UK financial firms’ optimism dampens, but business is growing and dynamic

The Confederation of British Industry (CBI) today published a report revealing a substantial deterioration in sentiment among respondents in banking and investment management.

The quarterly survey of 104 financial services firms concluded that this sector’s optimism fell at the fastest pace for over four years during the first quarter of 2016, -21% lower (14% more optimistic against 35% less optimistic) than in Q4 2015, despite improving numbers in overall businesses volumes (+26%, expecting further 22% in Q2) and employment (+15%). Banking saw employment falling by 20%, though.

Rain Newton-Smith, Economics Director at CBI, said that “concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services”.

“As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.”, he added.

Kevin Burrowes, UK financial services leader at PwC, admitted that the cloud forming across the sector is getting darker: “As previously predicted, the lack of opportunities to generate revenue has shifted the focus of financial services companies to how they make their business models more efficient or effective – no easy task in such an unpredictable climate.”

Mr. Borrowes expects consolidation among the sector as challengers compete for incumbents’ customers: “Despite the pessimistic mood in the sector, it is very encouraging to see that many financial services organizations are planning to up their game around talent attraction and diversity.”

Such predictions come in line with FinanceFeeds’ expectations for 2016 among the financial sector, where mergers and acquisition should replace IPOs in the newswires.

Delloite has also made public its prediction of the strongest M&A markets since 2008 as “challenger banks outperformed incumbents on a return on tangible equity basis by 13.5 percentage points but face increasing disadvantages in terms of capital and funding costs as they try to grow out of the smaller niche sectors in which they operate in to more mainstream markets. This makes the Challengers clear targets either for self-consolidation or for acquisition by larger banks.”

The report by Delloite also added the European M&A activity will be driven Basel III and the IFRS, forcing banks to release and re-deploy their tied up capital (€2.2 trillion of non-core assets and €800 billion of non-performing loans).

“Digital disruption will force Insurance companies to invest heavily in research and digital capabilities, either in-house or via acquisition, in order to keep up with developments such as the internet of things, peer to peer insurance and the sharing economy in this increasingly disrupted market.”

“The implementation of Solvency II from 1 January 2016 is expected to drive M&A amongst Insurance companies, particularly in mainland Europe where capital requirements have been historically less onerous than in the UK”, concluded the press release by Deloitte.

The CBI report found that competition is expected to be the main factor for business constraints in the financial sector, now with almost every respondent (98%, up from 87%) saying competitors will come from within their own sector. But firms in other sectors may also compete for clients (53%, up from 44%).

Uncertainty about demand or business prospects (54%) is the main factor to limit capital authorizations, but increasing speed/efficiency are the main reasons behind investment (78%).

The Confederation of British Industry has been active in supporting the pro-EU side of the referendum in the UK, voicing the will of 80% of its members as only 5% support Brexit, and warn that leaving the European Union would risk 950,000 job losses plus a £3,700 drop per household income by 2020.