Nine out of 10 UK banks polled believe that incoming regulation is likely to limit business expansion over the coming 12 months, while all banking respondents said that they anticipate spending more on regulatory compliance over the next year relative to the past one, according to the latest CBI/PwC Financial Services Survey.
Across the UK financial service sector, a record high percentage (74%) of the 80 companies polled say they are concerned about the impact of statutory legislation and regulation on their ability to expand in the next 12 months. In addition, the proportion of firms fearing the UK is losing its competitiveness as a financial centre rose again to 85% (from 79% in December).
Despite these fears, and the fact that lending to industrial and commercial companies continued to fall (-9%), confidence has risen, with slightly fewer firms (55%) think the likelihood of further deterioration in financial markets is low compared with December (58%). Also, the highest balance of firms since March 1999 (+34%) expects profitability to increase in the next three months.
Ian McCafferty, CBI chief economic adviser, said: “Financial firms are more optimistic in terms of business performance for the fourth consecutive survey. They have seen an improvement in profitability and there are expectations of further growth. This survey sees the highest number of firms expecting profitability to increase since March 1999 – these are signs of a bounce back.
“Financial services companies hope lending will grow across their customer base over the coming quarter, lifting business volumes and helping profitability. Fears that regulation will hamper growth prospects in the year ahead have reached a record high, however, with companies expecting to have to ratchet up spending on compliance sharply,” he said.
Looking specifically at the UK banking industry, Andrew Gray, UK banking advisory leader, PricewaterhouseCoopers (PwC), added: “Banks’ confidence is continuing to rise amid predictions that business volumes will show the sharpest increase for three years. Commercial business has been weak during the quarter, but for the first time in two years activity is now expected to pick up and demand from financial and overseas customers is also predicted to be an area of growth. However, retail activity remains an area of concern as growth predictions remain hesitant. Staffing levels are also expected to continue to be an area of constraint, with further reductions predicted for the coming quarter.”
Overall, activity in the sector was broadly stable over the past three months, somewhat better than expected, and firms hope to see much better growth in the next three months. The profitability of financial services businesses improved for the third quarter running, and is expected to increase further in the coming three months.
Asked how their business volumes fared in the three months to March, 43% said that volumes rose and 42% said they fell. The resulting balance of +1% is better than the expected -13%. In the next three months, a balance of 48% of firms expects a rise in business volumes, which is the most positive expectation since March 2006 (+58%).
Other key findings of the survey:
- Against expectations, the value of fee, commission and premium income rose (a balance of +14% versus an expectation of -20%). The value of net interest, investment and trading income also rose (+7 is the highest balance since June 2007). In the coming quarter, firms also expect both these types of income will grow.
- Total operating costs (excluding costs of funds) fell, but at the slowest pace since September 2008. Average operating costs per transaction also fell (-28%), and in the coming three months these are expected to come down at a similar rate (-24%).
- Spreads narrowed slightly, with a balance of -11% the most negative figure since December 2007 (-15%). This followed the sharpest widening of spreads in the previous quarter since June 2008, however.
- The trend in cost reduction, combined with increases in fee income and the previous widening of spreads contributed to the third successive quarterly rise in profitability.
- Firms’ investment plans for information technology over the coming year are positive again (a balance of +25%), while those planning to spend more on marketing in the next 12 months has risen to a balance +47, which is the highest for 10 years.
- The level of demand is thought to be less of a factor likely to limit expansion in the coming 12 months than it has been since September 2008. The ability to raise funds is also less of an issue for firms, back in line with the survey average.
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