changes in regulation and accelerations in digital technologies, compared with COVID-19 and macroeconomic developments in the previous survey. COVID-19 remained a prominent driver, but to a slightly lesser extent than in September. The majority of firms are responding by implementing new technologies within their business, or offering new products or services to customers. Operational resilience remained the top priority in future business strategies and transformation plans, followed by advances in technology and cyber security.

Upskilling

Nearly all financial services businesses anticipate a greater need for skills in technological proficiency over the next five years, and nearly three quarters also believe customer interaction skills will be needed. People management & leadership skills and problem solving/cognitive skills also ranked highly. To meet these needs, firms are upskilling existing staff and looking at greater agility in ways of working. Recruitment of new staff was also cited by many firms. The majority expect to automate standardised or repetitive tasks over the next five years, in response to growing digitisation and new technologies. In this regard, over eighty percent also expect greater collaboration between humans and machines.

COVID-19

Financial services firms stated their business volumes were 6% higher relative to normal conditions, i.e. in the absence of a pandemic. The COVID-19 pandemic has brought about a greater shift towards remote working for financial services, with nearly 90% of firms looking to reappraise office space. Just under eighty percent of firms are looking to change employee engagement going forward, and nearly three quarters are reviewing their current office space requirements. Most of this review seems to be driven by a desire to redefine or reconfigure use of existing office space, and/or reducing office space.

Brexit

Over two-thirds of FS firms (68%) believe that equivalence is either very important or somewhat important in allowing market access between UK and EU. Within the sector, most of the work around governance & oversight and booking models has been done. More work is yet to be done on the movement of people into roles in the EU and the migration of client contacts. COVID-19 has had a negative impact on effective regulatory dialogue and businesses’ ability to focus on Brexit.

Key findings:

  • Optimism improved in the three months to December (+44% from +9% in September), reflecting rising sentiment across most sub-sectors.
  • Business volumes growth picked up to its fastest since June 2017 (+34% from +1%). Growth was seen in banking, building societies, finance houses, general insurance and investment management, while life insurance saw a decline in volumes and insurance broking business was unchanged.
  • Over the next three months, business volumes are set to grow at a slightly quicker rate (+39%).
  • Average spreads fell (-20%) after a brief period of growth in the previous quarter (+16%), with spreads set to fall further but at a slower pace next quarter (-11%).
  • The value of non-performing loans continued to grow (+12%) but at a slightly slower pace than the previous quarter (+17%). Next quarter, growth is set to accelerate (+42%).
  • Profitability grew at the fastest pace since March 2018 (+30% from -5%). Overall, profitability is set to grow at a slightly slower rate next quarter (+21%).
  • Employment dropped for the fourth consecutive quarter (-20% from -21%). Headcount fell in all sub-sectors except building societies, insurance broking and investment management. Numbers employed are expected to fall at a similar pace in the quarter to March (-22%).
  • Investment on land and buildings (-53%) and vehicles plant and machinery (-12%) is set to be cut back over the year ahead. IT spending is set to increase (+44%, from +35% in September).
  • Uncertainty about demand was the key factor expected to limit capital expenditure.

New questions:

  • The biggest drivers of disruption for FS businesses over the year ahead are changes in regulation (80%) and accelerations in digital technologies (77%). COVID-19 remained a prominent driver (73%), but to a slightly lesser extent than in September (80%). Changes in customer preferences and behaviours also ranked highly (72%).
  • The majority of firms are responding to disruption by employing new technologies within their business (85%), or offering new products/services to customers (70%).
  • Operational resilience remained the top priority in future business strategy and transformation plans (91%), followed by advances in technology (86%) and cyber security (76%).
  • Nearly all financial services businesses anticipate a greater need for skills in technological proficiency (98%) and nearly three quarters also believe customer interaction skills will be needed (74%). People management and leadership skills (67%) and problem-solving or cognitive skills (61%) also ranked highly.
  • To meet these needs, financial firms are upskilling existing staff (81% up from 74% in September) and looking at greater agility in ways of working (80% up from 68%), to equip business for future skills needs. Recruitment of new staff was also cited by over two-thirds of firms (68%).
  • 94% (up from 87% in September) expect to automate standardised or repetitive tasks over the next five years, in response to growing digitisation and new technologies. 81% expect greater collaboration between humans and machines.
  • COVID-19 has brought about a greater shift towards remote working for financial services firms (cited by 90% of companies), with 88% of firms looking to reappraise office space (up from 76%). 79% of firms are looking to change employee engagement going forward.
  • 72% of financial services firms are reviewing their current office space requirements (74% in September). Most of this review seems to be driven by a desire to redefine or reconfigure use of existing office space (64%), and/or reducing office space (57%).
  • 14% of FS firms believe equivalence is very important in allowing market access between the UK and EU, while over half said this was somewhat important (54%).

 

Original article link: https://www.cbi.org.uk/media-centre/articles/business-volumes-return-to-growth-cbipwc-quarterly-financial-services-survey/

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