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Financial sector contracts for the first time in over three years, CBI survey finds

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The UK’s financial services sector contracted for the first time since June 2020 in the final quarter of last year, according to a new survey.

The Confederation of British Industry’s (CBI) financial services survey showed that a weighted balance of -23 per cent of firms saw volumes fall in the final quarter of last year, down from +27 per cent in the previous quarters.

Both banks and insurance firms reported a drop in volumes, although investment management firms returned to growth in the quarter. 124 firms replied to the survey.

Firms across the financial sector have had to rapidly adjust to a world of higher interest rates, which has stymied demand and piled pressure on borrowers.

Heading into the new year, lenders are likely to come under further pressure as deposits reprice. “Profitability is anticipated to fall next quarter,” the survey noted.

It also showed that the value of non-performing loans was broadly unchanged in the previous quarter, but is expected to climb slightly over the next three months.

“With business volumes falling and both sentiment and profitability stagnating, 2023 ended on a flat note for financial services firms,” Louise Hellem, CBI chief economist said.

“However, it is encouraging to see that many businesses are still looking to grow their workforce and increase investment going forward,” she continued.

For the first time since December 2014, finance firms expected to increase investment in vehicles, plant and machinery.

Firms also expected to increase in investment in IT, although capital expenditure was likely to take a hit.

Plans to boost investment come shortly after the government introduced generous incentives for capital investment in the Autumn Statement.

Hellem suggested that the Government needed to provide greater clarity on its plans to make London a hub for green finance too.

“At the Spring Budget, the Government should provide an update on the green finance strategy so that the financial services sector can continue to play its part on the road to net zero,” Hellem said.