The majority of global financial services companies around the world don’t expect a return to growth until the first half of 2010 or even later, according to new research by Ernst & Young.

A survey of 125 financial services executives conducted by the Economist Intelligence Unit in recent months finds that while a third of respondents expect some expansion this year, 34% believe the return to growth to begin in the first six months of 2010, and 32% expect it to be further out.

“The financial services industry has certainly been battered,” said Diane Sinhuber, Ernst & Young partner and financial services industry leader. “More than 60% of our survey respondents still expect to spend more time securing the future of their business.”

More than half of the executives surveyed admitted that the downturn had impacted them more than expected. Some 72% of respondents were surprised at the severity, and 70% were surprised by the speed of the financial crisis.

Banks were most taken by surprise, with 68% saying they had been impacted more than expected, compared to 36% in the insurance industry.

But the finance industry has been quick to react to the changing conditions, with 61% saying they have achieved cost reductions in the last six months, with some even reporting signs of improvement. Of the respondents, 38% said their businesses had improved over the last 12 months. But six in 10 financial institutions have seen their profitability decline and 56% have seen overall revenues decline in the same period.

The insurance industry appears to be most bullish, with 40% of industry respondents reporting an improvement in profitability, compared to just 24% of bankers.

The overriding economic conditions have curtailed the abilities of many financial services firms to look forward, according to the survey results. More than 40% of respondents reported difficulties investing in capital programs and another 40% noted an inability to expand into new markets.

Firms are also experiencing increased competition, particularly on pricing. In the banking sector, nearly three quarters of respondents reported heightened competition on price.

But despite being hit harder than expected by the financial crisis, a majority of respondents said they believe the impacts will be temporary. Most believe that profitability, economic conditions and competitive intensity will eventually return to pre-crisis levels.

The regulatory changes, however, are widely expected to have permanent impacts. Nearly 70% of financial services respondents expect their businesses to be impacted permanently by new regulatory framework, compared to just 44% of managers in the broader economy.

More than half of financial institutions believe the current crisis will permanently and fundamentally change operating models.

In terms of permanent adjustments already made by financial services firms as a result of the crisis, 70% have permanently changed their risk management strategy, 68% implemented permanent differences to their regulatory framework and 54% changed their operating model.

“Clearly, the recession has left a lasting mark on the sector,” said Sinhuber. “It’s time to build new operating models and regulatory frameworks that will carry them into the future.”

IE