CBI: Optimism continues to fall, as challenges increase for Financial Services

26 Sep 2016 12:50 PM

Sentiment in the financial services sector deteriorated in the three months to September, as firms digested the challenges of lower interest rates and the uncertainty caused by the vote to leave the European Union, according to the latest CBI/PwC Financial Services Survey.

Image of Optimism continues to fall, as challenges increase for Financial Services – CBI/PwC

The quarterly survey of 115 firms – the first since the Brexit vote – found that optimism about the overall business situation fell for the third consecutive quarter, which was the longest period of declining sentiment since the depths of the financial crisis in early 2009. Optimism was broadly stable in the life & general insurance sectors and fell only slightly among banks, but it deteriorated sharply among finance houses, building societies & investment managers.

Meanwhile, firms saw healthy growth in overall business volumes in the three months to September, with only finance houses reporting a drop in activity. Growth in overall business volumes is expected to slow in the coming quarter, but to remain decent from a long-run perspective.

Growth in profits also picked up in the quarter to September, having slowed over the previous year, but is expected to ease back again over the next quarter.

Asked about the effect of the UK’s vote to leave the EU, just over half of all financial services firms said the general impact of the vote was negative, whereas only around one in ten firms pointed to a positive impact. The main cause for concern was market volatility, with just under three quarters of firms reporting a negative impact in this area. In the wake of the vote, the top three risks facing financial services firms are: the impact on the economy; changes in access to EU markets; and the prospect of lower yields.

Rain Newton-Smith, CBI Chief Economist, said:

“As firms get back into the swing of things after the summer, and continue to digest the implications of the EU Referendum, it’s good to see that demand in the financial services sector has held up.

“But the challenges facing the sector have not gone away - they’ve actually grown. Add the uncertainty caused by Brexit to low interest rates, technological change and strong competition, and it’s plain to see why optimism is falling and pressure on margins remains intense.

“With firms voicing strong concerns about the impact of Brexit, especially the risks to the wider economy in the years ahead, the Government must allay their unease with clear plans for negotiations to leave the EU. An ambitious Autumn Statement would also set a clear direction for growth and prosperity.”

Andrew Kail, UK financial services leader at PwC, said:

“Life was busy for UK financial services firms before the Brexit vote - it just got a whole lot busier as they digest the implications for their businesses. The survey shows business performance holding up in the short term which is positive. However, the continuing fall in optimism is a cause for concern. Trading conditions and the 'lower for longer' interest rate environment continue to be challenging. 

"The big picture agenda of transforming business models to respond to customer, regulatory and technological changes continues apace and now Brexit has added an additional ingredient to the mixture.

"It's still early days, and there is no real clarity on what future agreements will be reached. Consequently, many of our clients are considering their options, including potential restructuring and relocation of their businesses. However it’s the domino effect on people, productivity and position as a financial hub that must be guarded against. 2 million people across the UK are directly or indirectly employed by the financial services sector. Financial services firms all depend on the access to talent and market infrastructure, and the business environment. And by extension, so do the many firms using Europe as a springboard into the UK."

Employment was stable in the three months to September, for a second successive quarter. Employment growth is expected to pick up over the next quarter, reflecting rising headcount across most sub-sectors. Training expenditure also continued to expand at a brisk pace.

Investment intentions improved marginally over the last quarter. Growth in spending on IT over the year ahead is expected to remain robust, while firms expect to keep other forms of capital spending broadly steady. Promoting efficiency and regulatory compliance were the most important motivations for investment.

Key findings:

Incomes, costs and profits:

Employment:

Investment over the next 12 months:

In the year ahead, financial services firms expect to increase IT and marketing capital spending at a faster pace, and to scale back other investments to a lesser degree than in the previous quarter:

The main reasons for authorising investment are cited as:

The main factors likely to limit investment are cited as:

Business expansion over the next 12 months:

The most significant potential constraints on business growth over the coming year are:

Impact of the EU referendum:

Asked to rank the top three risks over the medium-term, the factors gaining the highest rankings were:

Asked to rank the top three opportunities over the medium term, the factors gaining the highest rankings were: