Financial services activity strengthens but optimism softens

Financial services firms reported that business volumes in the three months to December grew at the quickest pace since June 2017, according to the latest CBI/PwC Financial Services Survey.

The survey added that this rate of growth is expected to be matched in the quarter ahead. The survey of 105 financial services firms, conducted between 22 November and 10 December, found that firms’ profitability grew at the fastest rate since December 2015 – marking a third successive quarter of strong growth. However, profitability growth is “expected to ease somewhat” in the next quarter.

They also found that despite the recent strengthening in volumes and profitability, growth in optimism softened compared to the previous quarter but remained above the long-run average.

In addition, headcount across the FS sector was unchanged for the second quarter in a row and is expected to grow in the quarter ahead.

The outlook for investment over the coming year continues to be mixed, with anticipated growth in IT capital expenditures being offset by a deterioration in investment intentions for land and buildings and vehicles, plant and machinery.

PwC found that the main factor cited by FS firms as a “likely constraint” on investment in the next year was uncertainty about demand (33%), closely followed by labour shortages (31%). The share of firms citing inadequate net return as a factor likely to limit future investment (26%) dropped noticeably from last quarter (51%).

Rain Newton-Smith, CBI chief economist, said: “While volumes and profitability growth across the financial services sector remain buoyant, the softening in optimism is something to watch closely, due to increased COVID-19 uncertainty clouding the near-term economic outlook.

“This uncertainty may be weighing on investment intentions in physical assets, such as buildings, although IT spending – so crucial in allowing firms to innovate and operate remotely during the pandemic – continues to be a bright spot. Unleashing business investment is key to powering the UK’s economic recovery, and it will be a cause for concern if firms move back from a growth mindset to focusing on survival.”

Isabelle Jenkins, head of Financial Services at PwC UK, said: “The softening in optimism likely reflects concerns about what could be a destabilising cocktail of COVID-19 uncertainty, higher inflation, geopolitical tensions, and cyber security concerns. However, the financial services sector has proved its resilience in the face of increasing change, which will likely continue over the next quarter.

“The anticipated flattening out in NPLs must also play a part in the slightly sombre mood. But again, we are seeing firms ensure that they have a tight grip on their strategic priorities meaning that the consequences of increasing levels of debt may not impact significantly the strong position the sector is currently in.”

She added: “Firms should, of course, keep an eye on the underlying trends coming their way, but also ensure that key priorities, such as upskilling staff, embracing tech and enhancing customer interaction, remain high on the to-do list.”