WIREDGOV

Optimism among financial services firms improved at the fastest rate since December 2013 despite business volumes stalling, according to the latest CBI/PWC survey. 

The survey, conducted between 1-19 March during the third national lockdown with 146 respondents, found that business volumes stalled in the three months to March after seeing the strongest growth since June 2017 in the quarter to December. The picture among sub-sectors was mixed, with growth seen in building societies, life insurance, insurance broking and investment management. Meanwhile, banking saw a decline in volumes, and they were unchanged in finance houses and general insurance. Looking ahead, firms across the financial services sector anticipate that volumes will return to growth next quarter.  

Respondents also reported continued growth in profitability – albeit at a slower pace than last quarter – with all sectors except banking experiencing profits growth. Overall, profitability is set to grow at a faster pace next quarter.

Nevertheless, employment fell for the fifth consecutive quarter, although the rate of decline eased. Numbers employed are expected to continue falling over the next three months, but at a slower pace once again.

Investment in land & buildings and vehicles plant & machinery is set to be cut back again in the coming year. Spending on IT is expected to increase relative to the previous twelve months, at a rate above the long-run average. The number of firms citing uncertainty about demand as a barrier to capital expenditure was the lowest since December 2014, with inadequate net returns now cited as the top constraint.

Rain Newton-Smith, CBI Chief Economist, said: 

“It’s encouraging that financial services firms are feeling optimistic about the months ahead, likely warmed by the prospect of a phased reopening of the economy. This is clearly driving expectations of a strong rebound in business volumes and profits over the second quarter.

“Firms also have their eye on the future. Covid is continuing to accelerate business transformation, with the role of the office space evolving to facilitate greater hybrid and flexible working. The majority of financial services firms also anticipate greater need for technological, people management and leadership skills, and are preparing their workforce for this.

“Clarity provided by the government’s road-map is hugely welcome, but the ongoing weakness in non-IT investment plans suggests that business resilience is still fragile. As with the rest of the economy, the stability of financial services firms will rest on facilitating a wider economic recovery.”

Isabelle Jenkins, Head of Financial Services at PwC UK, said:

“As the UK eases out of lockdown, our survey confirms that financial services organisations are well placed both to lead the economic recovery and boost their own competitive reinvention and growth.

"The businesses out in front recognise the importance of understanding what customers really value in this fast-changing marketplace and of securing organisational buy-in for the road ahead.

"However, regulation is rising back up the agenda for firms, reflecting the significant changes in areas ranging from pricing to sustainability and financial reporting.

"Firms should continue to maintain the kind of consistency we've seen throughout the pandemic to ensure that they can withstand the headwinds on the horizon."

Disruption 

The biggest drivers of disruption for FS businesses over the year ahead are changes in regulation and changes in customer preferences and behaviours. The majority of firms are responding by offering new products or services to customers or implementing new technologies within their business. Operational resilience remained the top priority in future business strategy and transformation plans, followed by advances in technology.

Upskilling 

Nearly all financial services businesses anticipate a greater need for skills in technological proficiency and most also believe that people management and leadership skills will be needed. The majority of firms are upskilling existing staff and looking at greater agility in ways of working to equip their business for future skills needs. A majority are also considering recruiting new staff to this end. Over 90% expect to automate standardised or repetitive tasks over the next five years, in response to growing digitisation and new technologies.

COVID-19 

The COVID-19 pandemic has brought about a greater shift towards remote working for the majority of financial services firms, with many looking to reappraise office space. Over two-thirds of FS firms are looking at redefining or reconfiguring use of existing office space while nearly 60% are considering reducing office space, mainly in banking. Just under three quarters of FS firms believe that the role of office space will change to facilitate greater hybrid/flexible working (e.g., more hot desking), with two thirds stating that they will be utilising more space for collaboration activities between staff.

Key findings: 

• Optimismimproved in the three months to March, at the fastest rate since December 2013 (+52% from +44% in December 2020).
• Business volumesstalled (-3%) following the strongest growth since June 2017 in the quarter to December (+34%). The sub-sector breakdown was mixed: growth in building societies, life insurance, insurance broking and investment management was offset by falling volumes in banking. Business volumes were unchanged in finance houses and general insurance.
• Over the next three months, business volumes are set to return to growth (+43%).
• Average spreads fell (-24%) at a similar pace to the previous quarter (-20% in December), with spreads set to grow next quarter (+10%).
• The value of non-performing loans continued to grow (+19%) but at a faster pace than the previous quarter (+12%). A similar rate of growth is expected in the next quarter (+22%).
• Profitability continued to grow but at a slower pace than the previous quarter (+8% from +30%). Profits rose in all sub-sectors except banking. Overall, profitability is set to grow at a slightly quicker rate next quarter (+32%).
• Employment dropped for the fifth consecutive quarter (-12% from -20%), but with the rate of decline easing once again. Headcount was mixed across sectors, with falls in banking and general insurance outweighing growth in finance houses, insurance broking, investment management and life insurance. Employment was unchanged for building societies.
• Numbers employed are expected to fall at a slower pace in the quarter to June (-6%).
• Investment is set to be cut back on land and buildings (-19%) and vehicles plant and machinery (-11%) over the year ahead. IT spending is set to increase (+40% from +44% in December).
• Uncertainty about demand saw a drop in the number of businesses citing it as a factor to limit capital expenditure (28% from 64%), the lowest percentage since December 2014, with inadequate net return now cited as the top factor (40%).
• The biggest drivers of disruption for FS businesses over the year ahead are changes in regulation (83%) and changes in customer preferences and behaviours (74%).
• The majority of firms are responding to this disruption by offering new products or services to customers (73%) or implementing new technologies within their business (71%).
• Operational resilience remained the top priority in future business strategy and transformation plans (82%), followed by advances in technology (73%).
• Over 90% of financial services businesses anticipate a greater need for skills in technological proficiency (93%) and 71% believe that people management and leadership skills will be needed.
• To meet these skills needs, financial firms are upskilling existing staff (83%) and looking at greater agility in ways of working (70%).
• 91% expect to automate standardised or repetitive tasks over the next five years, in response to growing digitisation and new technologies.
• The COVID-19 pandemic has brought about a greater shift towards remote working for financial services firms (cited by 84% of companies), with 77% of firms looking to reappraise office space (down from 88% in December).
• 67% of FS firms are looking at redefining or reconfiguring use of existing office space while 59% are considering reducing office space.
• 73% of FS firms believe that the role of their office space will change to facilitate greater hybrid, flexible working (e.g., more hot desking), with 66% stating that they will be utilising more space for collaboration between staff.

For insights on the latest survey results from PwC visit: www.pwc.co.uk/cbisurvey