UK financial services sector ends year with mixed fortunes

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UK firms in the financial services sector enjoyed stronger business volumes in the fourth quarter of 2015, while profitability continued to improve at a healthy pace according to the Confederation of British Industry (CBI).

The CBI’s survey of more than 100 financial services firms, conducted in partnership with PwC, found that the overall level of business remained “above normal” in the three months to December 2015, although the level of business with overseas customers fell below normal in the biggest dip for three years.

The quarterly survey also found that optimism within financial services rose only slightly in Q4 2015, following more robust increases in the first half. Strong competition is bearing down on incomes, although tight cost control is helping to support growth in profitability.

Looking ahead, weaker growth in business volumes, flat income and rising costs are expected to dampen profit growth in the first quarter of 2016. Meanwhile, employment prospects remain mixed, with banks reporting falling employment, compared with solid growth in headcount in the insurance and building society sectors. Overall, expenditure on training rose strongly in Q4 2015.

“Despite strong growth in profitability driven by easing cost pressures and increasing business volumes, the financial services industry is alive to downside risks from developments overseas,” said Rain Newton-Smith, CBI director for economics. “The global economic outlook remains uncertain while China rebalances, which is having knock-on effects on emerging markets, amidst continued unrest in the Middle East.

“While investment intentions remain robust in IT, and marketing spend is set to expand as firms seek new customers, elsewhere companies are curtailing their capital spending due to poor returns.

“There is a great deal of uncertainty within the financial services industry over the impact of financial technology (fintech). Firms in most sectors are looking to upgrade their own platforms over the next five years rather than acquire fintech firms. However, partnerships with these firms are seen as a high priority by companies in some sectors, particularly finance houses, insurance brokers and investment managers.”

Kevin Burrowes, UK financial services leader at PwC, added: “We see the emerging trend of firms making more investment in new products. Another positive is that IT investment is moving from regulatory spend to front line systems to help overcome the rise of new competition.

“Also, it’s clear that optimism is muted across the whole sector and each sub-sector has its own challenges. Ongoing low interest rates, cost of floods claims, the continuing slump in oil prices and the domino effect of stock market volatility are responsible for the increased pessimism compared to this time last year.

“Cost reduction therefore remains a major focus but we see the issue of firms developing new products and making IT investments to fight off the rise of new competition as a new emerging trend. Against this backdrop, the growing spectre of cyber-crime looms large and the threat of major attacks continues to stalk the entire financial services industry.

“This is borne out by recent research which found that UK bankers and market watchers now put fears about cyber-crime at the top of a list of 24 possible risks to banks, eclipsing doubts about heavy-handed regulation for the first time.”

Among the findings of the Q4 survey, conducted in late November 2015, 45% of financial services firms said that business volumes were up, while 22% said they were down. The balance of +23% improved on the Q3 2015 balance of +4%. However, looking ahead, 30% of firms expect business volumes to increase, while 20% said they will fall, to give a balance of +11% – the lowest since September 2011 (+5%).

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