'˜Perfect storm' leads to gloomier outlook in UK's banking sector

Optimism among firms in the financial services sector has fallen at the fastest rate since 2011, according to the latest CBI/PwC Financial Services Survey.

Raine Newton-Smith, director of economics, CBI

The quarterly survey of 104 financial services firms found that respondents in banking and investment management had seen the sharpest deterioration in sentiment – while optimism among building societies and in the insurance sector was broadly flat.

Financial market instability, competition from within the sector and macroeconomic uncertainty were identified as the top three challenges facing financial services over the coming year.

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Nevertheless, business volumes continued to expand at a solid pace, while profitability improved, albeit at the slowest pace for almost two years, according to the survey’s findings.

Employment in financial services increased last quarter, but is expected to remain flat in the next three months, with increases in the insurance and building society sectors offset by another sharp fall in headcount in banking.

Rain Newton-Smith, CBI Director for Economics, said: “Concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services.

“As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.

“Investment intentions for IT remain resilient, but spending plans are being scaled back in other areas.

“Investments are increasingly motivated by the need to promote efficiency, while uncertainty about demand appears to be holding additional investment spending back. Increasing competition in the sector was cited as a key threat to business expansion by over two thirds of firms over the next 12 months.”