Many parts of the UK’s financial services sector expect business volumes to rise in the next quarter after 21 months of falls, while optimism about the overall business situation has risen for the first time in two years. But banking remains under pressure. That is according to the latest survey (Monday 29th June) from CBI (Confederation of British Industry) and PricewaterhouseCoopers Financial Services.
Although the three months to June saw levels of business, income and profitability continue to fall, this was at a much slower pace than earlier this year. This suggests the industry may now be on a gradual path towards recovery, though differences between the sectors remain.
Insurance companies are the most optimistic about growth in business over the coming quarter, while banks also expect volumes to rise. Building societies have experienced extremely tough business conditions since early 2008, but are now hopeful that volumes, income and profitability will stabilise in the next quarter. By contrast, securities traders and investment managers expect the recent improvement in their business to be short-lived, with volume declines expected to resume next quarter.
Every respondent reported business volumes and profitability to be down on the previous three months, the latter no doubt due to sharp falls in income values and spreads staying flat. However, optimism among life insurers was high, most likely due to expectations of growth in both business volumes and profitability over the coming quarter.
Business volumes fell in the last three months, despite expectations of strong growth. This, along with a fall in income values, outweighed the advantage of falling costs, thus leading to a marginal decline in profitability. Nonetheless, optimism rose further, with business volumes set to increase over the next three months.
Andrew Kail, UK insurance leader, PricewaterhouseCoopers LLP, said:
“General insurers continue to feel positive about their outlook however business levels are down when compared to last quarter’s as planned rate increases are not being seen at the levels predicted. Previous plans to increase recruitment have been reversed, bringing the sector in line with other areas of financial services sector. Modest spending on regulatory compliance is a surprise, given the requirements of Solvency II. Despite cost reduction measures, some insurers now expect profitability to fall as the cost of claims will probably increase as the impact of the recession bites.”
“Life insurers report the most positive results in sentiment for five years, after seven consecutive quarters of negative outlook. Business however, remains subdued for now. The industry is hoping for a recovery in fortunes following recent rises in the equity markets and some positive news on the housing market. Expense reduction and customer retention are still the order of the day and there is nothing in the survey results to suggest an upturn in business has yet materialised.”
Profitability grew in the current quarter, but at a much slower pace than in March’s survey – likely due to a comparatively stronger performance overall in the previous three months. The increase in profitability is expected to gather pace over the next quarter. Numbers employed fell at their slowest rate over their five quarters of decline so far, and a further easing in the pace of deterioration is expected in the next three months.