Sentiment recovers but outlook for financial services firms remains gloomy – CBI/PWC Financial Services Survey

Sentiment among financial services recovered in the three months to December (+10% from -55% in September), despite gloomy expectations for activity in the quarter ahead, according to the latest CBI/PwC Financial Services Survey.  

The quarterly survey, conducted between 22 November and 9 December 2022 with 95 respondents, found that business volumes grew at a solid rate in the quarter to December (+24% from +31% in September). Employment growth recovered to a firm pace (+23% from -8% in September), while profitability was flat (-1% from +24% in September). 

Looking ahead to the next three months, FS firms expect business volumes (-28%) and profitability (-26%) to decline. Headcount is anticipated to be unchanged (0%). 

The outlook for investment over the next year is mixed. While IT investment is set to grow over the next 12 months (compared to the previous 12), capital expenditures on land & buildings and vehicles, plant & machinery are anticipated to decline. 

Uncertainty about demand was the key factor weighing on investment intentions in the year ahead (34% of firms from 17% in September).  

Over 2023, the key trends driving disruption for firms are expected to be changes in regulation (85% of firms), high inflation (79%), and accelerations in digital technologies (70%). With the cost-of-living crisis spilling into the new year, the survey found that over two-thirds (70%) of financial service firms have initiatives to support consumer and/or commercial clients with inflation.   

Rain Newton-Smith, CBI Chief Economist, said:  

“It’s good to see optimism return to financial services in Q4. Unfortunately, this may prove to be short-lived as FS firms’ predictions look bleaker going forward, with business volumes and profitability set to fall over the next quarter.

“All eyes are now on the upcoming Spring Budget to see if the Chancellor can build on the stability provided by the Autumn Statement and deliver a concrete plan for growth.

“A fit and firing financial services sector is vital to the UK’s long-term economic success – that’s why we need business and government working together to safeguard the industry’s global competitiveness.”

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

"Despite the uptick in sentiment, it seems that this quarter's results reflect the gloomy forecasts we've been seeing, with firms mindful of the ongoing impact of the cost-of-living crisis especially as our research showed that the total amount of unsecured debt now exceeds £16,000 per household. 

"However, the Edinburgh Reforms announcement has brought increased clarity for the sector on the UK’s regulatory agenda and the Government’s focus on green finance, technology and removing unnecessary regulatory burdens will no doubt be welcomed.  

"As we go into 2023 following a period of relative stability for the industry, the focus will now be on ensuring that while economic conditions remain challenging, firms will continue to support both customers and employees through what may be another difficult year." 

Key findings:

• Sentiment increased in the quarter to December (+10%) following a quick decline last quarter (-55% in September).
• Business volumes grew at a solid rate in the quarter to December (+24% from +31% in September). However, financial service firms expect volumes to decline next quarter (-28%).
• Average spreads were broadly unchanged in the three months to December (+2% from -31% in September) but are expected to fall again next quarter (-20%).
• The value of non-performing loans was flat for the second quarter in a row (0% from 0% in September) but is anticipated to grow next quarter (+23%).
• Profitability was broadly unchanged in the quarter to December (-1% from +24% in September). Firms expect profitability to decline in the next three months (-26%).
• Employment growth recovered following last quarter’s decline (+23% from -8% in September). Numbers employed are anticipated to be unchanged next quarter (0%).
• Firms expect to increase investment in IT over the next 12 months (compared to the last 12), while capital expenditure on land & buildings and vehicles, plant & machinery is anticipated to decline.
  • The most common factor likely to limit investment next year is uncertainty about demand (34% from 17% in September). 

Disruption 

The key trends driving disruption for FS firms over the coming year are changes in regulation (85% of companies), high inflation (79%), and accelerations in digital technologies (70%). 

Firms are responding to disruption from employing new technology or adapting tech capabilities within their business (89% of companies), upskilling the existing workforce (84%), and reducing costs (60%). 

The most common priorities for future business strategy and transformation plans are achieving operational resilience (86% of companies), upskilling or reskilling the workforce (78%), and advances in technology and business transformation (69%). 

Technology 

Almost 8 in 10 (79%) financial service firms are in the “transition” stage (i.e. the process of modernising technology and IT architecture) of realising the benefits made from investment in IT and technology. 

65% of FS firms think the most value to be gained from advances in AI and analytics is through understanding customers and their behaviours/preferences (65%). 

92% of FS firms think customer experience is one of the areas most likely to be impacted by automation, standardisation, and FinTech. 

Cyber security 

Firms expect to increase investment in cyber security in the next 12 months (compared to the previous 12) to a greater degree than last quarter (+46% from +5% in September). 

The most common priorities for improving cyber resilience and reducing tech risk are placing a greater focus on how to respond to new/emerging threats (85% of firms) and improving the reporting and mitigation of a cyber risk (75%). 

Upskilling/reskilling 

Firms’ key workforce priorities for the year ahead include supporting employee financial wellbeing (59% of firms), maintaining/achieving high levels of employee engagement (55%), and reskilling the workforce (53%).  

The most common objectives from reskilling are improved workforce agility (76% of firms), increased staff retention (61%), and cost savings instead of making staff redundant (50%). 

ESG 

The most common climate change priorities over the next three months are planning practical steps towards achieving net zero goals (57% of firms) and accelerating green financing options and products (47%).  

D&I 

The most common priorities for D&I over the next 6-12 months are improving ethnic equality (67% of firms), improving inclusivity (49%), and supporting health & wellbeing (49%). 

Cost of living 

A combined 70% of financial service firms have initiatives to support consumer and/or commercial clients with the cost of living / cost of doing business.  

Financial wellbeing 

76% of firms think that organisations in their sector can support consumers through early identification and support for customers facing hardship.