Ernst and Young: Global financial services expect rebound after first half of 2010

Accelerating the change finds that while a third of the 125 global financial services respondents expected some expansion this year, 34% of those polled expect the return to growth to begin in the first six months of 2010, with 32% believing it would be further out.

Reflecting on the general mood of the investing public in the region, Noor Abid, Managing Partner, Assurance, Ernst & Young Middle East says:

"The financial services industry had borne the brunt of the correction phase during the downturn which then cascaded to other key sectors. Now there are strong indications, especially in the Middle East, that the sector is poised to see a return to steady growth."

"We see every possibility of the recovery phase being a relatively protracted one, but nevertheless, market fundamentals point toward a steady climb. Though tempered with cautious optimism, there are signs of marked improvements in investor sentiments as well - a first step in the path of recovery. Given the multiplier effect that financial services has on the economy, this bodes well for the other key sectors in the region," Noor added.

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 businesses over the last 12 months, compared to almost 50% that had not.

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.

Noor adds, "With the passage of both the time and the intensity of the downturn, organizations are better equipped to assess priorities, evaluate options, allocate resources and track performance metrics effectively."

Its worth noting 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.

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.

"In addition to promoting the industry, governments in the region have themselves been active players in the sector. Government and quasi government organizations have traditionally been a prominent part of the region's financial landscape. Their commitment to extend support to the industry in these difficult times has proved to be a major source of impetus for restoring and improving investor confidence. The renewed push for transparency and rigorous financial reporting procedures has only served to further strengthen these sentiments," adds Noor.

Two thirds of financial services companies surveyed 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.