Financial services optimism had already fallen in the three months to March, and firms expect a sharp decline in business ahead, according to a recent survey.

The quarterly survey of 103 firms by CBI/PwC, which was conducted between 2-26 March, found that business volumes, profitability, and employment are all tipped to fall over the next quarter. Investment plans for the year ahead have also deteriorated. Optimism about the overall business situation in financial services fell sharply in the three months to March.

Business volumes were broadly unchanged in the three months to March (up one per cent). Conditions were mixed by sub-sector; volumes fell in banking, but remained unchanged in building societies and investment management. Meanwhile, volumes rose in finance houses, life insurance, general insurance and insurance broking. But expectations for the next quarter are for a marked decline in volumes (-30 per cent), the weakest predictions in a year.

Meanwhile profitability fell slightly in the three months to March (-4 per cent), but the picture was also mixed by sub-sector: profits fell in banking and life insurance, but grew in finance houses, insurance broking, general insurance and investment management. Next quarter, profitability is expected to fall overall (-15 per cent).

Rain Newton-Smith, CBI chief economist, said: "The bulk of the survey took place before social distancing measures were ramped up, but there were already signs of the Covid-19 pandemic leaving its mark. Expectations for business volumes and headcount weakened, non-performing loans rose sharply, and financial firms are planning heavy cuts to investment in the year ahead.

"Financial services are already playing an essential role in helping companies with their cashflow, through channelling funds from the government's support schemes. But like other businesses, they've also been struck by staff shortages and changes to how they operate. As a result, alleviating capacity pressures and streamlining how firms access government support through our financial institutions is vital. With the peak of the economic impact to come, equipping the sector to deliver for business is crucial in supporting the growth recovery beyond the pandemic."

Andrew Kail, Head of Financial Services at PwC, said: "The Covid-19 pandemic is one of the most significant tests of operational resilience the FS sector has seen. The need to move to full workforce remote working, on a global scale for many, has significantly tested business continuity plans. The response by the industry has largely been a success. The need to maintain vital customer services in a technically and regulatory compliant manner has seen organisations act at their most agile and responsive.

"The FS sector must continue to work with customers, the government and the regulators to help the economy recover in the best possible shape. Services it provides across banking, insurance and asset management are central to the sustainability of the corporate sector and millions of people.

"Our financial services firms are upholding the ultimate responsibility as they continue to treat customers fairly while galvanising their own businesses and the workers they employ."

Employment fell (-9 per cent) at the fastest pace in a year, driven by the banking sector. Headcount is set to decline at a much faster pace next quarter (-37 per cent), the weakest expectations since March 2009.

Reacting to the findings, Sam Holliday, FSB development manager for Gloucestershire, Bristol, Bath & South Glos, said: "These figures obviously make bleak reading and it is totally understandable that people are feeling very nervous for the future.

"Most small businesses are understandably concentrating purely on the here and now at the moment, but it is inevitable we think at times about the post-crisis world and wonder how business will look then.

"The most important thing now though is that our businesses are given as much support as possible to ensure they can have a stake in that post-coronavirus future. We will continue at the FSB to work with the government and other agencies to help businesses get through, this so they can be part of the national recovery and revival that will be needed."