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LONDON (Thomson Financial) - Profits in the UK's financial services sector are falling at their fastest rate since the start of the war in Iraq five years ago as the crisis in the credit markets intensifies, a survey found today.

In their quarterly assessment of the sector, the Confederation of British Industry and accountants PricewaterhouseCoopers LLP found business volumes in one of the main drivers of UK economic growth continuing to fall at a sharp pace in the first three months of the year in the wake of the credit squeeze. And things are not likely to get better any time soon, they added.

'We can expect further tough times in the financial sector, and as this feeds through into the wider economy it will inevitably be felt through slower economic growth this year and next,' said Ian McCafferty, the CBI's chief economic adviser.

A more detailed look at the survey shows that firms expect to find it significantly more expensive to access finance for investment purposes, and that they fear the credit squeeze will get worse over the coming six months.

As expected, banks have been particularly hit by the credit crisis, with their volumes falling at their fastest pace since September 1991. As a result the numbers employed are falling at their fastest rate since September 2000.

During the first three months of the year, the survey found overall business volumes in the financial services sector fell sharply, as 17 percent of respondents said volumes had grown in the three months to early March, while 47 percent said they had decreased.

The resulting balance of -30 pct followed December's near 17-year low of -33 percent, and was worse than expected. A similar rate of decline is expected over the coming three months.

The survey also found that a record balance of respondents (-44 percent) reported a fall in the value of fees, commissions and premiums, while income from net interest, investment and trading also fell sharply again. Both of these income categories are expected to fall heavily again over the next three months.

Meanwhile, total operating costs, excluding the cost of funds, grew, although this was at a slower rate than the previous four surveys and they are expected to be flat over the next three months.

As a result, the sector's profitability has dipped sharply, after holding up last quarter. The balance of -18 pct was a weaker figure than expected and the most negative since March 2003's -19 percent.

On a more positive note, the CBI/PwC said profitability is expected to stabilise in the coming three months.

All this is likely to have an impact on jobs, the survey found.

A net 25 percent of respondents said they had cut jobs over the past three months, which is the highest rate since March 2003 and against expectations that numbers employed would increase marginally.

And firms' expectations for employment over the next few months -- a balance of 33 percent expecting numbers employed to reduce -- were the weakest since December 2002.

pan.pylas@thomson.com

pp/cmr

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