Optimism in the financial services industry fell for the fourth consecutive quarter at the start of 2018, according to the latest Financial Services Survey by CBI/PwC. The report, for Q1 2018, found that Brexit remains front of mind for the survey's respondents, with nine out of 10 firms expecting the political separation to challenge the UK’s status as a leading financial centre. This would bring in a period of uncertainty, potentially causing disruption for some City businesses, including relocation costs and supply chain/customer disruption. However, the decline in optimism among financial services is also partly due to new regulations, such as MiFID II and PSD2, which are causing a spike in operating costs for banks, due to increased IT investment.

Banks feel challenged

The quarterly survey of 81 firms found that sentiment in banking continued to deteriorate, in line with recent quarters but overall business volumes continued to expand in the three months to March, with the pace of growth picking up from the previous quarter. Despite the geopolitical uncertainty, banks expect to increase the profitability of their business, now at its strongest in over a year. The report stated: “Competition, particularly from new entrants is seen by banks as a key barrier to growth over the next 12 months. In fact, competition from new entrants is now at a joint survey record, suggesting that traditional banks are feeling under threat from challenge banks. This is further supported by banks’ focus on organic growth and in particular activities to retain and cross sell to their existing customer base.”

Elephant in the room

The CBI's chief economist, Rain Newton-Smith, said: “Financial services firms have performed well over the last three months, with business volumes and employment on the up and beating expectations. But there is no escaping the rather large elephant in the room. Optimism has been flat or falling for over two years now – that’s nine quarters – something not seen since the Financial Crisis. The Brexit transition that has been agreed between the UK and the EU will give financial services firms more reason to pause contingency plans, and to invest in the UK, but the government must push energetically for the protection, maintenance and development of our world-beating financial services sector.” Newton-Smith added: “Looking to the longer-term, it’s clear that the sector needs to work hard to ensure the workforce has the digital skills necessary for maintaining the UK’s competitive edge, as well as to attract a younger, more diverse group of people and the very best international talent.”

The survey's key findings were:

• Optimism in the financial services sector dropped substantially again, the eighth quarter of declining sentiment in the last nine quarters (the exception was the first quarter of 2017, when sentiment was flat) – surpassing two years of negative sentiment. This marks the longest period of flat or falling sentiment since the global financial crisis of 2008, and no material increase in optimism for almost three years
• 7 per cent of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 24 per cent were less optimistic, giving a balance of -17 per cent (compared with -22 per cent in the quarter to December)
• 33 per cent of firms said that business volumes were up, while 11 per cent said they were down, giving a balance of +22 per cent (up from +7 per cent in the quarter to December)
• Looking ahead to the quarter to June, business volumes are expected to expand at a steady pace: 23 per cent of firms expect volumes to rise next quarter, and 3 per cent expect them to fall, giving a balance of +20 per cent.