Financial Institutions Sentiment Survey 2020
Insights and expectations from across the sector
Financial Institutions Sentiment
Insights and expectations
from across the sector
Head of Financial Services
Lloyds Bank Commercial Banking
The report gathers the views of more than 100 senior decision-makers at banks, asset and wealth management firms, insurers and intermediaries to get under the skin of the issues that have driven the sector in the last year, as well as those setting the agenda for the year ahead.
Clearly, 2020 has been a year unlike any other. Covid-19 had an immediate and devastating impact on the global economy, with the lockdowns necessary to avoid an escalating health disaster resulting in many economies, including the UK, entering recession.
At the time of writing, while the UK and other advanced economies have passed the initial peak of the pandemic, the speed and extent of economic recovery remains highly uncertain, particularly with regard to consumer behaviour and employment.
While some of the most immediate economic consequences of the outbreak have been mitigated by swift government intervention on an unprecedented scale, the more enduring outcomes are harder to predict.
If there is one word that has come to dominate discussions of the UK’s outlook in recent years, it has been 'uncertainty'.
Accurate forecasting was already difficult with the UK scheduled to leave its Transition Period with the European Union at the end of 2020 with no trade deal yet agreed at the time of writing. Covid-19 has compounded those difficulties.
Most firms have become less optimistic, but it is perhaps heartening to see that the majority still expect to maintain or grow revenues and jobs in the year ahead. The UK financial services industry is rightly renowned for its initiative, innovation and international outlook.
I’m confident that whatever challenges the coming year may bring, our industry’s focus on technology, sustainability and mitigating risk will help to ensure that the nation retains its position at the top table of global finance.
Three key themes
Despite a sharp decline in the economic backdrop, most financial services firms still expect to maintain or grow both revenue and jobs in the year ahead
Nearly nine out of 10 firms said their top strategic priority for the next year was technology investment
Sustainable investments provide an opportunity for growth after outperforming the wider market during the pandemic
Results at a ***Glance***
Results at a Glance
A summary of key insights and expectations for 2020 and beyond from senior decision-makers in the UK financial services sector:
Expect economic growth to worsen
Financial services sector
Expect sector growth to worsen
Top three areas for technology investment:
Top three reasons for increasing environmental sustainability or sustainable finance:
Due to the Covid-19 pandemic, economies across the developed world have experienced their sharpest contraction in decades during the first half of 2020.
Indeed, none of us have seen anything like it in our lifetimes.
UK economic growth was already lacklustre - the economy grew by 1.4% in 2019, up slightly from 1.3% in 2018 - but GDP plummeted by 20.4% in the second quarter of 2020, according to the Office for National Statistics (ONS).
This is the largest quarterly contraction in the UK economy since ONS quarterly records began in 1955, plunging the UK into the deepest recession of the G7 and more than twice as deep as that of the US.
That impact was clearly reflected in our survey of decision-makers at institutions from global banks and insurers to intermediaries, investors and asset managers, which was conducted between July 7 and 31.
Nine in 10 (92%) said they have become less optimistic about the UK economy in the last year, compared to 62% in 2019.
Tellingly, the percentage of respondents who said they were significantly less optimistic grew almost tenfold, from 4% to 39%.
However, as lockdown restrictions were eased, official monthly GDP data up to June showed the economy having already clawed back around one-third of the decline in activity caused by the lockdown.
The Bank of England’s Monetary Policy Report in August included a projection that the UK economy could expand by 20% in H2 2020.
68% expect growth in the UK economy to worsen over the next 12 months.
(2018: 29%, 2019: 58%)
Nevertheless, the more circumspect will have observed that even if recent Bank of England projections for economic expansion of over 20% in the second half of 2020 are realised, that will still leave GDP around 5.5% below the pre-virus peak, similar to the trough in the 2008-09 financial crisis.
When comparing the UK to its peers, almost half (48%) expect the UK’s economic growth will be in line with or stronger than other G7 countries in the next 12 months. In 2019, only a third felt the same way.
Broadly that reflects International Monetary Fund GDP projections for 2020, which show the UK ahead of France and Italy but behind Germany, the US, Canada and Japan.
Focus on financial services
Turning to the financial services sector, while sentiment has worsened, respondents’ views are somewhat more positive than those on the wider economy.
This tallies with the Bank of England’s assertion in August’s Monetary Policy Report that, while risks are rising for UK banks, they remain resilient.
Turning to the financial services sector, respondents’ views are somewhat more positive than those on the wider economy"
The number of respondents to this survey who expect the sector’s growth to worsen grew only slightly from 55% last year to 62%, while those forecasting an improvement doubled from 6% to 13%.
But overall optimism about the prospects for financial services firms has declined year-on-year, largely due to a big drop in those with an expectation of stability, which fell from 42% last year to 22%.
At the same time, the proportion of those who labelled themselves significantly less optimistic grew from 2% to 15%.
However, the financial services sector has operated during the pandemic with the comparative advantage of offering products that can increasingly be delivered without social contact, an advantage which could be embedded with further investment in technology.
Turning to the financial services sector, respondents’ views are somewhat more positive than those on the wider economy
Over the last 12 months, has your outlook for the UK financial services sector changed?
*Figures subject to rounding
Faced with ever-growing levels of economic and political uncertainty, it should come as no surprise that firms displayed a varied range of views on their prospects for the next 12 months.
The UK’s financial services industry is incredibly vibrant. The prospects for different parts of the sector will be affected by an equally diverse set of challenges.
For example, wealth and asset managers have experienced outflows but also achieved a revenue boost through strong equity market rebounds, while the Association of British Insurers recently estimated that the impact of Covid-19 will cost the UK insurance sector alone £1.7bn.
Collectively, while the sector has become less optimistic about revenue growth, return on investment and job creation, more than half still expect to maintain or increase revenue.
Given the expectation of further economic disruption, it is encouraging that 62% still expect to maintain or grow revenues in the year ahead, though this figure was down from 80% in last year’s survey and 87% in 2018.
Delving deeper, firms were fairly evenly split on their revenue forecasts – 38% expect a decrease, 30% no change and 32% an increase.
What are your firm’s top strategic priorities over the next
*Figures subject to rounding
While two in five (40%) expect return on equity to fall – almost double the 21% who held the same view in both 2019 and 2018 – 21% predict it will increase in the year ahead.
Over half (55%) expect no material change to investment in their UK business, with two thirds (64%) expecting to maintain or grow their UK workforce. However, over a third (36%) are now planning to cut jobs, up from a fifth (20%) last year.
62% expect to maintain or grow revenues in the next 12 months
And while a significant 36% anticipate operating costs will fall in the year ahead, the largest proportion – 43% – expect no material change, highlighting the steps many firms have taken to make their business more resilient to future shocks in the wake of Covid-19.
At the time of writing, interest rates stand at just 0.1% and the majority of respondents appear to believe that is unlikely to change significantly in the year ahead, with 56% forecasting no material change to the cost of capital.
That comes as no surprise, given that central banks around the world have clearly signalled their intention to use monetary policy to help offset the impact of Covid-19 for as long as required with the prevailing view among economists that interest rate rises in the G7 are unlikely until 2022.
Running the risk
When asked to identify the most significant risks to their UK business, the Covid-19 pandemic was the most common response, cited by 62%.
While banks’ capital ratios have improved significantly since the last financial crisis in 2008, the economic shock of lockdown will undoubtedly have increased the risk of future credit losses for lenders.
The second-biggest potential threat, flagged by 58% of respondents in July, was a UK economic downturn, although this is also clearly linked to the impact of Covid-19.
Official data released in August confirmed that the UK economy, alongside the US and eurozone, was in sharp recession.
The nature and timing of the recovery are more difficult to predict.
Although the data does not allow direct comparisons with last year’s report on the question of risk, it’s notable that the number of firms flagging the threat posed by Brexit was 40% this year, down from 58% in 2019. This likely reflects advances in firms’ preparations since last year’s survey and/or that Covid-19 has supplanted leaving the EU as their primary worry.
An ever-growing proportion of firms recognise the risk from cybercrime, which has risen to 38% from 29% last year and just 17% in 2018.
That underlines the truly global threat that cybercrime represents, which has been exacerbated during lockdown. One survey1 found 53% of IT security professionals reporting an increase in cyberattacks exploiting Covid-19, with financial services the most commonly targeted sector, receiving 51% of attacks.
Accordingly, almost nine in 10 (88%) firms said their top strategic priority for the next 12 months was technology investment.
This not only highlights firms’ ongoing efforts to make themselves more resilient to another shock like Covid-19, including enabling secure remote working and providing alternative distribution channels for customers, but also moves to modernise and remain competitive.
What are the most significant risks to your UK business over the next 12 months?
*Figures subject to rounding
The Covid-19 Pandemic
Firms told us that they believe the coronavirus pandemic is the biggest risk to their business in the coming year.
It has demanded a decisive response. The Financial Conduct Authority was on the front foot in early March, warning firms that it would work with the Bank of England to review their contingency plans, including their ability to continue operating effectively and the steps being taken to serve and support customers.
This focus on the fundamentals could have shaped firms’ tactical response to the outbreak, which saw two in five (43%) businesses freeze or cancel planned recruitment and more than a third (36%) moving to reprioritise their business plans.
The increased spend reported by 30% of firms likely reflects investment in technology to bolster their operational resilience and enable staff to productively and securely work from home.
A fifth (20%) of respondents surveyed said they had suspended dividends or share buyback schemes, as recommended by the European Central Bank and Bank of England in March.
Firms were also asked how, in the longer term, they would change their business practices in response to the pandemic. Their responses were largely focused on more flexible working practices, facilitated by investment in technology.
Each of the top four responses were selected by more than two thirds of the firms surveyed. They planned to increase flexibility of colleagues’ working patterns (89%), use more digital methods of communication (81%), embrace technologies to transform or automate their business (68%) and reduce corporate travel (68%).
This is evidence of a sustained shift towards agile working practices in the sector, as some of the UK’s biggest financial services businesses set out their stall for the future. Schroders and PwC both recently announced they would make the option of home working a permanent fixture of their flexible staff working arrangements.
So, it was perhaps surprising to see that, in response to the challenges of working remotely, just 28% of firms also flagged that they would increase pastoral care for colleagues.
Given that employee wellbeing has become an increasingly important focus for businesses in recent times, it can be anticipated that more firms will follow suit.
In the longer term, how will your business change or behave differently post Covid-19?
*Figures subject to rounding
Brexit preparations and the pandemic
But what impact has the pandemic had on the sector’s preparations for Britain’s exit from the Transition Period with the European Union on December 31, 2020?
Given that this was originally scheduled for March 2019 and has now been postponed three times, it’s reassuring that 90% of the firms surveyed reported that their Brexit preparations were on track, with just 7% saying Covid-19 had caused delays.
90% say their Brexit preparations are on track
This is likely evidence of the sector’s advanced Brexit preparations compared with other sectors, reflecting longstanding concerns over the potential for market disruption.
And while a third (33%) said the pandemic had made their firm less optimistic about the outcome of Brexit, almost twice as many (64%) said Covid-19 hadn’t affected their outlook.
What tactical steps has your business taken in response to Covid-19?
(Top 10 answers)
*Figures subject to rounding
Technology and Payment *Innovation*
Technology and Payment Innovation
Across the UK economy, the coronavirus pandemic has accelerated firms’ ongoing digital transformation, and the financial services sector is no different.
Looking forward, 62% of the firms surveyed said they would grow investment in technology and core systems over the next year as they work to drive efficiency and grow market share in an increasingly competitive environment by simplifying client journeys and addressing their behavioural requirements.
Many financial services firms’ tech investment will have been diverted to fixing or improving core platforms to enable new ways of interacting with customers and enhancing their digital journeys.
Across the sector, a focus on cybersecurity goes hand-in-hand with this digital transformation and indeed firms’ top three investment priorities remain unchanged year-on-year: cyber security, the cloud and Application Programming Interfaces (APIs) - software that can enable third parties to access data that will let them build new solutions such as synchronous, around the clock, payment methods.
It’s notable that the buzz around blockchain has faded in the past year, with a quarter (27%) now prioritising investment in that field, down from a third (35%) last year. 2019 was a bumper year for blockchain acquisition, suggesting that across 2020-21 firms will be embedding and driving value from previous investments.
71% are increasing their technology investment to improve productivity
Those firms planning to grow their tech investment told us they are aiming primarily to improve their productivity (71%), provide a better client experience (70%), drive growth (51%) and achieve a competitive advantage over rivals (50%).
Almost as many (47%) said they were investing to increase their operational resilience to threats like Covid-19 and boost their cyber security (46%).
Despite reports that investment in the UK fintech sector has slowed by more than a third in the first half of 20202, a third (32%) said they would seek to boost their fintech capability by increasing investment in acquisitions and partnering, though 61% said this activity would remain broadly the same.
This underlines how financial institutions still recognise how agile smaller firms and start-ups are often well placed to innovate disruptive fintech solutions that can accelerate digital transformation, increase revenue and create efficiencies.
Focus on payments
In July, Lloyds Bank announced a strategic partnership with Form3, a cloud-native payment technology fintech. This partnership will develop a Payments-as-a-Service platform which has the potential to significantly accelerate its transformation, create more efficient processes and enhance the digital experience for its customers3.
When firms were asked what payment market innovations they thought would deliver the most business growth over the next three years, open banking and APIs led the field, cited by 60% of respondents.
This was followed by alternative payment acceptances like QR codes and Pay by URL (51%), data formats and analytics (34%) and digital currencies (22%).
How do you see your firm prioritising investments in the following technologies/use cases in the future?
*Figures subject to rounding
The financial services sector’s commitment to sustainability is sincere and substantial, but our survey found that in many ways it is still evolving.
Firms told us that, so far, their sustainability strategies have been primarily motivated by a genuine desire to do – and be seen to be doing – the right thing.
The top three reasons they gave for increasing their environmental sustainability or sustainable finance offering were reputation and brand advocacy (72%), board or management team focus (69%) and engagement from investors or shareholders (60%).
It is notable that only 35% said that risk mitigation was driving them, despite the substantial physical, transition and reputational risks arising from sustainability, as well as the increasing drive for transparency through bodies such as the Taskforce on Climate Related Financial Disclosures.
And only 18% said they were motivated by improving returns. However, studies show that a majority of sustainable funds have actually outperformed the wider market, offering better average returns than their traditional peers in recent years.
That outperformance has continued during the coronavirus crisis, in part because sustainable funds favour tech stocks and shun companies trading in non-renewable fossil fuels, which have been badly affected by lockdown4.
Could Covid-19 therefore prove to be a tipping point that will lead to more responsible investing?
80% said finding people with relevant skills and expertise was a challenge to growing their sustainable finance assets
Investor groups have joined campaigners in calling on governments to ensure their Covid-19 recovery plans are sustainable, supporting the move to a low-carbon global economy as laid out in the Paris climate accord.
When firms were asked about the challenges to growing their sustainable finance assets in 2019, 62% suggested a lack of investor demand. This has fallen to 45% in this year’s survey, showing a potentially interesting change of pace in consumer attitudes.
A more pressing headwind was finding the right people with relevant skills and expertise.
This skills shortage was identified as the biggest challenge to growing sustainable assets by four in five firms (80%), up from three quarters (75%) last year.
That might help to explain why 41% of firms said they had no plans to access green, social or sustainable investments in the next year, 49% said they would not be using green bonds or lending and 55% were not planning sustainable deposits.
It’s noteworthy, however, to see that seven in 10 (71%) respondents said governance around environmental sustainability was a priority, suggesting that it is core to their overall strategy and accountability.
And the same proportion are also looking at their own operational footprint to reduce the environmental impact of their activities.
What is driving your business to increase environmental sustainability or sustainable finance?
*Figures subject to rounding
What sustainable finance products and services does your business use now or want to access in the next 12 months?
*Figures subject to rounding
At Lloyds Bank, reducing the carbon footprint of our own operations is a critical element of our sustainability strategy.
We have reduced our own carbon emissions by 63% since 2009 and continue to work towards achieving our long-term target, to reduce our carbon emissions by 80% by 2050.
Though 72% of respondents said Covid-19 was a challenge to growing their sustainable finance assets, 63% said it wouldn’t change their focus on sustainability, clearly reflecting how the issue is now embedded into firms’ long-term business plans.
A fifth (21%) said the outbreak would actually increase their focus on, and implementation of, environmental sustainability and sustainable finance activities over the next three years.
While both the business and moral case for sustainable finance now appears clear cut, time will tell whether one of the enduring consequences of coronavirus will be an increased focus on corporate responsibility and sustainable investing.
Financial institutions have an opportunity to collaborate and lead systemic changes that are needed to support this transition.
Head of Financial Services
When we look back on 2020, inevitably it will be a year shaped by what we have lost.
The Covid-19 pandemic has taken a heart-breaking toll on the health and lives of friends and family, and the economic impact will bring hardship for many more.
The outbreak pushed the economy into its largest recession on modern record, though at the time of writing there are some potentially promising, early, indicators of recovery.
And this is not the only test we face.
At the end of 2020, the UK is set to have a new trading relationship with the European Union, with all the uncertainty and opportunity that entails.
The financial services sector is a key driver of the British economy and, as such, has the potential to lead Britain’s bounce back from these unprecedented challenges.
As employers, investors and responsible corporate citizens, we see that firms across the country are working hard to ensure they can continue to support their colleagues, create opportunities and foster prosperity.
This report reassures us that we, as financial institutions, are responding to all the challenges of the modern world with our eyes open and clearly focused on the prize of recovery.
We are building organisations that are resilient, robust and ready for the future. We are all focused on innovating, forming partnerships and pushing the boundaries to deliver new ways of doing business and more value for our shared clients.
At Lloyds Bank, we believe the industry focus on technology, productivity and sustainability will see us all through the current crisis, ready to lead the UK back to growth.
To gather representative data, financial decision makers at a cross section of 107 UK financial institutions were surveyed between 7 July and 31 July 2020
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