Optimism among firms in the financial services sector has fallen at the fastest rate since 2011 amid global and national uncertainties, according to a quarterly survey.

The latest CBI/PwC Financial Services Survey of 104 financial services firms found that 14% were more optimistic and 35% were less optimistic, giving a balance of minus 21%, against the previous low of minus 24% in December 2011.

Respondents in banking and investment management saw the sharpest deterioration in sentiment while optimism among building societies and in the insurance sector was broadly flat.

Financial market instability, competition from within the sector and macroeconomic uncertainty were identified as the top three challenges facing financial services over the coming year.

But business volumes continued to expand at a solid pace, while profitability improved, albeit at the slowest pace for almost two years.

Employment in financial services has also increased in the last quarter, but is expected to remain flat in the next three months, with increases in the insurance and building society sectors offset by another sharp fall in headcount in banking.

Rain Newton-Smith, CBI director for economics, said: “Concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services.

“As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.

“Investment intentions for IT remain resilient, but spending plans are being scaled back in other areas. Investments are increasingly motivated by the need to promote efficiency, while uncertainty about demand appears to be holding additional investment spending back. Increasing competition in the sector was cited as a key threat to business expansion by over two thirds of firms over the next 12 months.”

Kevin Burrowes, UK financial services leader at PwC, predicted that with uncertainties over the EU referendum and global economy, the next quarter will be a challenging one for the financial services sector.

“This quarter’s survey findings tell us that the cloud forming across the sector is getting darker,” he said.

“As previously predicted, the lack of opportunities to generate revenue has shifted the focus of financial services companies to how they make their business models more efficient or effective – no easy task in such an unpredictable climate. Firms will have to play ‘business black jack’ and decide the merits of whether they ‘stick’ ‘twist’ or ‘fold’.”

Banks in particular were highlighting what a difficult position they find themselves in, said Mr Burrows.

However, he added: “Despite the pessimistic mood in the sector, it is very encouraging to see that many financial services organisations are planning to up their game around talent attraction and diversity.”

Firms reported a modest rise in employment in the last quarter, with 37% saying headcount had risen and 22% reporting a fall, giving a balance of plus 15%, slightly down from 17% in December.

There were robust increases across many sectors, but not in banking where the balance came in at minus 20%.

Overall, 40% of firms reported that profits had increased and 27% said they had fallen, giving a balance of plus 13%, suggesting that profitability grew at a slower pace than in the previous quarter (plus 42%).