The UK’s financial services sector, a broad-based term including everything from building societies to investment managers, have seen their business volumes decline sharply as a result of the COVID-19 pandemic.
A survey conducted by the Confederation of British Industry (CBI) and PwC found that business volumes were down on average by 12 percent compared to ‘normal’ times, ie in the absence of a pandemic.
Given that the UK’s known for its financial services sector, this is a worrying development. The sector has already been hit by Brexit uncertainties, with some banks moving offices to continental Europe, such as HSBC moving seven of its Europe-focused offices to Paris. Asset managers had largely chosen Dublin as its European headquarters with US firms in particular finding the culture more amenable.
The survey found that profitability ‘nosedived’ among financial services firms at its fastest rate since the global financial crisis. One of banks biggest fears, non-performing loans, are on the rise again and may turn into impairments (written off debts) soon.
Generally, optimism about the sector’s overall business situation fell for a second consecutive quarter albeit at slower pace than the three months to March.
Employment within financial services fell at its quickest rate since 2010, with only building societies and general insurers bucking the trend as numbers of employees stayed the same. This was in line with expectations according to the CBI and PwC.
All in all a rather bleak picture and one that doesn’t look like it’s going to improve anytime soon. Moreover, the report states that while business volumes are expected to stabilise, profitability is set to drop at a similar pace in the next three months, while the fall in employment is even tipped to accelerate slightly.
The fallout from this gloomy context is firms tightening their purse strings when it comes to investment. This is across the board, as spending on marketing is set to be cut back to the greatest extent since 2009, while expenditure on land and buildings and vehicles, plant and machinery is also expected to be reduced once again. IT spending is tipped to increase only very slightly, marking the weakest expectations since December 2011. Uncertainty about demand was cited as the main factor limiting investment.
Rain Newton-Smith, CBI Chief Economist, said in a statement: “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.”
Andrew Kail, Head of Financial Services at PwC, offered a hint of optimism. He added: "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."