Optimism among financial services companies dropped during the final quarter of last year but may bounce back due to signs of improving business conditions, according to the latest CBI/PwC Financial Services Survey.
The quarterly survey of 103 financial firms found that faith in the overall business sector fell for the fourth consecutive quarter, the longest period of declining sentiment since the global financial crisis.
This represents the sharpest fall since December 2008, as the UK waits for Prime Minister Theresa May to trigger Article 50 that will eventually lead to Britain's exit from the European Union.
A more pessimistic mood was particularly prevalent among banks, according to the survey, with general insurers and finance houses also feeling more pessimistic.
However, investment managers, life insurers and insurance brokers were more optimistic than they had been three months earlier.
Overall business volumes fell flat in the last quarter of 2016, but the CBI and PwC said they expected the situation to pick up somewhat in the first three months of 2017, with stronger demand in the life insurance and investment management sectors going some way to nullifying a more challenging environment expected by banks and building societies.
Growth in profits were also unchanged in the three months to December, but profitability is expected to improve across financial services in the next quarter, according to the survey - with the exception of building societies.
Rain Newton-Smith, chief economist at the CBI, said: “As we head into the New Year, a mixed picture emerges from financial services firms about their hopes and fears.
"Whilst 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.
“Ruling out membership of the single market has reduced options for maintaining a barrier-free trading relationship between the UK and the EU. Businesses will welcome the greater clarity and the ambition to create a more prosperous, open and global Britain, with the freest possible trade between the UK and the EU."
Asked about the main challenges for financial services firms in 2017, several concerns emerged. Nine in ten banks said that preparing for the impact of Brexit was the number one challenge for this year.
Building societies were most concerned about macroeconomic uncertainty, while the level of competition furrowed the brows of the insurance sectors. Firms in every sector said they needed to "intensify their dialogue" with regulators in response to uncertainty around Brexit.
Andrew Kail, head of financial services at PwC, added: “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.”
