Brexit continues weigh on investment plans of financial services firms

Rain Newton-Smith, CBI chief economist.
Rain Newton-Smith, CBI chief economist.
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Brexit uncertainty continues to drag on the investment plans of financial services firms despite expectations of a return to growth in the coming months, a new study has suggested.

Profits in the sector are set to “stabilise”, research by the Confederation of British Industry (CBI) and professional services firm PwC among almost 100 companies indicated.

Optimism rose just before the general election, at the fastest pace since the summer of 2015, the report said.

Improvement was driven by investment management, insurance broking and general insurance, but was flat in banks and building societies, the CBI said.

Profits in the sector continued to fall - at the quickest pace in a decade, according to the study.

Profitability continued to deteriorate at a sharp pace in banking, while profits also fell in life insurance and insurance brokers.

However, in the three months to March, overall profitability is expected to stabilise.

Rain Newton-Smith, the CBI’s chief economist, said: “It’s great that optimism has risen following four-and-a-half years of dire sentiment, with financial services firms also suggesting that an end to falling business volumes and profitability may be in sight.

“However, the sector isn’t quite out of the woods yet. Against the backdrop of another fall in business and profits, Brexit uncertainty continues to drag on investment plans, and concerns over labour shortages have spiked.

“As the UK begins a new future outside the European Union, the Government must do everything it can to support and stimulate one of the UK’s most globally competitive sectors, so that expectations of an upturn can come to pass - both over the next quarter and beyond.”

Employment growth in financial services remained solid and far above the long-run average, with general insurance the only sub-sector that reduced headcount last quarter.

Employment growth is expected to pick up over the next quarter.

Andrew Kail, head of financial services at PwC, added: “The stirrings of optimism represent a significant turnaround given the flat and falling optimism that has beset the past four years.

“An uptick in hiring, investment in systems, and better profit expectations for the first three months of the new year are driving the positivity in the sector, following the general election.

“However, this year in particular, firms will need 20/20 vision in order to maximise performance. Not least as there is still work needed to bring clarity on Brexit transitional arrangements.

“Encouragingly, PwC has already observed firms responding to the current environment of long-term low interest rates, intense competition and continuing regulation by resetting strategy, changing their business models, and investing in technology and their people.”

Looking to the year ahead, investment intentions have deteriorated. Spending plans on IT and marketing remain positive, though less so than in the three months to September.

IT investment intentions were the weakest in seven years. Investment in land and buildings, and vehicles, plant and machinery is set to be cut back.

Nevertheless in all three areas, spending plans were in line or above their long-run average.

Investment is largely motivated by the desire to increase efficiency and speed. However, concern over labour shortages rose prominently as a perceived brake on spending, to its highest in one-and-a-half years.

Optimism returns after 15 consecutive quarters of decline

The financial services sector’s slight improvement in optimism ended 15 consecutive quarters in which sentiment has mostly declined.

In the report, 19 per cent of firms said they were more optimistic about the overall business situation compared with three months ago.

While 11 per cent were less optimistic, giving a balance of +8 per cent, the fastest pace of growth since June 2015, when business optimism registered at +32 per cent.

According to the survey, 10 per cent of firms said that business volumes were up, while 28 per cent said they were down, giving a balance of -18 per cent, the sharpest fall since September 2012, when it was -19 per cent. Business volumes are expected to return to growth in the quarter to March.