WM Market Reports

UK Financial Service Sentiment Slid In Q4 Amid Brexit Uncertainties - CBI/PwC Survey

Tom Burroughes, Group Editor, London, 23 January 2017

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The UK's vote to leave the European Union in June last year hit sentiment among financial institutions, although recent government comments on the policy are welcome, according to a quarterly survey.

UK-based financial services caught a dose of the “Brexit blues” in the final three months of 2016, a poll showed, with sentiment in the industry falling for the fourth consecutive quarter. This is the longest period of declining sentiment since the global financial crisis of 2008.

The survey, by PricewaterhouseCoopers and the Confederation of British Industry, also showed that sentiment posted its sharpest fall since December 2008. It showed that for nine out of 10 businesses polled, preparing for the UK's departure from the European Union is the top concern. Macroeconomic uncertainties are also weighing on some firms' minds, such as those of insurers.

The survey did not explicitly refer to wealth management as a sector, although several categories, such as banks, include this activity.

Despite the uncertainties, the report said the comments on Brexit policy last week from UK prime minister Theresa May were welcome, and that there are some grounds for more industry optimism overall going forward.

“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,” said Andrew Kail, head of financial services at PwC.

Some 103 firms were surveyed, including 17 banks and 16 investment managers. Other categories included building societies, finance houses, life insurance firms, general insurance firms, insurance brokers and private equity firms (excluding venture capital).

Pessimism about the future deepened in the quarter. Asked about their view of the business outlook, only 10 per cent of those surveyed said they were more optimistic than three months before, while 45 per cent were less optimistic, giving a balance of around -35 per cent (compared with -13 per cent in the quarter to September). The survey found that profits growth halted following a two-year slowdown, even though a 16 per cent increase was expected in the last quarter. However, firms do expect profitability to improve by 37 per cent in the next quarter.

Business volumes were also flat in the last quarter, up just 2 per cent compared to the previous quarter’s 34 per cent. Looking ahead to the first quarter of 2017, growth in business volumes is expected to pick up: 29 per cent of firms expect volumes to rise next quarter, and 22 per cent expect them to fall, giving a balance of 7 per cent, the survey showed.

​Meanwhile, 91 per cent of surveyed firms believe their growth will come from the acquisition of domestic customers over the next three months.

“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,” Kail said.

The survey showed that different segments of the financial industry held contrasting views. For example, investment managers were more optimistic, with 29 per cent saying they were optimistic about the overall business situation in their sector, following the sharpest drop in optimism in the previous quarter of 72 per cent. This was the first time in a year any optimism was recorded amongst investment managers. Nevertheless, investment managers were increasingly concerned that finance shortages could constrain business growth.

Banks, however, did not expect much improvement over the near term, with business volumes expected to fall 42 per cent over the next three months, and overall optimism down 92 per cent, despite the overall positive outlook.

Commenting on why firms invest, the report said: “Increasing efficiency and ensuring regulatory compliance remain the most important motivations for investment. Asked about the potential of fintech investments over the next three years, firms see the biggest potential as being for process automation, data analytics, cybersecurity and digital transformation.”

 

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