By Daniel Hunter

The volume of business in the financial services sector grew for the eighth quarter running, at well above the average pace, in the three months to March, according to the latest CBI/PwC Financial Services Survey.

This growth is reflected in the first rise in optimism among financial services firms (+32%) in a year and an unexpected increase in employment in the sector (a balance of +19%). Companies also plan to invest more in IT over the next year.

Of the 95 financial firms that responded, 44% saw volumes rise in the quarter to March, and 21% reported a fall. The resulting balance of +23% was well above the long-run average (+12%) and driven primarily by business with private individuals. In the coming quarter, companies expect growth to accelerate somewhat (+34%), again mostly coming from business with individuals.

The rise in incomes was driven by fee, commission, or premiums (+13%), with the value of net interest, investment or trading remaining flat (+3). Meanwhile, average spreads widened further this quarter (+11%), building on already solid growth in the previous quarter (+43%).

The growth in income more than offset the impact of the sharp increase in total costs, allowing profitability to rise more rapidly than in the previous three quarters (+21%).

Numbers employed in the financial services sector rose unexpectedly (a balance of +19% compared with an expectation of -18%). A similar increase is expected in the next quarter (+20%).

Financial services firms resumed investment in both marketing (+16%) and information technology (+47%) in the three months to March, after a slack period last quarter. Spending intentions for IT were the strongest in a year, as financial services companies looked to increase efficiency.

As has been the case over the last year, companies continue to cite uncertainty about demand (+55%) and inadequate net return (+46%) as the factors most likely to limit capital expenditure over the next twelve months.

The number of firms highlighting the shortage of labour as a significant constraint increased this quarter (+35%).

Level of demand (75%) and competition (52%) continued to be the two most significant factors likely to constrain business expansion in the coming twelve months.

“Financial services sales volumes and income continued to rise this quarter, putting the sector’s recovery on a firmer footing," Ian McCafferty, CBI Chief Economic Adviser, said.

“Optimism levels and business investment intentions have also improved, in contrast to last quarter as some of the worst risks around the euro area crisis have eased.

“The unexpected rise in employment is a further encouraging sign for the sector. But with the current level of business regarded as below normal, conditions still remain challenging for financial firms.”

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