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.
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.
Nevertheless, business volumes continued to expand at a solid pace, while profitability improved, albeit at the slowest pace for almost two years.
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.”
Kevin Burrowes, UK financial services leader at PwC, said: “This quarter's survey findings tell us that the cloud forming across the sector is getting darker. As previously predicted, the lack of opportunities to generate revenue has shifted the focus of financial services companies to how they make their business models more efficient or effective - no easy task in such an unpredictable climate.
"Firms will have to play ‘business black jack' and decide the merits of whether they ‘stick’ ‘twist’ or ‘fold’. With uncertainties over the EU Referendum and global economy, the next quarter will be a challenging one for the financial services sector. Banks in particular are highlighting what a difficult position they find themselves in.
“In the challenger bank sector, there is a serious concern as to whether competition with the established players can be maintained over a longer period. The market could see some consolidation as new entrants continue efforts to woo customers from the incumbent banks."