The volume of business in UK financial services grew for the seventh quarter running and at the fastest pace since June 2007, in the three months to December, according to the latest CBI/PwC Financial Services Survey.
The level of business was also seen as being normal, after being regarded as below normal since September 2007.
In the next three months firms expect business to continue growing, albeit at a slightly slower pace. However this positive picture is tempered by a fall in sentiment and employment levels in this quarter. Firms also say that they plan to invest less over the coming year.
Of the 106 financial companies surveyed, 53% saw volumes rise in the quarter to December, and 24% reported a fall. The resulting balance of +29% is the highest since June 2007 (+51%) and above expectations (+5%). Firms expect volumes to continue to increase next quarter (+19%), but at a slower pace.
Both the value of fee, commission and premium income (+28%) and the value of income from net interest, investment and trading (+24%) grew in the three months to December, at the fastest pace since June 2006 (+28%) and December 2005 (+26%) respectively. Both types of income are expected to grow in the next quarter.
At the same time, the average spreads and the average commissions, fees and premiums paid both increased strongly (+43% and +33%). A further increase in both is expected over the next three months.
The rise in volumes and income helped push up profitability for the tenth consecutive survey: 36% of firms reported a rise in profitability and 22% a fall, giving a balance of +14%. This compared with +16% in September, completed a year of above average growth in profitability (+11%).
However, optimism in financial services was lower than three months ago (-24%), and employment was also down (-13%), with firms predicting a faster decline next quarter (-18%).
Companies say they will invest less on land and buildings (-29%) and vehicles, plant & machinery (-21%) over the next year. Unusually, firms also say they plan to invest less on marketing over the same period (-10%), representing the first fall since September 2009 (-29%). Investment in information technology is expected to see a minimal increase (+4%), which is well below its long-run average (+28%).
Shortage of finance, uncertainty about demand and business prospects, and inadequate return on investment were seen as the factors most likely to limit investment.
Ian McCafferty, CBI Chief Economic Adviser, said:
"This has been a strong quarter for the financial services sector, with increases in sales volumes and profits showing that the sector's recovery is on track.
"But firms are less optimistic, employment is down and investment intentions for this year are weaker, as concerns about the global recovery and ongoing troubles in the Eurozone create uncertainty.
"Nevertheless companies are expecting business volumes and profits to continue to grow, albeit more slowly, in the next three months."
Business levels were regarded as normal, but business with overseas customers was above normal (+24%). This was the highest since June 1998 (+35%). The volume of business grew in all customer categories except financial institutions.
Total operating cost (excluding the cost of funds) were flat, but because volumes rose, the average costs per transaction fell in line with the long-run trend (-12%), and meant that profitability advanced for the tenth successive quarter.
Competition (74%) and level of demand (70%) are seen as the two most important factors likely to constrain business expansion in the coming year.
