UK Financial Services Activity Growth Strong but Sentiment Weakens
Business volumes and income for the UK financial services sector grew strongly in the three months to June, but firms report that they are less optimistic about their business situation than in Q112, the Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC) said in their latest survey of business sentiment.
Of the 108 UK financial companies that responded to the CBI/PwC survey, conducted between 18 May and 7 June, 59% reported that business volumes rose in Q212 to June while 21% experienced a fall. The resulting rounded positive balance of +39% represented the ninth consecutive quarter of growth and also marked a further acceleration in the rate of growth.
The survey suggests that the improvement was driven by business with overseas customers, cited by a positive balance (+42%) of respondents, and also with financial institutions (+15%). Business with private individuals continued to rise at a solid pace similar to that of the first quarter (+19%), but with industrial and commercial companies it was broadly flat (+3%).
Strong growth in incomes was reflected by increases from fees, commissions and premiums (+43%) and net interest, investment and trading (+37%) relative to the first quarter, which both beat expectations. This momentum is expected to continue into the third quarter, although at a slightly slower pace. There has also been a further widening of average spreads in the past three months (+37%), marking a strong rebound from the March survey when the balance was +11%.
The combination of stronger business volumes and income and widening spreads enabled profitability to continue to rise solidly, with a balance of +25% compared with +21% in the first quarter and marking the twelfth consecutive quarter of growth.
Despite this strong growth, and expectations for the trend to continue, financial firms were less optimistic overall about their business situation in the three months to June (-13%); partly reversing an improvement in sentiment for Q112 (+32%). The number of people employed in the financial services sector also fell slightly (-7%) despite an expected rise, although companies expect to resume hiring in Q312 (+15%).
Financial services firms also appear likely to retain cash over the year ahead, rather than invest. Spending on marketing is expected to remain unchanged from the previous 12 months and financial service firms plan to reduce spending on vehicles, plant and machinery. While investment intentions on IT remain positive at +25%, the figure has fallen from the balance of +47% recorded in the March survey.
The survey found that the majority of firms (48%) cited uncertainty over demand and business prospects as the factors most likely to limit capital expenditure. A weak level of demand was again the factor most likely to constrain business expansion (83%), while more firms cited a shortage of finance as a constraint on their investment.
Regulatory compliance again emerged as a key driver of business costs and capital expenditure plans. The number of financial services firms that anticipate having to spend more on regulatory compliance over the year ahead rose to +77%, from +58% in Q112. More firms also highlighted this as a motivation for capital spending in the year ahead, which at 68% was 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.