The UK's financial services are optimistis the worst of the financial crisis is over. Many parts of the sector expect business volumes to rise in the next quarter after 21 months of falls.

Optimism about the overall business situation has risen for the first time in two years.

However, banking remains under pressure. Securities traders and investment managers expect the recent improvement in business to be short-lived, with volume declines expected to resume next quarter. According to the latest CBI/PwC Financial Services Survey, the three months to June saw levels of business, income and profitability continue to fall, although at a much slower pace than earlier in 2009.

Conditions remain challenging, particularly for the banks, said Ian McCafferty, chief economic adviser at the Confederation of British Industry (CBI), said: "Although demand looks like it is beginning to recover, it is doing so from a very low base. We can still expect lower profitability, significant job losses and cuts to investment in the coming months. The rising levels of bad debt are a further worry for the industry," he noted.

Asked how their business volumes fared in the last quarter, 22% said they rose, while 50% said they fell, giving a balance of -28%. That was worse than companies had expected (-10%), but it was a marked improvement on the previous quarter (-47%). It is the slowest rate of decline since volumes started falling at the end of 2007.

For the next three quarter companies overall are the more upbeat than they have been since March 2007 on business volumes. Under a third (29%) said they expect a rise and 18% a drop, giving a balance of +11%.

Profitability continued to fall in the second quarter, albeit at a much slower rate. Over a quarter (27%) said profits rose and 51% reported a fall, giving a rounded balance of -23% (compared to -47% in March). This rate of decline is expected to ease further in the next quarter (-17%).

Average spreads, which show the difference between the rates at which capital is borrowed and lent, widened more than expected after the previous quarter's contraction (+16%). The value of non-performing loans increased at the fastest rate since the survey began in 1989 (+51%). A similar increase is expected (+50%) in the third quarter.

Banks widened spreads to a record degree in the second quarter, providing some support to profitability, which was broadly flat after six consecutive quarters of decline. While optimism regarding the overall business situation remained firmly negative, the rate of fall had slowed. Business volumes fell at the fastest rate since March 1991 and were considered well below normal with both domestic and overseas customers. Over the next quarter business volumes are set to increase, while the decline in employment is expected to ease further.

Finance houses reported a moderate rise in business volumes, while profitability was flat. Business volumes are expected to be flat over the third quarter with employment set to continue falling at the same rapid pace.

Securities trading

The volume of business rose in the second quarter for all securities trading respondents. Fee, commission and premium income recorded strong growth.

This was partly offset by a rapid tightening of spreads and an increase in costs, leading to a marginal rise in profitability. A decline in both business volumes and profitability is expected over the next quarter.

Investment managers reported business volumes are broadly unchanged on the previous quarter and the rate of decline in profitability has eased on the previous survey, contrary to the unanimous fall predicted.

Employment rose, despite expectations of a decline. Predictions for the coming quarter are gloomy, with a decline expected in business volumes, a sharper fall in profitability and a marginal decline in numbers employed expected.

According to Pars Purewal, UK asset management leader at PricewaterhouseCoopers, investment managers are feeling more optimistic for the first time in over a year. However, they are not predicting a real rally in business or revenues. "This is not yet a return to pre-crisis confidence levels. Investment firms continue to reduce their cost bases but profitability is still falling. Some firms may be running the risk of cutting costs to the bone," he said.

"M&A is becoming a larger feature of growth plans and we expect the role of M&A in the sector's plans to increase as firms' profitability comes under further pressure. There is also considerable concern around the impact of current regulatory proposals," concluded Purewal.