The majority of global financial services companies expect no return to growth until the first six months of 2010 or even later, according to the latest research conducted by Ernst & Young.
Market research firm IBISWorld also projects revenue growth to remain low, with activity revolving around changes to the industry this year. Industry revenue for 2008 came out to over $37 million, representing a 34 percent plunge.
As an indication of just how deep the recession is impacting the financial services sector, just over two thirds of those polled expect to increase the amount of time they spend on securing the future of their business.
The industry was clearly taken aback by the ferocity and depth of the downturn: 72% of respondents were surprised at the severity and 70% were surprised by the speed of the financial crisis. Only 30% had seen any improvement in their business over the last 12 months, compared to almost 50% that had not.
Tom McGrath, managing partner of Ernst & Young’s EMEIA financial services business, comments: “The end of the recession and a return to profitability is a tough one for any industry to call. But financial services are naturally more cautious – and possibly more realistic – about when the return to profitability might happen.”
The reorganization of the industry will be fundamental and it will vary by sector. However, managers are working hard to position their organizations to emerge stronger when the recovery comes – but there may well be some more casualties.”
Pennies being pinched, as profitability continues to decline
What is clear is the business-changing impact that the recession is having on the structure of financial services companies – and the toll it is taking on their bottom lines.
The majority (70%) of institutions have permanently changed their risk management strategy as a result of the crisis: 68% had implemented permanent differences to their regulatory framework and over half (54%) have changed their operating model. And it is easy to see why: almost six in ten financial institutions have seen their profitability decline and 56% have seen overall revenues decline in the same period.
If there is any silver lining, it is that 61% of respondents have had more opportunity to improve cost cutting in the last six months. Four in ten also plan to hive off their non-core or non-performing business, compared to five in ten in a similar survey earlier in the year.
Keith Pogson, managing partner for Ernst & Young’s financial services business in the Far East, said: “Fierce competition, volatility in the capital markets and business complexity are key concerns for any large enterprises, but they weigh more heavily on global financial institutions.”
Financial services clear on action from authorities
The sticky issue of pay and reward strongly divided respondents: 45% thought it needed more regulation while just under a third disagreed.
Financial services were also found to be broadly supportive of national and global initiatives aimed at stimulating the capital markets and easing the impact of the recession. However, only a third believed that their government should retain a stake in the financial services industry, with banking and insurance respondents the most skeptical suggesting that the time for bailouts may have come to an end.
Almost two thirds were inclined to agree that cooperation between international governments had played a central role in helping domestic and international economies in the last 12 months. Two thirds were supportive of their national governments economic policies in the past six months and half of the respondents believed their governments were powerful enough to solve their economy’s woes although a distinct minority (29%) felt they were ineffective in the face of the global recession.
Carmine DiSibio, managing partner for Ernst & Young’s Americas Financial Services Office, comments: “The financial services industry has been battered, but will certainly emerge from this recession stronger and healthier, with more focus on risk management. As the industry recovers, we are likely to see changes in operating models and regulatory frameworks. It’s likely to be a new world, and financial services firms will find their way together.”