UK Financial Sector Growth Increases
Wednesday, January 11, 2012

Growth continues apace in the UK financial services industry but continued wider economic issues are a cause for concern, according to a new survey.

The latest Confederation of British Industry (CBI)/PwC Financial Services Survey shows that, in the three months to December, 2011, the volume of business in UK financial services grew for the seventh quarter running and at the fastest pace since June, 2007. The level of business was also seen as being normal, after being regarded as below normal since September, 2007.

The survey, which began life over 21 years ago in December, 1989, was conducted between November 21 and December 7, 2011, with 106 respondents. Of the companies surveyed, 53% saw volumes rise in the quarter to December, while 24% reported a fall.

The resulting balance of +29% is the highest since June 2007, when a balance of +51% was recorded, and above expectations of a +5% balance. Firms also expect volumes to continue to increase next quarter, with a balance of +19%, but at a slower pace.

Business with overseas customers was above normal (+24%), the highest since June, 1998 (+35%). The volume of business grew in all customer categories except financial institutions.

Both the value of fee, commission and premium income (+28%) and the value of income from net interest, investment and trading (+24%) grew in the three months to December. These figures show growth at the fastest pace since June, 2006 (+28%) and December, 2005 (+26%) respectively. Both types of income are expected to grow in the next quarter.

In addition, the average spreads and the average commissions, fees and premiums paid both increased strongly (+43% and +33%), with a further increase in both expected over the next three months. Total operating costs (excluding the cost of funds) were flat, but because volumes rose, the average costs per transaction fell in line with the long-run trend (-12%), and meant that profitability advanced for the tenth successive quarter.

The rise in volumes and income helped push up profitability for the tenth consecutive survey. 36% of firms reported a rise in profitability and only 22% a fall, giving a balance of +14%. This, compared with +16% in September, completed a year of above average growth in profitability of +11%.

However, this positive picture is tempered by a fall in sentiment and employment levels in Q4. 74% saw competition and and 70% the level of demand as the most important factors likely to constrain business expansion in the coming year.

Firms also say that they plan to invest less over the coming year. Shortage of finance, uncertainty about demand and business prospects, and inadequate return on investment were seen as the factors most likely to limit investment.

Optimism in financial services was lower than three months ago (-24%), and employment was also down (-13%), with firms predicting a faster decline next quarter (-18%). Companies say they will invest less on land and buildings (-29%) and vehicles, plant & machinery (-21%) over the next year.

Unusually, the survey points out, firms also say they plan to invest less on marketing over the same period (-10%), representing the first fall since September, 2009 (-29%). Investment in information technology is expected to see a minimal increase (+4%), which is well below its long-run average of +28%.

Ian McCafferty, CBI Chief Economic Adviser, said: “This has been a strong quarter for the financial services sector, with increases in sales volumes and profits showing that the sector’s recovery is on track. But firms are less optimistic, employment is down and investment intentions for this year are weaker, as concerns about the global recovery and ongoing troubles in the Eurozone create uncertainty. Nevertheless companies are expecting business volumes and profits to continue to grow, albeit more slowly, in the next three months.”

Pars Purewal, UK investment management leader at PwC, added: “The turmoil in the eurozone and subsequent volatility in markets in the last part of 2011 has led to lower levels of business and fee income amongst investment management firms and this has been compounded by investors, particularly private clients, switching their capital to low-fee assets. There is significant concern that weak demand will be a threat to firms over the coming year and firms will also need to spend an exceptional amount of time and resources on making sure they keep abreast of and compliant with new regulation. As such, optimism for the coming quarter is low amongst investment managers.

“The continued difficulties in the eurozone are leading many securities traders to report downbeat predictions for volumes and revenues, although predictions for the next three months are slightly more optimistic with corporate clients expected to provide more business for securities traders. Employment has stabilised and firms now have more clarity around the impact of new regulation including the European Market Infrastructure Directive and Markets in Financial Instruments Directive, although the costs and potential limitations to growth of regulatory compliance remain a concern. Potential further regulatory changes and increasing constraints on capital are also causing concern in the industry," Purewal concluded.