Finance firms’ optimism wanes as uncertainty grows

Rain Newton-Smith, chief economist at the CBI. Picture: Contributed
Rain Newton-Smith, chief economist at the CBI. Picture: Contributed
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Optimism among financial services firms has fallen for the second quarter running as stronger competition and uncertainty over future demand levels continue to take their toll, a survey reveals today.

The latest CBI/PwC Financial Services Survey found that 29 per cent of those questioned said they felt less optimistic about the business environment in the three months to June. Although 13 per cent of firms were more optimistic, the net balance was -16 per cent.

Banks, securities traders and investment management firms are the gloomiest, although sentiment in other sectors such as insurance either improved or was stable.

The pessimistic outlook came despite overall business volumes across the sector – which employs an estimated 100,000 people in Scotland – continuing to rise at a healthy rate. Banking remains a notable exception, with business volumes having been broadly stable for the past year-and-a-half, and no change expected over the next quarter.

READ MORE: In numbers: Scotland’s financial services sector

Profitability expanded at the weakest pace for two years in the three months to June, although profits growth is expected to accelerate next quarter.

Costs edged higher reflecting increases in a majority of sectors.

Looking ahead to the next quarter, firms do not expect to raise charges amid the strongest competitive pressures for nine years.

Rain Newton-Smith, CBI chief economist, said: “There’s a mood of caution among financial services firms with the vote on our EU membership rapidly approaching and global economic waters still choppy.

“When talking to financial services firms, it’s clear that the low interest rate environment, increasing competition and regulatory pressure continue to weigh on profitability.

“But after a volatile start to the year there are some positive signs, with business volumes continuing to expand and overall employment levels holding up.”

Overall employment was stable in the quarter to June, after a modest increase in the three months to March.

READ MORE: What are the highest paid jobs in Scottish finance?

Headcount is predicted to increase a little further in the three months to September, reflecting hiring across the majority of sectors.

Investment intentions remain mixed with expected growth in marketing and IT budgets strengthening a little over the past quarter. Although firms still plan to cut back on other forms of capital spending, the pace of decline has eased.

However, the share of firms saying demand uncertainty could limit investment rose to a three-and-a-half-year high.

Andrew Kail, UK financial services leader at PwC, highlighted the importance of the EU referendum to the sector.

“The UK now stands at the crossroads of continued EU membership – the outcome will be keenly awaited by financial services firms,” he said.