The UK financial services sector saw activity grow strongly for the third quarter in a row, for the first time since the nationalisation of Northern Rock in 2007, according to the 86th financial services survey by the Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC). This is the eighth consecutive survey that confidence in the financial industry has increased.
Firms considered the level of their business is only slightly below normal, the best result since the financial crisis began in September 2007. Asked how their business volumes fared in the three months to March, 33% said that volumes rose and 11% said they fell. The resulting balance of +22% exceeded firms’ expectations (+15%), and was only slightly below the balances of +27% and +28% recorded in the preceding two quarters. Growth in business is anticipated to pick up a little further in the coming three months (+30%).
Business grew across each of the customer groups. Growth was particularly strong for business with private individuals, as volumes rose at the fastest pace since December 1996. Growth was slower for business with industrial and commercial companies, financial institutions and overseas customers. Business is expected to grow across all the customer groups again over the next three months.
Ian McCafferty, CBI Chief Economic Adviser, said: “A third quarter of strong volume growth shows the financial services recovery is building strength. It is particularly good news that firms consider their level of business to be only slightly below normal, for the first time since the financial crisis began in 2007.”
Despite the cost pressures and narrowing of average spreads, a combination of rising incomes and the fall in the value of bad debts led firms’ profitability higher in the past three months, and at the fastest rate since December 1993. A similar improvement is expected in the coming quarter.
Other findings of the survey include:
- In the next three months, the highest percentage of firms since the question was first asked in March 2009 expects that growth will come from cross-selling to existing customers and acquiring new domestic customers.
- The largest proportion of firms since the survey began in 1989 says that statutory legislation and regulation is likely to limit their ability to raise levels of business over the next 12 months.
- Concern over a further worsening in financial markets fell back in this survey, following a noticeable spike last time. However, the vast majority of respondents still think that ‘normal’ financial market conditions will only resume beyond a six-month period.
Banking saw little change in business volumes over the past three months, but reported that they were normal, which comes after three full years of well below normal levels of activity.
Bankers saw a steep decline in the value of non-performing loans (NPLs), relatively stable costs (despite a fall in numbers employed), and they plan to invest more in the year ahead, particularly on IT and marketing. Their profitability increased strongly after having fallen in the previous quarter.
Andrew Gray, UK banking leader at PwC, said: “There is encouraging evidence that the banks are adjusting expectations in line with what constitutes the ‘new normal’. Despite a strong round of annual results, they are increasingly realistic about the challenges ahead – particularly in terms of demand and regulatory obstacles. While they report near normal business levels for the first time since 2007, their actual activity is way below that seen before the financial crisis.”
Gray believes that the banks are becoming stronger and are investing in products and technology to improve customer experience. “The situation is more competitive today. The customer demand is weak, so banks are working hard to retain and expand their customer base,” he said.
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