Optimism among firms in the financial services sector fell for the second consecutive quarter in the three months to June, according to the CBI and PwC.
Stronger competition, rising uncertainty surrounding the EU referendum, demand and slowing profits growth were all contributing factors in the waning optimism.
Banks, securities traders and investment management firms were less optimistic about the general business situation than three months earlier, but sentiment in other sectors either improved or was stable.
Overall business volumes continued to rise at a healthy rate, in line with expectations, and the outlook is for a similar expansion next quarter. Banking remains a notable exception, with business volumes having been broadly stable for the last year-and-a-half, and no change expected over the next quarter.
Profitability expanded at the weakest pace for two years in the three months to June, although profits growth is expected to accelerate next quarter.
Costs edged higher reflecting increases in a majority of sectors. Interest and investment income remained unchanged, but rising business volumes and a modest increase in prices has supported revenues from fees and commissions. Looking ahead to the next quarter, firms do not expect to raise charges further amid the strongest competitive pressures for nine years.
Rain Newton-Smith, CBI chief economist, said: “There’s a mood of caution amongst financial services firms with the vote on our EU membership rapidly approaching and global economic waters still choppy.
“When talking to financial services firms, it’s clear that the low interest rate environment, increasing competition and regulatory pressure continue to weigh on profitability.
“But after a volatile start to the year there are some positive signs, with business volumes continuing to expand and overall employment levels holding up.”
Overall employment was stable in the quarter to June, after a modest increase in the three months to March. Headcount is predicted to increase a little further in the three months to September, reflecting hiring across the majority of sectors.
Investment intentions remain mixed: expected growth in marketing and IT budgets strengthened a little over the past quarter, but firms still plan to cut back other forms of capital spending, although the pace of decline has eased. However, the share of firms saying demand uncertainty could limit investment rose to a three-and-a-half-year high.
Andrew Kail, UK financial services leader at PwC, said: “The UK now stands at the crossroads of continued EU membership – the outcome will be keenly awaited by financial services firms.
“Financial services are vitally important for the UK economy - generating jobs, income, investment and exports. Finance and insurance generated £65bn in export earnings for the UK last year, nearly £2,500 per UK household, PwC analysis has shown.
“Technological advances are proving to be game changers, and increasing competition is causing industry heavyweights to overhaul how they respond to changing customer needs."