The majority of financial services firms reported rising business volumes in the three months to December, according to the latest CBI/PwC Financial Services Survey.

Overall business volumes rose at the fastest pace since the mid-1990s, with demand from both UK households and corporates underpinning solid growth across most industry sectors. Building societies were the exception, with business volumes falling unexpectedly. Firms expect similarly healthy growth to continue next quarter, with building societies expecting volumes to recover.

Financial services firms reported strong income growth, particularly from fees, commissions and premiums, but also a decent performance from net interest, investment and trading income. Alongside falling costs, that meant profitability improved at a lively pace for the second successive quarter. Profit growth was seen across all sectors, with the exception of life insurance.

Rain Newton-Smith, CBI Director of Economics, said:

“The upswing in growth among financial services firms continues on a solid footing, with overall optimism, business volumes and profits up.

“Building societies have struggled this quarter, likely as a result of the impact of the Mortgage Market Review, constrained buyer affordability in London and the South East, and stronger competition in the mortgage lending market. But a strengthening of household finances, continued low interest rates and the recent changes to stamp duty suggest that conditions in the sector should pick up ahead.

“The employment picture was mixed last quarter but firms are boosting their spending on training. It’s encouraging to see the majority of companies planning to increase their investment spend, especially on IT and marketing, to increase efficiency and to reach new customers as competition and technology change the nature of the sector.”

Kevin Burrowes, UK financial services leader at PwC, said:

“Financial services firms continue to be optimistic, but we will see them investing more to stay ahead of new entrants, deal with technology challenges, meet increasing regulatory and structural reform costs and deliver better results for customers.

“The increased investment in land and buildings is a sign of banks looking at expanding into cities outside London such as Manchester and Edinburgh due to high cost and capacity issues in the capital.

“Employment has fallen, but training expenditure has increased as banks face desired skill shortages such as compliance experts and we expect this trend to continue.”

Rain Newton Smith

Employment fell in banking and general insurance, dragging down overall employment. A somewhat faster decline is expected next quarter, with only four out of the eight sectors expecting to raise their headcounts. But firms are spending more on training, which rose at the fastest pace on record in the three months to December.

Overall marketing spend and investment intentions for the year ahead were positive across the board. IT investment is predicted to increase to the greatest extent, with all sub-sectors planning to step up spending in this area.

The need to increase speed/efficiency is the most widely cited motivation for higher investment, with a desire to provide new services and reach new customers becoming increasingly important (the latter setting a survey record).

Key findings:

• 64% of financial services firms said that business volumes were up, while 7% said they were down, giving a balance of +57% – the strongest growth since December 1996 (+79%)
• Looking ahead, 65% of firms expect business volumes to increase, while 6% said they will fall, giving a balance of +59%
• 49% of financial services firms said they felt more optimistic about the overall business situation compared with three months ago, while 12% said they felt less optimistic, giving a balance of +37%.

Incomes, costs and profits:

• Overall profitability stayed high, with 62% of firms reporting that profits had increased and 10% saying they fell, giving a balance of +52%, as income increased and costs fell.
• Income from fees, commissions and premiums increased at a robust pace (a balance of +62%), significantly improving from last quarter (-27%) and beating expectations (-22%). It is expected to increase at a similar pace next quarter (+64%)
• Income from net interest, investment and trading income also increased (+43%), with growth expected to remain steady next quarter (+44%)
• Overall operating costs fell slightly (-8%), following a spike to a survey high last quarter (+53%). Costs are expected to edge down a little further next quarter (-9%)
• Average spreads widened (+33%), with a similar increase expected next quarter (+35%).

Employment:

• 32% of financial services firms said they had increased employment, while 41% said that it had decreased, driven by banking and life insurance, which dragged the overall balance down to -9%
• A somewhat faster decline is expected next quarter (-15%), with only four of the eight sectors (finance houses, life insurance, securities trading and investment management) expecting headcount to rise
• Taking into account long-run trends, employment in financial & insurance activities is forecast to dip to 1.117 million by the end of Q1 2015, the same level as one year earlier and 38k below the level in Q1 2012
• On this basis, employment would still be 94k lower in Q1 2015 than its peak in Q4 2008, and only 20k above the trough in Q1 2010, implying that more than six years on from the financial crisis barely a fifth of the ground lost will have been recovered.

The next 12 months:

In the year ahead, financial services firms expect to increase investment across the board relative to the past twelve months:

• Marketing (+19%)
• IT (+75%)
• Land and buildings (+36%)
• Vehicles, plant & machinery (+34%).

The main reasons for authorising investment are cited as:

• To increase efficiency (85%)
• To reach new customers (73%) – a survey record high.
• To provide new services (72%)
• Statutory legislation & regulation (72%).

The main factors likely to constrain business over the next year:

• Level of demand (78% up from 37% in September)
• Competition (76%).