Senior banking and financial services executives believe strong profitability and revenues will return in 2010, but that their sector will lag the broader economy, KPMG found in a survey.

Slightly less than two-thirds believe financial services will recover after the broader economy, with only slightly more than a third believing the industry will right itself earlier. However, 72% expect revenue to be much stronger in 2010, and 68% expect improved profitability.

“The downturn impacted the banking and financial services industry to a greater degree than most industries, and, therefore, it will take longer to fully recover,” said Tony Anzevino, the lead partner of KPMG’s banking and finance practice. The executives think their industry has hit the bottom of the downturn and are now keenly focused on improving revenue and profits, he added.

Asked to identify the three top triggers that will spur an economic recovery, 46% said a stable real estate market, 45% said an increase in jobs, and 43% said improved consumer confidence.

Clearly, the executives don’t lend much credence to government actions, as the three least cited factors critical to an economic recover were effective regulations (6%), government stimulus (3%) and government bailouts (2%).

When asked what are the biggest challenges they face in dealing with the downturn, risk management was cited by the most, 70%, followed by finding new sources of revenue (57%), and complying with regulation, raising capital and restoring investor confidence (44% each).

Eight-five percent of the executives have either already or are planning to modify their risk management plans. Forty-five percent have turned to technology to reduce operational costs, and 33% have increased outsourcing.

“We’ve had an increasing number of discussions around better risk management and better cost control,” Anzevino continued. “We also see they’re getting back to basics with less reliance on complex structured products. The silver lining in this economic cloud may be that these actions could ultimately result in a stronger, more secure banking system.”

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