Sentiment among financial services firms fell at the quickest pace since September 2019, according to the latest CBI/PwC Financial Services Survey.
Despite declining optimism, the survey of 81 financial services firms – conducted between 1 March and 22 March – found that business volumes had continued to grow in the three months to March, albeit at a slower pace than the previous quarter. Firms expect volumes to be flat in the quarter ahead.
The survey also saw a significant slowing in profitability growth on the previous quarter, with firms anticipating a modest decline in the next three months.
The outlook for investment in the year ahead continues to present a mixed picture. Firms expect to continue investing in IT but are looking to cut back capital expenditures on land & buildings and vehicles, plant & machinery.
Uncertainty over demand (37%), inadequate return on investment (32%) and labour shortages (16%) were cited by firms as the biggest constraints on investment. However, the share of firms citing labour shortages as a factor likely to limit future investment (16%) dropped significantly from last quarter (31%).
Building operational resilience emerged as a key theme throughout the survey, with 92% citing this as the key priority for future business strategy and transformation plans. Firms separately identified ‘responding to new cyber threats’ (81%) and ‘improving detection of cyber breaches’ (71%) as the main priorities to improve cyber resilience and reduce tech risk.
Elsewhere, headcount across the FS sector was broadly unchanged for the third quarter in a row. Expectations are for a significant uptick in employment next quarter.
Rain Newton-Smith, CBI chief economist, said: “While business volumes and profitability held up against the headwinds buffeting the economy, global inflationary pressures and increased geopolitical uncertainty stemming from war in Ukraine have started to take a toll on business confidence.
“With operational resilience becoming an ever more important priority for the sector, there is danger that a ‘wait and see’ approach may dampen growth prospects for the wider economy.
“A lack of preparedness for mainstream use of digital currencies and challenges in developing Net Zero plans suggest a need for swifter policy development in both areas to guide and stimulate industry-wide action.”
Isabelle Jenkins, head of Financial Services at PwC UK, said: “Financial services organisations are right to be careful and cautious as their resilience is once again put to the test.
“As the cost-of-living crisis mounts for households, it’s likely that we may see an increase in non-performing loans, another challenge financial services firms will have to respond to ensure consumers are supported through this difficult time.
“Despite some investment plans reined in for now, this is not the time to batten down the hatches completely, rather firms should continue to look at how they can best use the insight they are gathering to respond quickly and decisively in changing market conditions.”
