Financial firms under pressure from China crisis and interest rate uncertainty

Global volatility has battered the optimism and growth prospects of the UK?s major banks.

Growth in business volumes for financial services firms, such as banks and insurance companies, slowed in the three months to September, as optimism levelled out, according to the latest CBI/PwC “Financial Services Survey”.

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.

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, financial service firms did 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 and vehicles, and plant and machinery, but will continue to grow robustly in information technology.

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.

?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,? said Rain Newton-Smith, CBI director of economics.

?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 US. 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.?

Kevin Burrowes, UK financial services leader at PwC, added: ?Business confidence among banks flat-lined in the quarter leading to September 2015, leaving the sector cautious over its short-term outlook. Recent macro-economic events such as the fall in oil prices, China?s ‘black Monday’, and the ongoing turmoil in global stock markets might have fuelled this sentiment. 

“With interest rates expected to remain on hold, growth for UK banks continues to be challenging. There is a looming question around how fintech could disrupt the sector. Most banks, 94 per cent, recognise that competition is coming from a new breed of institutions entering the industry but seem unsure of their impact. Fintech is a huge opportunity for the industry and the winners will be those who use it to better meet changing customer needs and grow their businesses in new ways.?

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