Financial sector firms are hiring again and profit growth is rising strongly, according to quarterly survey results issued by the Confederation of British Industry and PricewaterhouseCoopers.

Financial sector firms are hiring again and profit growth is rising strongly, according to quarterly survey results issued by the Confederation of British Industry and PricewaterhouseCoopers today.

Business volumes grew at their fastest rate since 2007 and the momentum is expected to continue into the coming quarter. Rising volumes helped push up overall profitability, which bounced back after the previous quarter’s contraction, and business volumes are predicted to grow strongly again in the next quarter, the report said.

Some 60 per cent of firms said that business volumes were up, while 11 per cent said they were down, giving a balance of +49 per cent, the strongest reading since 2007 (+51 per cent).

Looking ahead to the next quarter, 63 per cent of firms expect business volumes to increase, while 8 per cent say they will decrease, giving a balance of +55 per cent, which is the strongest expectation for growth since June 2010 (+63 per cent)

The evidence appears to chime with findings issued from recruiter Astbury Marsden, which has reported that recruitment activity in London’s financial sector bounced in September, with the number of new jobs created surging by 34 per cent.

The report did not disclose performance of the private banking/wealth management industry as a discrete sector, but the overall results may be indicative of health in this area. According to last week’s inaugural survey of the UK wealth industry from the British Bankers Association, the sector contributed £3.2 billion ($5.14 billion) in value-added contribution to UK domestic product last year; indirectly and directly, the sector creates over 65,000 jobs in the country.

The CBI/PwC report said profits rose robustly despite a spike in costs and will grow at a similar rate in the next quarter. But while costs rose at a record pace, this was off-set by a drop in the value of non-performing loans, which fell at the fastest rate since 1996.

Looking ahead, firms say statutory legislation/regulation and competition are likely to be the biggest constraints on business over the coming year, while concerns about level of demand have dropped off sharply.

“With competition one of the top concerns for the coming year, the sector could be moving to a new phase in the recovery where firms are feeling more assured about the level of demand, and are now shifting their gaze to competing for new customers and business. This is reflected in their expectation that sales to new customers will be the main driver of growth in the coming quarter,” Rain Newton-Smith, CBI Director for Economics, said.

“Worries about the impact of legislation at home and from Europe, such as new capital requirements and the prospect of a financial transaction tax, are also increasingly weighing on the sector. However, with strong broad-based growth, financial services firms are relatively upbeat about future prospects, despite some big geo-political risks that remain on the horizon,” Newton-Smith said.

Firms saw a return to hiring following last quarter’s unexpected fall in headcount, but this is expected to stabilise in the next quarter. Taking into account long-run trends, the latest survey results suggest that employment in financial & insurance activities is forecast to stand a little above 1.152 million by the end of Q4 2014, or 28,000 higher than at the end of 2013.

Investment intentions are mixed with more spending slated on marketing and information technology for the year ahead, but investment in vehicles, plant and machinery is still due to be scaled back.

Growth in optimism about the overall business situation has been easing since the start of the year, perhaps reflecting uncertainty about the outcome of the Scottish referendum - which fell after the survey period - and the situation in the Middle East and Ukraine. However, optimism has still risen at an above-average pace.

The survey of 109 firms operating across the sector was carried out between August 18th and September 4th.

Findings
Among other details, the survey found that 21 per cent of firms said they felt more optimistic about the overall business situation compared with three months ago, while 7 per cent said they were less optimistic, giving a balance of +14 per cent, compared with +28 per cent in June.

Overall profitability bounced back from the fall last quarter, with 60 per cent reporting a rise, and 8 per cent a fall, giving a balance of +52 per cent, the fastest growth since March 2011 (62 per cent). A similar rate of growth is expected next quarter (+53 per cent).

Income from fees, commissions or premiums fell unexpectedly in the three months to September (-27 per cent) at the fastest rate since March 2009 (-53 per cent). That disappointed expectations of growth (+12 per cent) and fee/commission income is expected to fall again in the coming quarter (-22 per cent).

Income from net interest, investment or trading rose more strongly than expected (+34 per cent) and is predicted to see similar growth in the coming quarter (+35 per cent).

Total operating costs spiked sharply (+53 per cent), raising at the fastest pace since the survey began (in December 1989), which also pushed up average operating costs per transaction sharply (+43 per cent - again, the fastest rise on record).

Some 24 per cent of financial services firms said they increased employment, while 7 per cent said that it had decreased, giving a balance of +17 per cent.

Investment prospects are mixed among financial services companies, with firms planning to increase their marketing and IT spend over the next 12 months but scale back on vehicles, plant & machinery.