UK Bank Business 'Normal' for First Time Since March 2011

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The level of business in the U.K. financial services sector rose at its strongest rate in a year in the second quarter of 2013 to return to a level considered "normal" for the first time since March 2011, according to a survey released on Monday.

The quarterly survey by accountants PriceWaterhouseCoopers and employers' body CBI said banks did more business with companies, private individuals and overseas customers. Only business with financial institutions was flat over the quarter. Overall business volumes were expected to expand at a similarly strong pace in the next three months.

"This may not mean that credit appetite is growing, but it certainly implies an improvement in economic performance," Kevin Burrowes, PwC's UK financial services leader said. "After allowing costs to rise in the first quarter of the year, banks are renewing their focus on efficiency and staff numbers are beginning to fall again. Retail and commercial non-performing loans are also predicted to decline during the coming quarter," he said.

He warned that there were a few notes of caution however. "Despite planning for customer acquisition and product development, banks still have doubts about continuing demand," Burrowes said.

Overall, financial services firms had seen another strong quarter of business growth.

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"Despite a fall in average costs, profitability has been dented by stagnant fees, commissions and premiums. But with business volumes continuing to grow and costs predicted to fall again, profits should rebound next quarter." Stephen Gifford, CBI director of economics said.

The life insurance sector was the only exception to overall buoyant sentiment in the industry, with business volumes falling strongly over the last three months, at the fastest pace since June 2009.

Optimism, But No Jobs?

Employment in the banking sector declined declined sharply in the second quarter despite forecasts of growth, and headcount is expected to fall again next quarter, the report said. although the pace of contraction is expected to ease.

(Read More: No Growth in UK Banking Until 2017, Says Think Tank)

Across the financial sector, employment fell by 12 percent in the past three months, equating to 10,000 people. The headcount across financial services as a whole was only expected to grow very slightly – by 1,000 people – in the next quarter.

Around a third of respondents believed that labor shortages would limit the level of business over the next twelve months.

(Read More: London Banking Jobs Will Plummet in 2013: Economist)

In addition, "reacting to regulation will continue to eat into investment budgets and constrain business expansion for a good while yet," the CBI's Gifford warned.

"Firms are learning to manage relationships with two new regulators; banks are grappling with structural reforms and fresh capital requirements; and the Parliamentary Commission on Banking has proposed substantial changes on governance and internal controls."

In terms of growth, 85 percent of firms said they viewed acquiring domestic customers as the main source of business growth. Investing in IT (according to 59 percent of businesses), is expected to be the most important element of growth strategies over the next 12 months.

- By CNBC's Holy Ellyatt, follow her on Twitter @HollyEllyatt