Optimism drops, but activity robust in financial services – CBI/PwC

Sentiment in the financial services sector deteriorated in the three months to June, but business conditions – such as volumes, profits and hiring – saw robust improvement, according to the latest CBI/PwC Financial Services Survey.

The quarterly survey of 94 firms – which was carried out before the UK’s general election on June 8th – found that optimism about the overall business situation fell, having been unchanged in the previous quarter. Optimism has now declined in five out of the last six quarters. However, this sentiment last quarter was not universal: while banks and life insurers felt less optimistic than three months earlier, finance houses, insurance brokers and investment managers felt more optimistic.

Meanwhile, financial services firms built on the healthy growth in business volumes seen in the first quarter of 2017, reporting another quarter of robust expansion, driven largely by demand from private and corporate clients. Growth was broad-based across sectors, with only building societies reporting no increase in volumes after almost two years of uninterrupted growth. Overall business volumes are expected to rise further over the next quarter, albeit at a slower pace.

Rising business volumes, combined with a slight fall in average costs, saw a second successive quarter of improving profitability. Profitability is expected to rise further in the next three months, though at a more moderate pace. Employment also rose solidly, and is expected to continue to grow at a healthy pace in the next quarter.

The financial services sector is at the forefront of adopting new technologies to gain customer insights, with almost two thirds actively investing in operational data analysis and almost half actively investing in process automation. In addition to securing the best Brexit deal for the UK, firms believe the Government’s top priorities should be reducing the cost of regulatory compliance and ensuring tax stability.

Rain Newton-Smith, CBI Chief Economist, said:

“The robust performance of financial services firms over the last quarter gives us a good dose of summer cheer. Volumes continue to expand strongly, profits are up and more people are being hired in a thriving part of the British economy. Even better, that is all set to continue over the next three months.

“But there are mixed messages coming from the sector. Whilst business activity is holding up strongly, optimism took another dive, which likely reflected a mix of Brexit uncertainty and concerns that financial market conditions could tighten.

“It’s encouraging to see financial services firms continuing to seek out future opportunities, and staying ahead of the curve when it comes to investment in new and innovative technologies.”

Andrew Kail, Head of Financial Services at PwC, said:

“The counterweight of short-term performance against medium-term outlook explains the sentiments expressed by financial services companies this quarter.

“Currently the financial services sector is performing well in both business volume terms and underlying profitability. However, another quarter of falling optimism points to an industry harbouring concerns about the future. The UK will continue to be a leading financial centre, but political uncertainty and the ongoing wait for an agreed Brexit blueprint are fuelling more questions about companies’ futures and the performance of the wider economy.

“In response, firms continue to fine tune their contingency plans, which include options for establishing operations in the EU27 and ensuring they are adequately resourced.

“More widely, the sector continues to respond to the impact of digital advances in the way they serve their customers and they run their business. We are seeing plans in this area accelerate markedly.”

Looking to the year ahead, financial services firms intend to cut back on spending on marketing, land and buildings, and vehicles, plant & machinery. But spending on IT is forecast to grow at its fastest for two and a half years, and firms see IT as more important to business growth than at any time since 2009.

Concerns over a deterioration in financial market conditions remain elevated. Nearly a fifth of firms believe there is a high likelihood conditions will worsen over the next six months, with a further two thirds seeing a medium likelihood.

Key findings:

  • Following a stabilisation last quarter (+4%), optimism in the financial services sector fell, in line with the trend of the previous year and a half
  • 15% of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 25% were less optimistic, giving a balance of -10%
  • 47% of firms said that business volumes were up, while 3% said they were down, giving a balance of +44%. This compares with +18% in March
  • Looking ahead to the quarter to September, growth in business volumes is expected to slow somewhat: 40% of firms expect volumes to rise next quarter, and 21% expect them to fall, giving a balance of +19%.

Incomes, costs and profits:

  • Overall profitability rose again in the quarter to June, with 41% of firms reporting that profits had increased and 6% saying they fell, giving a balance of +35%. This followed a similar balance of +33% in March
  • Income from fees, commissions and premiums rose strongly (+39%), but growth is expected to slow over the quarter ahead (+9%)
  • Income from net interest, investment and trading (+17%) rose faster expected (+8% in March), but incomes are expected to be unchanged next quarter (+2%)
  • Total operating costs rose a little (+9%), while average costs dropped slightly (-6%). Both total costs and average costs are expected to rise next quarter (+14% and +4% respectively).


  • 46% of financial services firms said they had increased employment, while 17% said that it had decreased, giving a balance of +29% (rising from +11% last quarter)
  • Numbers employed are expected to see another solid increase next quarter (+25%), with headcount expected to be stable in banks (+2%) but to increase in all sectors.

Investment over the next 12 months:

In the year ahead, financial services firms expect to increase IT spending at the fastest pace since December 2015, but to cut back on other forms of capital spending:

  • IT: +61% (up from +46% in March)
  • Marketing: +3% (down from +11% in March)
  • Land and buildings: -28% (down from -4% in March)
  • Vehicles, plant and machinery: -16% (down from -11% in March)

The main reasons for authorising investment are cited as:

  • To increase efficiency/speed (80% of respondents)
  • Statutory legislation & regulation (61% of respondents)
  • To expand capacity (59% of respondents)

The main factors likely to limit investment are cited as:

  • Inadequate net return (49% of respondents)
  • Uncertainty about demand or business prospects (49%)
  • Shortage of labour, including managerial & supervisory staff (43%).

Business expansion over the next 12 months:

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

  • Level of demand (cited by 62% of respondents)
  • Statutory legislation & regulation (46%)
  • Competition (46%)
    • 98% of firms see competition coming from within their own sector of financial services
    • 54% see competition coming from other sectors of financial services
    • 49% see competition coming from new entrants.

Financial market conditions, priorities for the Government, technology adoption:

  • Asked about their perceptions of financial market conditions, one in five (18%) firms said there was a high likelihood they would worsen over the next six months, with 65% assigning a medium likelihood and 16% a low likelihood
  • Besides securing the best Brexit deal for the UK, financial services firms ranked reducing the cost of regulatory compliance and ensuring tax stability as the top priorities for the new government
  • Financial services firms are turning to technology to gain customer insights. Almost two thirds (63%) of firms are actively investing in technologies to enable data analysis, such as customer history and risk profiling. Around half (48%) of firms are actively investing in process automation
  • Firms see longer-term potential from other technologies, with 40% saying they may in future invest in artificial intelligence, and 35% seeing potential to invest in situational data analysis (such as sensors and wearables).

Source: PwC