Financial services optimism dives at fastest pace since crash.

CBI/PwC charts banking volumes falls.

Sentiment, volumes and profits all deteriorated markedly in the financial services sector, with various indicators at their weakest since before and during the financial crisis of 2008, according to the latest CBI/PwC Financial Services Sector.

The quarterly survey of 83 firms found that optimism about the overall business situation in the financial services sector plunged sharply, falling at the quickest pace since September 2008. This decline was broad-based across sub-sectors (except general insurers), but particularly acute for banks and building societies. Optimism has now been flat or falling for 15 consecutive quarters, amounting to nearly four years in total.

Overall business volumes fell further, at the fastest pace since September 2012, but conditions varied significantly across financial services sub-sectors. The greatest drag on growth came from the banks (which saw volumes drop at the sharpest pace since March 1991) and finance houses. Meanwhile, insurance brokers and investment managers saw robust growth. Looking ahead, overall business volumes are set to fall at a sharper pace next quarter.

With volumes declining, profits also fell, at the quickest pace since June 2009. However, the sub-sector breakdown showed some variation. Profitability in finance houses and building societies fell, and the banking sector saw the quickest decline since December 2010. Insurance brokers saw strong profits growth, while investment management profitability grew slightly. Overall profitability is expected to drop even further in the three months ahead, the weakest expectations since June 2015.

Meanwhile, in a positive sign, employment across financial services grew at the fastest pace in over a year, although growth is expected to slow over the next quarter. Headcount in banking grew at the fastest pace since December 2006.

“Quarter after quarter after quarter, optimism continues to drop in the financial services sector,” said Rain Newton-Smith, CBI chief economist, “Add to that the dive in volumes and profits over the last three months, and it’s clear something has to change.

“The sector is the jewel in the crown of the UK’s world-leading services industry. While it’s encouraging that investment plans have improved, the threat of a ‘no deal’ Brexit is hitting confidence,” he added. “The government cannot ignore the voice of this bellwether of the domestic economy and one of the UK’s most important globally competitive sectors. No ifs, no buts, the government must heed the call to avoid a ‘no deal’ Brexit, and secure an ambitious deal with our largest trading partner.”

Andrew Kail, head of financial services at PwC: said: “The deep concerns across the financial services industry, driven by the UK’s unresolved political position, cannot be downplayed. As sentiment has taken a further slump this quarter, we’ve observed a drop-off in plans to launch new products and services as firms batten down the hatches in expectation of a turbulent few months.

“Businesses will be reducing spending on training in the short term, as the focus moves from specialist skills to contingency planning,” he added, “Yet, the resilience of the sector is encouraging in certain areas. Employment numbers have swelled in Q3, most likely in response to an increase in regulation requirements. Pragmatism and resilience are set to be the watchwords as the industry maintains its role as a key cog of growth for the UK economy.”

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