Financial services business volumes and income both grew strongly in the three months to June, but firms say they are less optimistic about their business situation than in the last quarter.

Of the 108 financial companies that responded to the CBI/PwC survey, 59% saw volumes rise in the quarter to June, and 21% reported a fall. The resulting rounded balance of +39% marks a further acceleration in the rate of growth, as well as being the ninth consecutive quarter of growth. Companies reported that overall levels of business were above normal (+10%), for the first time since June 2007.

The improvement in growth was driven by business with overseas customers (+42%) and financial institutions (+15%). Business with private individuals continued to rise at a similarly solid pace to the previous quarter (+19%), but with industrial and commercial companies it was broadly flat (+3%).

Income also rose strongly, with the increase in income from fees, commissions, and premiums (+43%), and net interest, investment & trading (+37%) relative to the previous three months both beating expectations. Further growth is expected next quarter, but at a slightly slower pace.

At the same time, average spreads widened further over the past three months (+37%), rebounding from a slight weakening in the March survey (+11%).

The combination of strong growth in business volumes and income and a widening of spreads meant that profitability continued to rise solidly (+25%), at a similar pace to the previous quarter (+21%), marking the twelfth consecutive quarter of growth.

But despite strong growth in activity and expectations that this trend will continue, financial services firms overall were less optimistic about their business situation in the three months to June (-13%). This partly reversed the rise in sentiment in the previous quarter (+32%).

Furthermore, in the three months to June, the number of people employed in the financial services sector fell modestly (-7%), against expectations of a rise. However, companies expect to resume hiring over the next three months (+15%).

Firms’ investment intentions for the year ahead have softened compared with the previous quarter. Spending on marketing is expected to remain unchanged (0%) relative to the previous twelve months, and businesses plan to spend less on vehicles, plant & machinery (-18%). While investment on IT is expected to increase (+25%), intentions have weakened relative to the March survey (+47%).

The majority of firms continued to cite uncertainty about demand and business prospects as the factor most likely to limit capital expenditure (48%). The weak level of demand also remained the factor most likely to constrain business expansion (83%).The number of firms citing a shortage of finance as a constraint to investment picked up, continuing the volatility in this data in recent surveys.

Regulatory compliance is once again a key driver of business costs and capital expenditure plans. The number of Financial services firms anticipating having to spend more on regulatory compliance over the next twelve months relative to the past year rose to +77%, up from +58% in the last quarter. More firms also highlighted this as a motivation for capital spending in the year ahead (68%, the highest proportion since June 2010). More than half (54%) of respondents said that dealing with statutory legislation and regulation was likely to limit their ability to increase business over the next year.

Ian McCafferty, CBI Chief Economic Adviser, said:

“The financial services sector has seen another quarter of robust growth, with business volumes, income and profitability all rising solidly once again.

“However, businesses are less optimistic than in the previous survey, have reduced headcount and are reappraising investment plans. Regulatory compliance is an increasing factor shaping investment, activity and intentions.”

Analysis by sector

Banking

Business volumes rose at a solid pace over the past three months and the volume of business was considered to be above normal. Income rose, while total costs were unchanged, leading to a sharp rise in profitability. But staff numbers fell and investment intentions for the year ahead were generally subdued.

Building societies

Business volumes rose only slightly over the past three months, broadly in line with expectations. But coupled with solid growth in net interest & trading income and a widening of spreads, this led to a sharp rise in profitability.

Finance houses

Business volumes rose at a faster pace than expected over the past quarter, numbers employed increased and investment intentions for the year ahead strengthened. But while profitability rose for the fifth consecutive quarter, the latest increase was the slowest in the five-quarter run of growth so far, as average costs rose unexpectedly.

Julian Wakeham, PwC Partner, Investment Banking, said:

“The banks continue to be more confident in their own performance than their operating environment. Revenue, spreads and profitability are all increasing, but there is tangible concern about the impact of regulation. The survey results imply that regulatory expenditure is limiting the banks’ ability to invest in other areas.

“Retail activity remains surprisingly upbeat, but commercial business is seen as having ended its recent run of growth. More positively, almost all the banks say that average spreads are expanding, suggesting that the sector had been expecting some form of credit easing from the Bank of England. Total costs remain well controlled, so profitability has improved and banks are relatively optimistic about the credit outlook.”

Life insurance

Business volumes increased and premium, fee and commission income also rose solidly. But profitability fell for the first time since December 2009, affected by rising costs and reduced pricing power.

General insurance

Profitability was broadly flat, as falling business volumes and income values offset a rise in commissions, fees & premiums. Sentiment fell at the fastest pace since March 2003, and investment intentions for the year ahead were subdued.

Insurance brokers

Profitability fell unexpectedly over the past three months, as business volumes were flat, income values fell and average costs continued to rise.

James McPherson, PwC Partner, Insurance, said:

“General insurers’ confidence has fallen rapidly, ending the stability of the past two quarters. General insurers’ performance often reflects the health of the broader economy, so it is not encouraging that business volumes and premium income have fallen. Despite this fall in confidence, general insurers still expect revenues to pick up during the coming quarter. With investment income under growing pressure, insurers are hoping that price increases following 2011’s motor and catastrophe losses will help them achieve stronger rates and alleviate pressure on underwriting profits.

“Life insurance sentiment has declined slightly, reflecting growing uncertainty in the sector over the long-term impact of the Retail Distribution Review and pension auto-enrolment. Despite this, the sector has had another good quarter with a strong majority of firms reporting higher volumes of business."

Investment management

Business volumes were stable, defying expectations of a very strong rise, but general optimism rose for the second consecutive quarter. Numbers employed rose for the first time in three quarters.

Securities trading

Optimism about the general business situation fell markedly, as business volumes fell strongly for the third consecutive quarter. Profitability declined at the fastest pace since June 2010.

Rob Mellor, PwC Partner, Asset Management, said:

“Despite the challenges posed by market volatility, investment managers remain upbeat about their business prospects. Headcount has increased and whilst profitability has improved for now there are challenges ahead. Regulation represents the largest cloud on the sector’s horizon. Volumes of business have remained steady during the quarter and are now predicted to accelerate. There are also remarkably buoyant predictions for international business.

“Almost all respondents expect compliance spending on regulation to grow over the coming year, a sharp increase from the level seen in March. 79% of respondents identified regulation as a limitation on business, a record for this sector but not surprising given the wall of regulation that asset managers face this year and next.

“Financial volatility and the increasing burden of regulation continue to hang over securities traders. Confidence has declined again, and falling revenues are pushing profitability downwards. A proportional increase in staff costs hints at the possibility of future headcount reduction. Securities traders report the biggest decline in business volumes of any financial services sector, and a clear majority see fee and commission income falling. Competition and costs are expected to continue to squeeze profitability in this sector.”

ENDS