Financial services growth slows as global volatility increases - CBI/PwC

Overall business volumes rose at their slowest pace in two years, following nearly two years of robust expansion.

But building societies & finance houses and life insurance business volumes continued to grow at a healthy pace, the latter for a fifth consecutive quarter. Financial services firms expect growth to tick up in the next three months, but to remain below the strong growth seen earlier in the year.

Optimism about the overall business situation was stable, after more than two and half years of continuous improvement.

Strong competition seems to have had a knock-on effect on income growth for financial services firms, bearing down on fees & commissions as well as net interest, investment and trading income. But with average costs under control, profitability grew at a healthy pace, albeit somewhat slower than in recent quarters.

Fraser Wilson, financial services partner, PwC in Scotland, said: “Emerging macro-economic factors in recent months, from global stock market turmoil to the economic slowdown in China, appear to have tempered previous levels of optimism. As a result the industry, both in Scotland and across the UK, is being more cautious on its short-term growth prospects.

“And with interest rates likely to remain at historically low levels, growth for UK banks remains challenging as we head into 2016.

“We’re seeing an increasing focus on technology investment as banks and insurers across Scotland deal with the demands for greater efficiency and ongoing regulatory compliance. With technology becoming an increasingly disruptive force, FinTech is emerging as a significant opportunity, although some risks prevail with many in the industry still unclear as to how it will impact their business model.

“As we have seen in the past, Scotland is well placed to benefit from new market entrants. With growing evidence of an increased FinTech presence, Scotland not only has the opportunity to help shape this market but to nurture new industry leaders as they emerge.”

Numbers employed dropped slightly on the previous quarter, but remained higher than was seen at the beginning of the year. With profit growth tipped to slow further, firms do not envisage any increase in headcount over the coming three months, but will continue to spend more on training.

Firms plan to scale back investment in most other areas, including marketing, land and buildings (where investment intentions are at their lowest since March 2009) and vehicles, plant & machinery, but will continue to grow robustly in information technology. The principal reasons financial services firms gave for any further investment were the need to increase efficiency and speed, followed by statutory legislation and regulation, the latter being a survey record high. Meanwhile, concern that a shortage of finance and labour could constrain investment rose to highs last seen during the financial crisis.

A record two thirds of firms believe that competition is likely to come from new entrants to the sector, and the rise of Financial Technology (or FinTech - software providing financial services) could have an impact on firms’ profitability. Life insurance firms see it as an opportunity, but other sectors remain uncertain of its impact, or even view it as a threat to their profits.

Rain Newton-Smith, CBI Director of Economics, said: “The winds of volatility blowing through global markets have left a clear mark on the financial services sector, impacting business volumes and investment intentions, particularly in investment management and securities trading.

“Nevertheless, building societies’ business volumes have rebounded, and with financial sector costs under control, profitability is in good shape. At the same time, investment in IT is set to increase as firms aim to improve efficiency.

“Slower growth in China and other emerging markets has had a knock-on impact on confidence in the world economy, with the Federal Reserve holding off raising interest rates in the United States.

“It’s interesting to see that the sector is waking up to the impact of FinTech. Firms will need to look carefully at their operations and put strategies in place in order to profit from or protect against the impact of new technologies.”