Profitability remains strong as financial services firms focus on costs – CBI/PwC

The survey of 100 financial services firms reported that the overall level of business remained “above normal”, despite the fact that the level of business with overseas customers fell below normal to the greatest extent for three years.

The quarterly survey also found that optimism within financial services rose only slightly, following more robust increases in the first half of 2015.

Strong competition is bearing down on incomes, though tight cost control is helping to support growth in profitability.

Looking ahead, weaker growth in business volumes, flat income and rising costs are expected cause growth in profits to ease in the run up to March.

Meanwhile, employment prospects remain mixed, with banks reporting falling employment, compared with solid growth in headcount in the insurance and building society sectors. Overall, expenditure on training rose strongly in the three months to December.

Allan McGrath, financial services partner, PwC in Scotland, said: “While optimism continues to be muted across the industry, with each sector experiencing its own challenges, there are some glimmers of light.

“As firms face up to the rising threat from new, agile competitors, we’re seeing IT investment shift from regulatory spend to front line systems. The spotlight on new products is also intensifying, with the survey revealing an emerging trend in investment in this area.

“Nevertheless, cost reduction remains a significant issue alongside ongoing low interest rates and stock market volatility.

“Financial Services organisations are also dealing with the growing spectre of cyber-crime and the ongoing threat of major attacks. According to recent research, fears of cyber-crime have eclipsed regulatory challenges for the first time in a list of 24 possible risks to banks.

“Add to this the recent storms and floods, with insured losses estimated to reach up to £350m in Scotland and £1.4bn in the UK, and it’s perhaps not surprising that there is increased pessimism in some organisations compared to this time last year.”

Rain Newton-Smith, CBI Director for Economics, said: “Despite strong growth in profitability driven by easing cost pressures and increasing business volumes, the financial services industry is alive to downside risks from developments overseas. The global economic outlook remains uncertain while China rebalances, which is having knock-on effects on emerging markets, amidst continued unrest in the Middle East.

“While investment intentions remain robust in IT, and marketing spend is set to expand as firms seek new customers, elsewhere companies are curtailing their capital spending due to poor returns.

“There is a great deal of uncertainty within the financial services industry over the impact of Fintech. Firms in most sectors are looking to upgrade their own platforms over the next five years rather than acquire Fintech firms. However, partnerships with Fintech firms are seen as a high priority by companies in some sectors, particularly finance houses, insurance brokers and investment managers.”