Sentiment amongst financial services firms deteriorated further in the three months to December, but there are signs of an improvement in business conditions over the next quarter for some sectors, according to the latest CBI/PwC Financial Services Survey.
The quarterly survey of 103 firms found that optimism about the overall business situation fell for the fourth consecutive quarter, the longest period of declining sentiment since the global financial crisis of 2008, and the sharpest fall since December of that year.
A more pessimistic mood was particularly prevalent among banks, with general insurers and finance houses also less optimistic.
However, investment managers, life insurers and insurance brokers were more optimistic than they had been three months earlier.
Overall business volumes were flat in the last quarter of 2016, but are expected to pick up somewhat in the first three months of 2017, with stronger demand in the life insurance and investment management sectors contrasting with a more challenging environment expected by banks and building societies.
Growth in profits was also unchanged in the three months to December, but profitability is expected to improve across financial services in the next quarter, (with the exception of building societies), as cost pressures continue to ease.
Nine in ten banks saw preparing for the impact of Brexit as the number one challenge in 2017, but this was not the case in any other sector. Building societies were most concerned about macroeconomic uncertainty, while the level of competition preoccupied the insurance sectors. Firms in every sector saw a need to intensify their dialogue with regulators in response to uncertainty around Brexit.
Rain Newton-Smith, CBI chief economist, said: "Despite feeling uncertain about the near future, it's encouraging to see the financial services sector charting a steady course, with firms expecting to raise investment and step up the pace of hiring, while continuing to deliver improvements to the bottom line.
"While Brexit is a particular challenge for banks, and broader economic uncertainty is also a concern for many, firms are also looking to future opportunities, with the promise of FinTech offering an exciting chance for the sector to lead the way in adopting new technology and boosting productivity."
Andrew Kail, head of financial services at PwC, said: "Uncertainty has contributed to the low levels of optimism reported by many financial services companies, particularly by the banks.
"However, the clarity on the UK position from the Prime Minister's speech is welcome, not least the commitment to a period of phased implementation.
“Financial services companies face many challenges to their business models from competition, regulation, technology and Brexit and, as a consequence, are having to take some big decisions about their future strategy.
"While companies are relatively positive about short term business volumes and profitability, they continue to need to make significant investments to protect their future. The first quarter of 2017 and beyond will see many start to fine tune and activate their Brexit contingency plans as the reality of life outside the single market and the EU begins to dawn."