Financial services companies have spent a long, turbulent spell wrestling with the huge credit and liquidity challenges that have rocked the sector. They've skirted insolvency, survived vertiginous drops in asset prices, raised fresh capital and adapted to tough government oversight. Unfortunately, much more work remains to be done.
Despite recent rallies by some commercial and investment banks, the industry's structural profit pools have shifted, with little sign that they will return to precrisis levels anytime soon. The sector, which nearly doubled its share of gross domestic product (GDP) between 1980 and 2007, now faces a major contraction, as industry returns will lag over the next several years. Based on Bain & Company analysis, profits shriveled to $17 billion in 2008, from an annual average of $430 billion between 2004 and 2007. (See Figure 1.) While the industry is likely to rebound in 2009, it won't regain precrisis levels until 2013.
As they struggle to find their footing amid continued economic turbulence, all three major sectors of the financial services industry -banks, insurers and investment houses-will remain hobbled by the legacies of past business practices. How the contraction plays out across each sector, or affects any particular company, will be determined by the changed behavior of customers battered by the downturn and how nimbly the financial service leaders respond.
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