Business volumes fall at record pace in financial services - CBI/PwC

7 Jul 2020 03:04 PM

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:

Incomes, costs and profits:


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:

The main reasons for authorising investment were:

The main factors likely to limit investment were:

Business expansion over the next 12 months:

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

COVID-19 supplementary questions: