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Brexit fears hit UK financial firms, sentiment falls to post-crisis low: survey

Confidence among UK-based financial services firms about their overall business prospects continued to deteriorate in the first three months of 2018, prolonging a downward trend in sector sentiment not seen since the global financial crisis, according to a new survey released March 26 by the Confederation of British Industry and PricewaterhouseCoopers.

Sentiment has fallen in eight of the past nine quarters, with the exception of the first three months of 2017 when it was flat, and there has not been any material increase in optimism for the past three years, the CBI said. "We are seeing a contradiction between a consistent trend of strong financial performance and weak levels of confidence about the future. The key question is: What looms that is worrying companies in the sector?" Andrew Kail, head of financial services at PwC U.K., said.

The quarterly survey, conducted among 81 U.K.-based financial services firms, showed that 33% of firms reported stronger business volumes in the first quarter of 2018, against 11% of firms booking lower volumes for the period compared to the previous quarter. Overall profitability in the financial services sector improved notably in the three months to March, with 44% of firms posting higher profits and just 11% of them reporting a decline, which also beat expectations, the CBI noted.

Nevertheless, 24% of firms were less optimistic about the overall business situation compared to three months ago, with only 7% being more optimistic.

Brexit worries continue

Although it is not the only factor contributing to the deterioration in confidence, Brexit still plays a major role. Even with a transition period agreed upon between the U.K. and the EU, uncertainty for the financial services sector will continue. "While Dec. 31, 2020, is a welcome extension on 31 March, 2019, it may not be sufficient to prevent companies planning for a hard Brexit until the shape of the landscape after 2020 becomes clearer," Kail said in a statement.

Banks, which have seen a continuous decline in confidence for the past four quarters, saw a spike in operating costs, likely related to Brexit contingency planning in the fourth quarter of 2017.

UK-based lenders remained less optimistic about their business in the three months to March even though their profitability is now at its strongest and many of them have seen a rise in business volumes, PwC said.

"A mix of challenging business conditions," including continued uncertainty related to Brexit over the past three months, resulted in the first drop in confidence among U.K.-based investment managers since 2016, according to PwC. More than before, firms in that sector were keen to boost investments in their workforce and training, which is likely "a response to the lack of clarity around immigration following Brexit and changing attitudes toward the outsourcing of services," the auditing firm said.

The ability to attract and import the best international talent was named by survey respondents one of the most significant challenges that must be tackled to preserve the U.K.'s position as a leading global financial services center in the long term.

London still ranked first in the 2017 Global Financial Center Index but had lost most of its advantage to New York over the past year. London's rating total was 794 in 2017, just a point above New York, with 793. In 2016, London, with a rating of 780, led New York by 24 points as the U.S. city's rating then stood at 756.

Competition from new entrants

"Add to Brexit the high levels of competition, changing consumer preferences and behaviors, rapidly developing technological changes, the need to aggressively manage costs, and new regulation — collectively, it is denting confidence about the future," Kail said.

Uncertainty about the level of demand from customers, along with competition, were identified as the most significant constraints to growth in the financial services sector over the next 12 months. Banks in particular are most worried about competition from new entrants, most notably other banks.

"Competition from new entrants is now at a joint survey record, suggesting that traditional banks are feeling under threat from challenge banks. This is further supported by banks' focus on organic growth and in particular, activities to retain and cross-sell to their existing customer base," PwC said.