Business volume growth returns across the financial services sector in last quarter

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Business volumes over Q2 grew across the financial services sector at the fastest pace since June 2017, after stalling in the previous quarter, with volumes set to grow at a similarly strong pace over the next three months, according to the latest CBI/PWC Financial Services Survey.

The survey, conducted between 1-18 June with 118 respondents, also found that profitability grew at the fastest pace since December 2015, and is set to grow at a slightly slower rate over the next three months.

Optimism rose for the fourth consecutive quarter, but to a somewhat lesser extent than the three months to March.

Encouragingly, employment grew for the first time since December 2019 after previously falling for five consecutive quarters. All sub sectors saw unchanged or rising headcount except for banking where employment declined. Overall, numbers employed are expected to grow at a faster pace in the quarter to September.

Investment is set to be cut back on land and buildings as well as vehicles plant and machinery in the year ahead. IT spending is set to increase, with expectations at their strongest in nearly two years.

Rain Newton-Smith, CBI Chief Economist, said:  “Growing business volumes across the sector is good news, especially when combined with rising profitability and employment. The outlook for the sector remains positive for next quarter. Meanwhile, regulation remains the main driver of disruption. This is sparking positive shifts in operating models – notably through greater tech adoption. However, firms are continuing to adapt to the absence of an equivalence agreement between the UK and EU, as recognised by the Chancellor’s Mansion House speech.

“Drilling down into continually strong IT investment plans, it’s clear more and more firms are making the most of new technologies to better understand their customers and drive their business strategies. There’s growing demand for digital skills, which should feature strongly in the government’s future plans for retraining and reskilling workers who’ve been affected most by COVID.”

Isabelle Jenkins, Head of Financial Services at PwC UK, said: “Today’s results point to the slightly stronger economic outlook we’ve been seeing, which can only be good news as recovery continues. With business volumes up, at the fastest pace since Summer 2017, and employment in most FS sectors on the rise, plus the flatlining in non-performing loans, the mood music is positive.

“For financial services, the emphasis on upskilling and investment in tech also makes sense, and we’re seeing some firms pulling ahead attempting to truly embrace a new digital future. However, if transformation is going to be fully embedded, it’s critical that businesses act now to truly respond to the  shifts in customer demand while continuing to find ways to keep new products coming and more effective ways to engage.”

COVID-19

The COVID-19 pandemic has created a shift towards remote working, with a large majority of firms also citing changes in employee engagement and reappraisal of office space. More than eight in ten FS firms are planning to implement more hybrid ways of working, with almost eight in ten having conducted employee consultations on their preferences for hybrid working.

Future working

Firms expect changes to future ways of working to have a broadly positive impact on productivity, investment in collaboration technology, employee wellbeing, diversity and inclusion and social mobility. On balance, firms expect collaboration and informal engagement with colleagues to be best achieved in the office in the future, with administrative/business-as-usual tasks best delivered via working from home. Other activities such as engagement with senior leadership, managing employees, recruitment and L&D are thought to be best delivered via a hybrid model. FS firms believe that public perceptions of the financial services industry have improved on balance, as a result of the COVID-19 pandemic.

Disruption

The biggest drivers of disruption for FS businesses over the year ahead remained changes in regulation, followed by accelerations in digital technologies. COVID-19 also remained a prominent driver of disruption. The majority of firms are responding to disruption by employing new technology within their business or adapting existing tech capabilities. Advances in technology was cited as the top priority in future business strategy and transformation plans, followed by operational resilience.

Technology

Firms appear to have moved further along in their adoption of the cloud since we started asking this question in September 2020, with a greater proportion in the implementation and transition realisation stages. Understanding the customer and their interactions is seen as the most valuable action to be gained from advances in AI and analytics.

Operational resilience

FS firms expect to invest more in cyber security over the next twelve months, compared to the previous twelve. In terms of actions set to be taken to improve cyber resilience, over three quarters of FS firms are looking to improve their ability to detect and respond to a cyber breach, followed by greater focus on how to respond to new/emerging cyber threats, and improving the way they report on and mitigate cyber security risk.

Upskilling

Nearly nine out of ten financial services businesses anticipate a greater need for skills in technological proficiency. Financial services firms are upskilling existing staff and looking at greater agility in ways of working, to equip them for future skills needs. Most expect to automate standardised or repetitive tasks over the next five years, in response to growing digitisation and new technologies.

ESG issues

Eight in ten financial services firms report that Environmental, Social and Governance (ESG) issues form part of their business’ objectives. Many FS firms see alignment with business purpose and customer priorities as the main motivations behind action around ESG issues. CSR, climate change issues and diversity and inclusion are the top priorities for FS businesses within their ESG agenda. Constraints on internal resource was cited as the top barrier that FS businesses face in delivering their ESG agendas.

D&I

Nearly nine in ten financial services businesses see diversity and inclusion (D&I) forming part of their business objectives. Actively increasing diversity at non-management level was cited by firms as an action taken to boost D&I, followed by actively increasing diversity within management areas of the workforce. Reforming more general recruitment practices also ranked highly.

Key findings:

  • Optimism improved in the three months to June, but to a lesser extent than the previous quarter (+41 from +52% in March). This marked the fourth consecutive quarter of rising sentiment.
  • Business volumes grew at the fastest pace since June 2017 (+40%), following unchanged volumes last quarter (-3%). Over the next three months, business volumes are set to grow at a similarly strong pace (+43%).
  • Average spreads grew slightly (+5%), after a decline in the previous quarter (-24% in March), with spreads set to fall next quarter (-12%).
  • The value of non-performing loans was unchanged (0%) after persistent growth since March 2020. Next quarter, non-performing loans are set to be broadly flat (-2%).
  • Profitability grew at the fastest pace since December 2015 (+39% from +8%), with profits growth seen in all sub-sectors. Overall, profitability is set to grow at a slightly slower rate next quarter (+30%).
  • Employment grew for the first time since December 2019 (+7% from -12%). Headcount was either unchanged or grew in all sectors except banking where employment declined (-41%). Numbers employed are expected to grow at a faster pace in the quarter to September (+16%).
  • Investment is set to be cut back on land and buildings (-38%) and vehicles plant and machinery (-9%) over the year ahead. However, expectations for IT spending are at their strongest in nearly two years (+56% from +40% in March).
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