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The UK's finance firms have become more pessimistic about prospects for the sector in the wake of the ongoing global credit crunch, new research has found.

Financial services firms expect to see a drop in business volumes, income and profitability over the coming three months, according to the latest quarterly survey of the industry by the Confederation of British Industry (CBI) and consultants PricewaterhouseCoopers (PwC).

Predictions that the outlook for finance firms will be bleak come despite the sector having experienced "unexpectedly good business" in the three months to the beginning of September.

The survey shows that finance firms are at their most pessimistic in almost two decades, with the impact of the credit squeeze having apparently taken its toll on their confidence.

Although a balance of 23 per cent of finance companies reported that business volumes had grown rather than decreased over the third quarter, a net 11 per cent of firms expect overall business volumes to fall over the coming quarter. The figure represents the first negative expectation recorded in over three years and the weakest since June 1991.

Meanwhile a balance of 14 per cent of firms expect profitability to decline over the fourth quarter, the weakest expectation since September 1990.

However the CBI stressed that finance firms are continuing with recruitment and investment plans, suggesting that they believe the impact of the credit crunch will be short-lived.

The CBI's chief economic advisor Ian McCafferty said: "The majority of financial services firms have become much more pessimistic, and predict that the credit crunch will put a squeeze on business volumes, incomes and profitability.

"They are however sticking with their plans to hire more staff and increase investment in training, IT and marketing, which suggests they anticipate an end to the current turbulence, and don't foresee major long-term damage to the sector."

Nonetheless firms questioned for the survey, including banks and building societies, were asked for their thoughts before the Northern Rock crisis. The poll of 89 businesses was conducted between August 22nd and September 5th, before the Newcastle-based lender revealed that it had applied to the Bank of England for emergency funding – a move which prompted the first run on the bank in over 140 years.

As such the confidence of financial services firms may have slumped further, with the impact of the global credit squeeze still emerging.