Firms' investment intentions and employment opportunities increase

Financial services firms' business volumes continued to grow at a steady pace in the three months to March and investment intentions and optimism firmed, according to the latest CBI/PwC survey.

Business volumes grew for the second consecutive quarter, across all industry sub-sectors except for life insurance. However, growth was not as strong as expected, partly reflecting stable business volumes in the banking sector against expectations of robust growth.

Volumes are expected to rise at a stronger pace next quarter across most areas, though not general insurance or insurance broking. However, this survey was concluded before the Budget so changes to the annuities market on the Life Insurance sector have not been taken into account.

Overall profitability in the financial service sector continued to grow, but at a more moderate pace compared with the previous quarter. Profits are expected to grow at a similar rate over the next three months.

Investment intentions for the next 12 months were positive across all investment categories, with IT predicted to grow most rapidly. Firms indicated that the main drivers of increased capital spending were replacement, capacity expansion and reaching new customers.

Matthew Fell, CBI Director for Competitive Markets, said:

London City by Joe D via Wikimedia Commons

London City by Joe D

"Financial services firms are growing steadily and are optimistic about their business situation. The fact that competition is growing as a potential business constraint highlights intensifying activity in the sector.

"It's also particularly encouraging to see that investment intentions continue to be positive across the board for the second consecutive quarter, strengthening further in some cases.

"Businesses plan to spend heavily on IT and are scrambling to find new professional staff to meet growth demands."

Kevin Burrowes, PwC financial services leader, said:

"A drive to improve customer service is seeing many banks revamp their products and invest in their people. Even so, the sector remains under threat from new entrants and higher regulatory costs. PwC research has shown that less than half of people in the UK are loyal to their traditional banks, and a significant number think challenger banks are a good alternative. Together with the emergence of peer-to-peer lending and crowdfunding, this is contributing to a sense that banks may never re-capture their pre-crisis role in corporate lending.

"Banks need to adopt bold new strategies as they face challenges around regaining trust, legacy issues, regulation and technology. Digital must be at the heart of their business as new entrants such as challenger banks, peer-to-peer lending and crowdfunding all have one thing in common – digital platforms which make the most out of big data and really focus on customer needs."

Having expanded at the strongest pace in six years during the three months to December, employment at financial services firms grew at a similarly strong rate in the quarter to March. The sector's headcount is expected to expand even more rapidly in the next three months (see below for jobs predictions). After three consecutive quarters of solid employment growth, however, firms are becoming more concerned that a shortage of professional staff may limit their business over the next year.

Taking into account long-run trends, the latest survey results suggest that employment in financial & insurance activities should rise to 1.16k by the end of Q2 2014, which would leave it 26k higher than one year earlier. On this basis, employment would be 56k lower in Q2 2014 than its peak in Q4 2008, but 58k above the trough in Q1 2010, implying that just over half of the ground lost during crisis will have been recovered.

Key findings:

• 41% of financial services firms said they felt more optimistic about the overall business situation compared with three months ago, while 7% said they were less optimistic, giving a balance of +34%

• 32% of firms said that business volumes were up, while 22% said they were down, giving a balance of +10%

• Looking ahead to the next quarter, 49% of firms expect business volumes to increase, while 3% say they will decrease, giving a balance of +46%.

Incomes, costs and profits:

• Income from fees, commissions or premiums was broadly stable in the three months to March (+4%), disappointing expectations for rapid growth (+39%)

• Income from net interest, investment or trading was also broadly flat (+5%)

• Average spreads were largely unchanged for a second consecutive quarter (-2%, following +3% the previous quarter)

• Total operating costs rose modestly in line with expectations (+27%), but volumes growth was sufficient to ensure that average costs were stable (-3%)

• As a result, total profits increased for the sixth consecutive quarter (+24%) and are expected to increase at a similar pace next quarter (+30%)

• However, firms expect a strong rise in total costs next quarter (+41% – the highest balance since 1990 when it was +50%), with average costs also expected to drift upwards to +14%, the highest balance since September 2004 (+16%).

Employment:

• 45% of financial services firms said they increased employment, while 7% said that it had decreased, giving a balance of +38%

• Firms expect employment to rise even more strongly next quarter (+46%).

The next 12 months:

Financial services companies plan to increase their marketing spend over the next 12 months and also to increase capital spending in all areas:

• Marketing (+42%)

• IT (+50%)

• Land and buildings (+21%)

• Vehicles, plant & machinery (+7%).

The main factors driving investment are:

• Increasing efficiency/speed (71% of firms) – the highest percentage since September 2013 (83%)

• Replacement (61%) – the highest since March 2012 (62%)

• The provision of new services (61%) – the highest since June 2013 (68%).

The main factors likely to constrain business over the next year:

• Competition (63%) – highest since June 2013 (65%)

• Level of demand (59%) – well below series average of 74%

• Statutory legislation and regulation (48%) – above series average of 33%, but down from recent highs (71% in September 2013)

• Availability of professional staff (38%) – highest since March 2006 (39%)

• Adequacy of systems capacity (34%) – highest since March 2007 (34%)

Analysis by sector:

Banking

Optimism rose further, despite the unexpected stability of business volumes. Profits increased for a third straight quarter and expectations for robust growth in volumes and profitability next quarter were undiminished. This favourable outlook is reflected in rising headcount. Banks are also planning to raise investment in land & buildings more rapidly than at any time since 2007 over the year ahead, while investment in IT is also expected to grow at a vigorous pace. Banks are looking to upgrade their systems, provide new services and reach new customers, but staff shortages are increasingly seen as a potential brake on business expansion in the year ahead.

Building societies

Business volumes rebounded from an unexpected fall last quarter and the level of business was deemed to be well above normal. Strong volume growth is expected next quarter. Profitability increased briskly, driven by broad-based income growth, stable average costs and a steep drop in non-performing loans. Another quarter of strong profit growth is expected in the three months to June. Headcount is forecast to rise at the fastest pace since 2008. Investment intentions remained firm and although legislative & regulatory requirements were the prime investment motive, the need to provide new services and expand capacity have gained in importance.

Finance houses

Optimism among finance houses rose at a robust pace in the three months to March, despite mixed results. Business volumes edged up only marginally, reflecting a fall in business with private individuals, but a return to growth across all customer groups is foreseen next quarter. Profitability declined last quarter, in the face of patchy revenues and increasing costs. However, strong hiring and rising training expenditure underline expectations of improved profitability ahead, while investment intentions also picked up for IT and vehicles, plant & machinery.

Life insurance

Business volumes fell unexpectedly, causing profit growth to stall. Numbers employed increased, but more slowly than expected. While respondents had anticipated a strong recovery in volumes and profits next quarter, it should be noted that the survey was completed before the Budget, which included important changes to the pension system. The phasing out of the obligation for retirees to channel their pension savings into the annuities market will have a significant impact on the business models of life insurance companies, affecting future business volumes and profitability, among other variables in our survey.

General insurance

Profitability fell for the first time in a year, as strong competition caused income from fees, commission & premiums to decline, compounding the longstanding problem of declining investment income. Adverse weather over the winter months has also taken its toll on the sector: a steep decline in the value of insurance claims over the previous three quarters slowed markedly, while dealing with claims may have diverted resources from securing new business. Profits are expected to fall further next quarter. Numbers employed rose at a somewhat stronger pace than in the previous quarter and are expected to pick up further over the next three months, but investment plans remains lacklustre.

Insurance brokers

The only sector in the survey where respondents were less optimistic than in the previous quarter was insurance broking. Growth in business volumes slowed markedly in the three months to March, partly because of a sharp fall in business with industrial and commercial companies. Overall, broadly similar growth rates are expected next quarter. Profitability nonetheless rose strongly, following a fall in the previous quarter, and is expected to grow at a similarly robust pace over the next quarter. The employment outlook remains strong and insurance brokers are planning to spend more on IT in the year ahead to boost efficiency/speed and upgrade systems.

Jonathan Howe, PwC's UK insurance leader, said:

"The survey shows that life insurers had concerns over business constraints in the year ahead, and as events have turned out, rightly so, although no-one could have anticipated the shock annuity announcements made in the Chancellor's Budget. However, with some focus on business strategy and product innovation, many life insurers can grasp this as an opportunity, and although we are likely to see a drop in optimism in the next quarter, we believe this will recover over the next 12 months. Business volumes fell while profitability remained flat, and life insurers will be keen to pick up these areas once their longer term strategy is more certain. It's good to see that investment in technology is high on the agenda – as much of the long term growth opportunity will be with those with a digital lifestyle.

"General insurers have seen business volumes continue to grow, however the long run of profitability increases is over and insurers saw it fall for the first time in a year, as competition got stronger meaning fee and commission income declined, and investment income continue to reduce. The recent extreme weather has understandably caused an impact too, with a huge number of flood related claims over the last few months. General insurers remain optimist about the future though; to deliver to this optimism will be a tough ask for many given the market constraints they have identified."

Securities trading

Optimism among securities traders improved more rapidly than in any other sector in the three months to March, on the back of robust growth in business volumes and profitability. Business volumes were deemed well above normal and an even stronger expansion in volumes and profits is expected next quarter. Numbers employed rose for the third quarter running, while spending on training staff grew at the fastest pace since 1998. Both employment and training expenditure are expected to rise robustly next quarter. Investment intentions were mixed, however, though spending on IT was predicted to rise at the fastest pace for four years, in order to increase efficiency, expand capacity and provide new services.

Investment management

Business volumes improved for a second consecutive quarter, underpinning vigorous growth in profitability. Volumes growth is expected to strengthen further next quarter and profitability is predicted to remain solid. Employment has now been growing steadily for the past two years and is expected to rise further in the coming three months. Investment intentions for the year ahead were robust across all categories, increasingly driven by a desire to boost efficiency/speed, expand capacity and reach new customers.

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Paula Smith, PwC's UK asset management leader, said:

"Investment managers have had an impressive three months. Optimism has risen yet again, for the ninth quarter, although for the first time the pace has slowed. And there is reason for this sentiment; business volumes have expanded again, driven by demand from private individuals and financial institutions, and incomes from fees, commission and premiums are growing at a remarkable rate. Profitability has rapidly picked up pace, as has employment.

"Investment managers need to remain aware of possible constraints to their business that might harbour this strong growth. Demand, regulation, and competition will all play a part, and need to be given the correct amount of focus. It's good to see that investment managers are reacting to this through investment intentions in order to increase efficiency and to reach new customers."

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