Financial sector faces toughest competition in nearly a decade

Banks are facing their toughest squeeze on profitability in nearly two years as fierce competition in the financial services industry puts pressure on bottom lines.

The latest quarterly survey of the sector from the CBI and PwC found that more firms are feeling pessimistic than optimistic about the outlook for the industry for the second quarter running, as the balance of those stating they were positive compared to negative came in at minus 16.

That was an improvement from the minus 21 registered in the first quarter of the year as turmoil stalked the financial markets, but well off the scores of 32 registered last summer.

Competitive pressure was cited as the main concern by financial services firms, with 88 per cent saying losing out to rivals could knock the amount of business they take on - the highest number since June 2007.

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Meanwhile, only 28 per cent of firms said their profits were increasing, compared to 20 per cent who reported they were on the slide. The balance - eight - was down from 11 in the first three months of the year.

Looking specifically at banks, rather than the entire sector, "profits were flat over the last three months, marking the first time that they have not risen in almost two years," according to the survey.

Rain Newton-Smith, chief economist at the CBI said: "It's clear that the low interest rate environment, increasing competition and regulatory pressure continue to weigh on profitability.

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Talk of job cuts and mass redundancies in the financial sector have dominated the City during the first few months of the year, as a string of organisations have issued high profile warnings about the health of the sector.

The International Monetary Fund (IMF), for instance, said that one-third of Europe's big investment houses would struggle to stay in the green unless they shake-up their business models.

Brexit fears also appear to be weighing on the financial sector. George Osborne warned tens of thousands of jobs would be put at risk if the UK votes to leave the EU, while the CBI/PwC survey found that banks believe business will pick-up once the referendum is out of the way.

Full story: Financial sector faces toughest competition in nearly a decade: City A.M.

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