Most banks operating in the U.K. identified macroeconomic uncertainty as their biggest concern rather than Brexit, according to a survey by the Confederation of British Industry and PricewaterhouseCoopers.
In a quarterly survey of the financial services sector, the CBI and PwC polled 84 companies, including banks, building societies, specialty lenders, insurance companies and investment funds that have U.K.-based operations. As many as 59% of respondents named macroeconomic uncertainty as the most important challenge for financial services companies. Regulatory compliance and the U.K.'s departure from the EU were identified as the second- and third-biggest risks, according to 26.7% and 25.3% of the respondents, respectively.
"A combination of macroeconomic and Brexit uncertainty, regulatory compliance and global market volatility are taking a toll on the U.K.'s financial services sector," Rain Newton-Smith, CBI chief economist, said Jan. 14. As the financial services industry is a bellwether for the wider economy, the "persistent weakness in optimism" and the gloomy business outlook can be seen as warning signs for the future, he said.
Although it ranked lower, Brexit has been one of the biggest dampeners of sentiment in the financial services sector, and has contributed to the longest-running pessimism streak since the financial crisis, the CBI and PwC said.
Sentiment among respondent banks was at negative 35% in the fourth quarter of 2018, compared to negative 59% in the previous three months. Overall fourth-quarter sentiment in the financial services sector was at negative 24%, compared to negative 30% in the prior quarter. Sentiment is measured as the difference in percentage points between firms giving a positive assessment and those giving a negative one.
"The underlying reasons for this dip in optimism have been around for some time," said Andrew Kail, head of PwC's financial services team. U.K. financial services companies should in 2019 concentrate on issues they can control, such as having a clear strategy on how to serve their clients in the most efficient way, he said.
The long-term slide in sentiment also led to a deterioration in expectations for future growth, with companies' assessment of their overall business volumes in the next three months turning negative for the first time since 2009, CBI and PwC said.
Total business volumes in the financial services sector edged down in the fourth quarter of 2018, marking the first drop in demand since September 2013, the researchers said.
A similar trend was observed in terms of profitability, with financial companies' earnings flat for the third consecutive quarter, and the outlook for the next three months pointing at a decline for the first time in three years.
Banks assessed their overall business volumes in the fourth quarter as worse than in the previous three months, but were less pessimistic about volumes over the three months to March, the survey found. Fourth-quarter volume assessment stood at negative 3%, compared to zero in the prior quarter. Expectations for the next three months were still at negative 1%, but considerably better than the negative 19% recorded in the previous quarterly poll.