Dip in confidence puts resilience on the agenda for FS firms - CBI/PwC Financial Services Survey

Sentiment among financial services firms fell at the quickest pace since September 2019, according to the latest CBI/PwC Financial Services Survey.

Despite declining optimism, the survey of 81 financial services firms – conducted between 1 March and 22 March – found that business volumes had continued to grow in the three months to March, albeit at a slower pace than the previous quarter. Firms expect volumes to be flat in the quarter ahead.

The survey also saw a significant slowing in profitability growth on the previous quarter, with firms anticipating a modest decline in the next three months.

The outlook for investment in the year ahead continues to present a mixed picture. Firms expect to continue investing in IT but are looking to cut back capital expenditures on land & buildings and vehicles, plant & machinery.

Uncertainty over demand (37%), inadequate return on investment (32%) and labour shortages (16%) were cited by firms as the biggest constraints on investment. However, the share of firms citing labour shortages as a factor likely to limit future investment (16%) dropped significantly from last quarter (31%).

Building operational resilience emerged as a key theme throughout the survey, with 92% citing this as the key priority for future business strategy and transformation plans. Firms separately identified ‘responding to new cyber threats’ (81%) and ‘improving detection of cyber breaches’ (71%) as the main priorities to improve cyber resilience and reduce tech risk.

Elsewhere, headcount across the FS sector was broadly unchanged for the third quarter in a row. Expectations are for a significant uptick in employment next quarter.

Rain Newton-Smith, CBI Chief Economist, said: 

“While business volumes and profitability held up against the headwinds buffeting the economy, global inflationary pressures and increased geopolitical uncertainty stemming from war in Ukraine have started to take a toll on business confidence.

“With operational resilience becoming an ever more important priority for the sector, there is danger that a ‘wait and see’ approach may dampen growth prospects for the wider economy.

“A lack of preparedness for mainstream use of digital currencies and challenges in developing Net Zero plans suggest a need for swifter policy development in both areas to guide and stimulate industry-wide action.”

Isabelle Jenkins, Head of Financial Services at PwC UK, said: 

"Financial services organisations are right to be careful and cautious as their resilience is once again put to the test.

"As the cost-of-living crisis mounts for households, it's likely that we may see an increase in non-performing loans, another challenge financial services firms will have to respond to ensure consumers are supported through this difficult time.

"Despite some investment plans reined in for now, this is not the time to batten down the hatches completely, rather firms should continue to look at how they can best use the insight they are gathering to respond quickly and decisively in changing market conditions."

Key findings (all figures are weighted balances, unless otherwise specified):

• Sentiment in the quarter to March fell at its fastest pace since September 2019 (-42% from +15% in December).
• Business volumes growth slowed in the quarter to March (+17% from +42% in December), with firms expecting volumes to be flat (0%) in the next quarter.
• Average spreads declined at a slightly slower pace than the previous quarter (-20% from -28% in December) and are expected to return to growth in the next three months (+12%).
• Value of non-performing loans declined at a broadly similar rate to last quarter (-15% from -18% in December). A return to growth is expected in the next three months (+13%).
• Profitability growth slowed considerably in the quarter to March (+10% from +42% in December) and profits are expected to decline modestly next quarter (-7%).
• Employment was broadly unchanged in the quarter to March (+2% from 0% in December), with headcount expected to grow next quarter (+23%).
• Investment in IT is expected to increase in the next 12 months, albeit to a lesser extent than last quarter (+35% from +46% in December). Investment is expected to be cut back in land & buildings (-40% from -17% in December) and vehicles, plant & machinery (-19% from -16% in December).
• The most common factors likely to limit investment in the next year cited by firms were: uncertainty over demand (37% from 33% in December), inadequate return on investment (32% from 26%) and labour shortages (16% from 31%). The share of firms citing shortage of finance as a potential limiting factor fell sharply from 17% the previous quarter to 2%.

Disruption 

Changes in regulation (77%) and acceleration of digital technologies (74%) were the two most common drivers of disruption – with changes in customer preferences and behaviours (72%) coming a strong third. Employing new technology or adapting existing tech capabilities within their business remains FS firms’ number one response to disruption (83% from 69% in December). With regard to future business strategy and transformation plans, the share of firms reporting achieving operational resilience to be a priority has jumped up from 59% in December 2021 to 92% in March 2022. Advances in tech and business transformation (84% from 76%) and upskilling or reskilling the workforce (82% from 68%) were also commonly cited as priorities.

Technology  

The survey asks financial services firms about their use of technology. When it comes to technology investment, 50% of FS firms said they are in the “transition” stage (i.e., in the process of modernising tech and IT architecture) of realising the benefits made from investment in IT and tech, while 38% are at the “implementation” stage. Understanding customer behaviours and preferences was the most commonly cited value from advancements in AI and analytics (54% from 43% in December). The areas cited by FS firms as most likely to be impacted by automation, standardisation, and FinTech are customer experience (75%), payments (61%), and cyber security (59%).

Cyber security

Firms still expect to invest in cyber security over the next twelve months, albeit to a lesser extent than in the previous quarter (+45% from +54% in December). Placing a greater focus on how to respond to new threats (81%) and improving detection of cyber breaches (71%) were the most common priorities for improving cyber resilience and reducing tech risk.

Upskilling and retraining

The most common workforce priorities for the year ahead are maintaining/achieving high levels of employee engagement (66%) and retaining talent (60%). 42% of FS firms are in the “analysis” stage of their reskilling journey, identifying where skills gaps lie in order to construct a plan. 28% are in the “planning” stage, identifying a reskilling plan but not yet implementing.

The most common objectives from reskilling are improved workforce agility (61%), the financial benefits from maintaining productivity (59%), and better team preparation to deliver strategy (49%).

ESG issues 

Planning practical steps towards achieving net zero goals was identified as the most common climate change priority for FS firms (52%). A standardised governance / reporting framework and ability to track progress was the most common factor needed to deliver the social aspect of firms’ ESG agendas (36%).

D&I 

The most common priorities for D&I over the next 6-12 months were supporting health and wellbeing (60%) and improving ethnic equality (54%).

Digital currencies 

73% of FS firms are not prepared for central bank issued digital currencies becoming mainstream.

Net zero targets

The most common net zero target dates for FS firms are 2030 (30%) and 2050 (27%). The most widely cited challenge when establishing a net zero target was devising a plan on how to reach it (81%). In terms of preparedness for mandatory TCFD disclosures, 28% of firms said they were ‘very’ prepared, 23% ‘fairly’ prepared, and 32% ‘somewhat’ prepared. Only 12% said they were not at all prepared.