Profits looking strong for the financial services industry but outlook remains weak

Hayley Kirton
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A picture shows the skyline of the City
All sub-sectors except securities trading reported a profitable end of 2015, so why isn't the industry all smiles? (Source: Getty)

Financial services firms reported strong profitability for the last quarter of 2015, although the sector is slightly cautious in its outlook.

A survey of 100 financial services firms out today from the Confederation of British Industry (CBI) and professional services firm PwC has discovered that financial services firms are reporting strong profitability for the three months to 31 December 2015, thanks mostly to efforts to keep costs down.

The firms also predicted that profits would be strong, although perhaps slightly more subdued compared to the quarter just gone, throughout the three months to 31 March 2016.

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However, optimism in the sector had increased slightly over the last three months but at a noticeably slower pace than in the first half of 2015.

“Despite strong growth in profitability driven by easing cost pressures and increasing business volumes, the financial services industry is alive to downside risks from developments overseas,” remarked Rain Newton-Smith, director for economics at the CBI. “The global economic outlook remains uncertain while China rebalances, which is having knock-on effects on emerging markets, amidst continued unrest in the Middle East.”

In particular, the general insurance industry reported very strong profit growth for the three months to 31 December 2015, but expects profits to dip over the next quarter.

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PwC believes this could be because the sector is anticipating a number of claims caused by the winter flooding, which the professional services firm has predicted could set insurers back up to £1.4bn.

Optimism among general insurers remained largely unchanged during the three months to 31 December 2015 compared to the quarter before.

“It’s clear that optimism is muted across the whole sector and each sub-sector has its own challenges,” said Kevin Burrowes, UK financial services leader at PwC. “Ongoing low interest rates, cost of floods claims, the continuing slump in oil prices and the domino effect of stock market volatility are responsible for the increased pessimism compared to this time last year.”

The only sub-sector in the financial services industry not to report a profitable final quarter of 2015 was securities trading.

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