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The financial services sector saw business volumes slump at the fastest rate on record alongside a sharp decline in profitability in the three months to June 2020, according to the latest Financial Services Survey from the Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC).

The report stated that in the three months to June, business volumes were on average 12% below those in typical market conditions in the absence of a pandemic. Although building societies had seen a 37% drop, general insurance was down 34% and finance houses had fallen to 33% below normal.

Furthermore, a gloomy economic cocktail of plummeting business volumes, narrowing spreads, and the rise of non-performing loans has meant that profitability began to nosedive at the fastest rate since the financial crash of 2008.

Andrew Kail (pictured above), head of financial services at PwC, explained: "While the financial services sector has been hit less hard than industries such as retail it is no surprise to see levels of optimism decline. Business volumes and margins have inevitably fallen as customer demand has waned. Financial services firms have the weighty responsibility of continuing to serve the needs of key stakeholders including customers, employees and shareholders while working closely with the government to drive the economy.

"The industry has the opportunity and, arguably, the responsibility to evolve itself with refreshed, digitally enhanced and more cost-effective business models. This will allow the sector to generate the returns and the platform to help boost and recapitalise the UK's finances. However key roadblocks - such as the stalemate on a Brexit trade deal for the sector- will need to be resolved."

Looking ahead to Q3, business volumes are expected to stabilise, with 26% of firms expecting volumes to rise next quarter, and 29% expecting them to fall.

Investment intentions

The survey was conducted on 111 firms across the UK between 1-18 June this year and also found that investment intentions for the year ahead remained negative. Company spending on marketing is set to be reduced by 44%, and spending on vehicles, plant and machinery is also expected to be reduced by 27%. The majority of respondents cited uncertainty as the main factor limiting investment.

However, during the year ahead financial services firms expected to raise their spending on IT by 4%, marking the weakest expectations since December 2011.

According to the survey, there were many factors influencing the decision to authorise investment with the main reason – as selected by 63% of respondents – being to increase efficiency. Some of the factors limiting investment cited by respondents included uncertainty about demand and business prospects (55% of respondents), inadequate net return (36%) and shortage of labour (31%).

Central role in recovery

While business volumes are expected to stabilise in the quarter and year ahead, profitability is set to drop at a similar pace. Some 53% of firms reported that profits had decreased in the three months to June, with 13% of firms reporting a rise. This resulted in a balance of -40%, and looking ahead to Q3, profitability is expected to fall at a similar pace of -37%.

Additionally, the value of non-performing loans grew at the same pace as the previous quarter, at +37%. This marks the fastest rise since September 2009, and is expected to grow at a similarly high rate in the coming quarter, at +40%.

Rain Newton-Smith, chief economist at CBI, said: “Financial services have not escaped the fallout of the coronavirus pandemic. Employment, profitability and volumes all fell sharply, with the outlook similarly bleak for the quarter ahead – underlining the need for the Chancellor to restore confidence among lenders, businesses and consumers.

“Government intervention so far has saved countless jobs, yet anxious months for many still lie ahead. Alongside this, it’s important to recognise the central role the financial services sector has played in getting support to firms in need at speed, while dealing with absences and new ways of working. The focus on rescuing viable firms cannot slip while the UK looks to recovery – the further rise in non-performing loans in our survey suggests that many firms remain in distress.

“Ultimately, preserving and creating jobs should form the centrepiece of the Chancellor’s update, with details on further targeted wage support, a new jobs programme and more funding for future skills in areas such as digital, low carbon and health.”

Resilience in the face of challenges

According to the survey, some 53% of financial services firms did not feel that any further measures were needed to address their business’ funding challenges. Although 31% suggested an extension of business rates relief to all businesses would be productive and the rest cited other tax holidays (14%) and grant funding (14%).

While a select few key operational challenges remain for financial services firms in restarting their businesses – namely workforce absences due to school closures (42%) and transport difficulties (37%) – the majority stated that their business could remain operational under the new requirements.

For example, despite the added strain of social distancing in the workplace, 31% of respondents stated it was “totally feasible” to remain operational, 46% said it was “very feasible”, 22% selected “feasible”, while the remaining 1% said it was “not very feasible”.

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