Banking Industry Outlook Survey:
Executives Seek Efficiency Gains Amid Challenges
kpmg.com
KPMG LLP, the audit, tax, and advisory firm, surveyed C-suite and other top-level executives in the banking and broader financial services industry during the second quarter of 2012.
Participants were asked about business conditions in their sector, the most significant revenue growth opportunities, and any barriers to growth that may exist. They were also asked a variety of questions about the economy, including factors they perceive might impede or support their sector’s recovery as well as the impact of regulatory reform on their businesses and potential areas of investment.
These responses were compared to the findings of a similar survey conducted among executives in the second quarter of 2011.
KPMG’s Industry Outlook Survey
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Contents
Foreword .......................................................................................................2
Key Findings from KPMG’s Industry Outlook Survey ....................................4
Slow and Steady Sector Progress .................................................................6
Business Conditions ......................................................................................6
Revenues .......................................................................................................7
Headcount .....................................................................................................8
Hope for Recovery Remains on the Horizon ................................................9
Pursuing Growth and Opportunity .............................................................. 10
Capital Spending and Investing ................................................................... 12
The Many Impacts of Regulatory Reform ................................................... 14
Risk and Regulatory Challenges .................................................................. 16
A Closer Look at M&A Activity .................................................................... 18
Data Analytics and Digital Marketing Channels ........................................... 19
Conclusion ...................................................................................................20
KPMG: A Leader in Serving the Financial Services Industry .......................21
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2 | Banking Industry Outlook Survey
Foreword
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Banking Industry Outlook Survey | 3
The events of the past year in banking have allowed even the casual industry observer to grasp the interconnectivity of this vital industry and the overall economy in which it operates. We have learned all too well that a healthy banking industry is critical to economic vibrancy, providing the essential credit, capital, and liquidity that support growth and profit.
In order to gauge the momentum of the industry and better understand the challenges it faces, KPMG LLP (KPMG) has again reached out to senior executives across a broad swath of the industry. As a result, this report includes both a snapshot of current conditions and impressions of what may lie over the horizon for an industry that continues to wrestle with choppy growth and persistent political and regulatory uncertainties.
Amid all of those uncertainties, however, is the growing realization that what’s worked in the past may not work in the future, leading many executives to closely examine how their business is organized, how it creates products and services, how it reaches out to its customers in a sustainable manner—indeed, how it grows its top line and builds revenue. While it may not be broken, senior executives at organizations large and small are making sure they understand their organization’s business model, as the industry navigates a landscape littered with ambiguous and sometimes perilous contours.
On behalf of KPMG, I would like to thank those who participated in this survey. I hope the findings are useful to you in addressing market challenges and opportunities. I also welcome the chance to discuss this study and its implications for your business in the year ahead.
Brian StephensNational Sector Leader, Banking & FinanceKPMG LLP
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4 | Banking Industry Outlook Survey
Key Findings from KPMG’s Industry Outlook Survey
Against the backdrop of a complex and uncertain regulatory environment—as well as a still-sluggish overall economy—a majority of the banking executives in the Unites States who participated in KPMG’s 2012 Banking Industry Outlook Survey say that growth, a reexamination of the business model, and operational-process improvements are at the top of their agenda this year.
Given those conditions and priorities, the executives say they will continue to focus on reducing costs, will be somewhat less likely to be involved in a merger or acquisition (M&A) than they were a year ago, and will concentrate on leveraging information technology (IT) to enhance their business.
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Banking Industry Outlook Survey | 5
Some of the key findings from the 2012 banking industry survey include:
• Ninetypercentsaidtheyareeitherexaminingor reexamining their business model as part of their growth strategy.
• Regulatoryreformcontinuestochallengethesectorina variety of ways. More than two-thirds (69 percent) of the executives surveyed view regulatory and legislative pressures as the greatest barrier to growth over the next year. While most respondents say they are generally optimistic about their bank’s revenue and growth prospects, the unstable economy has created an ambivalent industry in terms of increasing headcount for the future. About 40 percent of respondents say their organization has reduced headcount this year, while about a third reported an increase in headcount. More than a third (37 percent) don’t expect their bank to boost headcount to prerecession levels.
• Continuingatrendfromthepreviousyear,spendingprimarilywill be focused on IT, including initiatives in such areas as platform simplification, mobile payments, leveraging data for regulatory compliance, and creation of a more integrated view of customers.
• Comparedto2011,therewasasignificantdecline(14 percentage points) in the number of respondents who said their bank would be involved on the buy side (either likely or very likely). This year, 42 percent said they would be likely buyers, versus 56 percent in 2011.
• Morethanhalf(69percent)ofthebankingexecutivessurveyed expect some improvement in economic conditions over the next year. However, they have pushed back their expectations for a full U.S. economic recovery until 2014 or later.
KPMG’s survey reflects the responses of 100 banking/financial sector executives from large, U.S.-based companies with $100 million or more in annual revenue. The majority of respondents (54 percent) worked for institutions with annual revenues exceeding $10 billion, while 23 percent represented institutions with annual revenues between $1 billion to $10 billion, and 23 percent worked for institutions with revenues in the $100 million to $1 billion range. Eighty-two percent of these institutions are publicly held and 18 percent are privately held.
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6 | Banking Industry Outlook Survey
Faced with regulatory reform challenges and a lackluster economy, banking executives are focused on reexamining business models and initiatives that increase operational efficiency and reduce costs, according to the banking executives in this year’s survey. Regulatory reform continues to pose significant challenges for the sector and remains a significant barrier to growth. Executives will rely on traditional services and asset-wealth management as primary drivers for revenue growth over the next year and consider the mass affluent (top 10 percent of income earners) and young professionals as key customer segments for growth opportunities. While survey respondents expect modest gains in revenues and the economy over the next 12 months, their longer-term outlook is less certain, with the majority believing a full U.S. economic recovery is still years away.
More than two-thirds of the executives surveyed believe the economy will improve over the next year, which represents a brighter outlook than in 2011, when 55 percent thought so. Similarly, the number of executives who believe the economy will stay the same over the next year dropped to 28 percent from 36 percent a year ago.
Key
0
20
40
60
80
100
Better next year About the same Worse next year
69%
55%
36%
9%
28%
3%
2012 (Q2) 2011 (Q2)
Slow and Steady Sector Progress Business Conditions
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Banking Industry Outlook Survey | 7
Driving revenueAccording to 56 percent of the financial executives surveyed, traditional services are still considered the primary driver of revenue growth, down slightly from 59 percent in 2011. However, a significant number of respondents also view cross-selling of services (42 percent) and asset and wealth management (40 percent) as key revenue drivers over the next three years. This marks a shift from last year’s survey responses, which identified M&A activity and trading activity as having the most potential to drive revenue.
Biggest Drivers of Company’s Revenue Growth: Next 1–3 years
2012 (Q2) 2011 (Q2)
0
10
20
30
40
50
60
Trad
ition
al�
serv
ices
1
56%
59%
42%40%
25%28%
31%
23%22%
7%
3% 3%
8%
0%0% 0%
Ass
et a
nd w
ealth
�m
anag
emen
t
M&
A a
ctiv
ity
Oth
er
Cro
ss-s
ellin
g�se
rvic
es
Em
ergi
ng�
tech
nolo
gies
2
Trad
ing�
secu
ritie
s
N/A
Revenues showed modest signs of improvement over last year. Sixty percent of respondents reported an increase in revenues over the last year, up slightly from 56 percent the previous year.
Key
0
20
40
60
80
100
Better now Same now Worse now
60%56%
30%
14%
30%
10%
2012 (Q2) 2011 (Q2)
When asked to describe their revenue expectations a year from now, three-quarters (75 percent) of executives predict that revenues will increase, while 21 percent believe revenues will stay flat. This mirrors the expectations of the prior year, when 70 percent and 23 percent, respectively, answered similarly.
Key
0
20
40
60
80
100
Increase in revenues About the same Decrease in revenues
75% 70%
23%
7%
21%
4%
2012 (Q2) 2011 (Q2)
1 loans, savings, mortgages, etc.2 i.e., mobile payments, etc.
Revenues
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8 | Banking Industry Outlook Survey
While 31 percent of survey respondents noted they added personnel over the last year, 44 percent report a decrease in headcount. Executives have slightly higher expectations for the year ahead, with 39 percent predicting an increase in hiring as opposed to 32 percent who expect a drop in headcount.
Key
0
20
40
60
80
100
Increase About the same Decrease Unsure
23%
31% 39%
26%
32%
44%
2% 3%
Current Headcount(changes from last year)
Expected Headcountover next year
Notably, more than one-third (36 percent) of survey respondents do not expect their U.S. headcount to ever return to prerecession levels.
Headcount: Return to prerecession levels
Key
0
10
20
30
40
13%
2%
19%
11%
19%
36%
Already at, or greater than, pre-recession level
2013
2015 or later
2012
2014
Never
Headcount
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Banking Industry Outlook Survey | 9
The U.S. economic recovery continues to be just beyond reach, according to the financial executives who participated in this year’s survey. Seventy percent have pushed back their expectations for a complete U.S. economic recovery until 2014 or later.
0
10
20
30
40
3%
27%
36%34%
2012 (Q2)
Key
2012 2013 2014 2015 or later
Looking forward, financial services executives continue to view external factors as a much greater concern than internal factors. A vast majority (82%) admit to being more concerned about the economy, competition, and the impact of regulatory changes over their ability to compete or whether they have the right strategic direction internally (18%).
Hope for Recovery Remains on the Horizon
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10 | Banking Industry Outlook Survey
Initiatives garnering attention
When asked about the top initiatives on the mind of management, 19 percent of survey respondents cite the need to significantly improve operational processes and related technology.
Top initiatives on the mind of management
Key
19%
18%
15%13%
12%
8%
7%6%
2%
Significant improvement of operation processes and related technology
Navigating significant changes in the regulatory environment
Significant cost reduction initiatives
Significant investment in organic growth 4
Merger/acquisition
Improve enterprise risk management programs/processes
Strategic divestiture of current assets
Significant changes in business model
Significant changes to financial processes and related technology
3 (upwardly mobile young professionals who earn good income, about to buy first home, etc.)
4 (new product development, pricing strategies, geographic expansion)
Pursuing Growth and OpportunityEighty-one percent of the financial services executives surveyed acknowledge they have reexamined, or are in the process of reexamining, their operating model as part of their growth strategy. Respondents view specific customer segments such as the mass affluent (37 percent) and young rising professionals (23 percent) offering the greatest growth opportunities for their institutions.
Customer segments offering the greatest growth opportunity for your bank
37%
23%
19%
15%
5%
1%
Key
Mass affluent (top 10% of income earners)
Young rising professionals3
Consumers nearing retirement age (50–65)
Underbanked (consumers without access to incremental credit)
Unbanked (consumers with no transaction account)
Retirees
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Banking Industry Outlook Survey | 11
Assessing the competitionAs market dynamics continue to change, banking executives consider national banks (32 percent), and new market entrants (28 percent) such as PayPal, and retail outlets like Wal-Mart, as the biggest competitive threat to their banks.
Biggest competitive threat
Key
0
10
20
30
40
32%
National bank New market entrants5
Credit union Regional bank
Community bank
28%
16% 16%
8%
5 (PayPal, retail outlets such as Wal-Mart, etc.)
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12 | Banking Industry Outlook Survey
Among the financial services executives surveyed, 83 percent believe their institution has significant cash on its balance sheet, of which 25 percent acknowledge that investment is significantly underway.
Investment time frame
Key
0
10
20
30
40
25%
Investment is significantly under way Second half of 2012
First half of 2013 Second half of 2013
2014 and beyond
14%
19%21% 21%
Compared to a year ago, 71 percent of executives note that their company’s cash position on its balance sheet has increased, with the majority saying it’s a moderate increase.
Cash position
Key
0
10
20
30
40
50
60
70
80
71%
25%
4%
Increased� Remained the same� Declined
Capital Spending and InvestingCapital spendingAbout half (49 percent) of survey respondents predict their institution’s capital spending will increase, while 34 percent expect it to stay the same. Much of this spending is expected in the areas of information technology, regulation/control environment, new products and services, and acquisitions.
Increased areas of capital spending over the next year
Key
0
10
20
30
40
50
60 58%
Information technology Regulation/control environment
New products or services Acquisition of a business
Business model transformation Advertising and marketing
Geographic expansion Employee compensation and training
Green/sustainability initiatives Research and development
Expanding facilities
40%37%
32%
20%
15% 14% 13%
8% 7%5%
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Banking Industry Outlook Survey | 13
When it comes to IT investment, 58 percent of the executives surveyed believe platform simplification will be the most important focus for their bank over the next year.
IT focus
Key
0
10
20
30
40
50
60 58%
Platform simplification Mobile payments�(IT infrastructure, applications)
Leveraging data more effectively Creating integrated view of �for regulatory requirements customer accounts
Social media Catching up on deferred �maintenance
39% 38% 37%
31%
22%
LendingMore than half of survey respondents expect their bank to increase lending over the next year. Fifty-six percent anticipate higher commercial lending, and 58 percent think consumer lending will rise.
Key
0
20
40
60
80
100
Will significantly increase lending Will slightly increase lending Will moderately increase lending No increase in lending
24%
20%
33%
23%
26%
16%
Commercial Consumer
47%
11%
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14 | Banking Industry Outlook Survey
More than two-thirds (69 percent) of survey respondents identify regulatory and legislative pressures as the top growth barrier for their institutions. Other hurdles include risk management issues (38 percent), pricing pressures (24 percent), and lack of customer demand (16 percent). These results are in line with 2011 survey responses.
Barriers to growth
Key
0
10
20
30
40
50
60
70 69%
38%
24%
16%
11% 11% 9% 8%4% 4% 2% 1%
8%6%
1%
Regulatory and legislative pressures
Risk management issues
Pricing pressures
Lack of customer demand
Lack of qualified workforce
Access to and managing capital
Increased taxation
Energy prices
Staying on top of emerging technologies
Inflation
U.S. dollar strength
Labor costs
Exchange rate fluctuations
Foreign competition
Other
Moreover, almost all of the executives surveyed (95 percent) believe the capital requirements called for in various regulatory reform initiatives, including the Dodd-Frank Act and Basel III, will hinder growth moving forward. Impacts on growth
Key
0
10
20
30
40 38%
Significantly hinder growth, Moderately hinder growth
Slightly hinder growth Improve growth
No impact
34%
23%
3%2%
The Many Impacts of Regulatory Reform
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Banking Industry Outlook Survey | 15
When asked to identify regulation that is having the most negative impact on bank revenue, 30 percent of executives cited residential troubled mortgages, followed by the Durbin Amendment (14 percent) and new capital requirements (14 percent).
Most negative impacts on bank revenue
Key
0
10
20
30
40
30%
Troubled mortgages – residential Durbin Amendment
New capital requirements6 Not applicable, our revenue has �increased or remained the same
Other Dodd-Frank Act compliance Troubled mortgages – commercial�requirements7
Volcker Rule
14% 14% 13%13%
9%7%
Of the types of government regulations listed below, more than half (59 percent) of respondents believe that capital and liquidity requirements from various regulatory reform initiatives, such as the Dodd-Frank Act and Basel III, are having the most impact on their business.
Most impactful on business
Key
0
10
20
30
40
50
60 59%
Capital and liquidity requirements Consumer protection
Federal supervisory changes8 Durbin Amendment
Volcker Rule Limitation on federal preemption �authority for national banks and thrifts
OTC derivates-related issues9 Systemic risk regulation (i.e., living wills)
FATCA
42%
35%32%
18%
12%9%
6% 5%
6 resulting from regulatory reform initiatives (such as Basel III and the Dodd-Frank Act)
7 (consumer protection, OTC derivatives-related issues, etc.)
8 powers and duties of OTS being transferred to OCC, FDIC, Fed, and CFPB9 (Swaps Push-Out Rule, clearing, trading and reporting rules on Section 1256)
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16 | Banking Industry Outlook Survey
Risk and Regulatory ChallengesEvolving regulation and changing marketplace dynamics have heightened the need for companies to implement a strong internal risk framework. When asked to identify any existing challenges preventing the adoption of a formal risk policy, 40 percent of survey respondents believe that process integration and operational efficiency pose significant obstacles.
Challenges preventing the adoption of a formal risk policy
Key
0
10
20
30
40
50
40%
Process integration/efficiency of operations Culture and behavior
Clearly defined roles and responsibilities Shared resources across the �organization
Governance framework Don’t know
30%
22% 22%
26%
12%
(Multiple responses allowed).
Despite obvious challenges, 62 percent of the financial services executives surveyed believe their institution is at least somewhat prepared to seize opportunities as a result of public policy and regulatory reform. Meanwhile, 30 percent report being very prepared.
Ability to seize opportunities from regulatory change
Key
0
10
20
30
40
50
60
70
62%
Somewhat prepared Very prepared
Not prepared Don’t know
30%
2%6%
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Banking Industry Outlook Survey | 17
Tax regulationAccording to the executives surveyed, evolving tax regulation is expected to impact their business strategy, with 30 percent believing it will result in less capital investment.
Key
0
10
20
30
40
50
30%
Less capital investment Changing business structure/impact to hiring
Increased overseas expansion Increased M&A activity
Increased domestic expansion Don't know
25%
16% 15%
9%
29%
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18 | Banking Industry Outlook Survey
The evolving regulatory environment has also impacted potential M&A activity. While many had been predicting a wave of consolidation in the banking industry, 40 percent of respondents believe it may have been tempered by anticipation of regulatory actions and related issues.
Key
0
10
20
30
40
50
40%
Anticipated regulatory actions/issues Targets' balance sheet issues
Sellers' demands too high Buyers' offers are not reasonable
27%
19%
13%
At the same time, 60 percent of respondents also believe regulation will be a key driver of M&A, followed by new geographic markets (28 percent) and new technology (24 percent). These results closely mirror the responses seen in last year’s survey.
M&A drivers
Key
0
10
20
30
40
50
60
70
60%
Regulatory changes/reform Access to new geographic markets
Access to new technology and products Product synergies
Access to new resources Debt
Labor cost pressures Pension and healthcare cost pressures
28%24%
21% 19%16%
11% 10%
Looking forward, 55 percent of banking executives think it is likely their institution will be involved in a merger or acquisition either as a buyer or seller over the next two years.
Likelihood of M&A activity
Key
0
10
20
30
40
50
42%
Involved in M&A as buyer Involved in M&A as seller
No plans for M&A activity Unsure/don’t know
13%
39%
32%
A Closer Look at M&A Activity
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Banking Industry Outlook Survey | 19
When asked to describe the organizational maturity regarding usage of data analytics, more than one-third (34 percent) of executives rate the data analytics literacy of their bank’s management and workforce as average, while 28 percent rate their data analytics literacy as high.
Data analytics maturity of company
Key
0
10
20
30
40
50
34%
Average when it comes to utilizing analytics High data analytics literacy Rapidly moving toward high analytical literacy Average to low analytical literacy No formal data analytics capabilities Don't know
28%
19%
13%
2%4%
Financial services executives plan to use digital, social, and mobile technologies in a variety of ways over the next 12 months. In fact, nearly half (49 percent) have plans to use social media for external brand promotion, and 43 percent expect to deploy customer-facing mobile applications over the next year.
Digital marketing strategies planned for year ahead
Key
0
10
20
30
40
50 49%
Digital marketing strategies planned for year ahead
Social media for external brand promotion
Social media for customer insight�
Social media for recruiting�
Social media for two-way customer engagement
Mobile-specific customer-facing Web sites
Enterprise mobile applications
Mobile-commerce technologies10
Location-based marketing using mobile technology
Mobile-specific enterprise websites (i.e., mobile intranets)
Social media for enterprise collaboration/knowledge sharing
Social media for customer crowdsourcing
Creation and distribution of digital media marketing messages using video11
Creation and distribution of digital media internal messages using video
Social media for enterprise crowdsourcing
Social media for enterprise risk management
Don't know
43%40%
36%
33% 32%29%
28%
24%
17% 17% 16%13%
22% 21%
15%12%
Data Analytics and Digital Marketing Channels
10 including NFC-enabled payments and mobile wallets11 (including company-specific external video channels)
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20 | Banking Industry Outlook Survey
Banking executives maintain a cautious optimism for the near-term business outlook, expecting modest improvements in revenue, the economy, and hiring in 2013, but remain guarded longer term, not seeing a complete economic recovery until 2014 or beyond. Mounting regulatory and legislative pressures continue to create significant challenges and serve as sizable barriers to growth within the sector. As a result, many banking executives are focusing their efforts on strategies to increase operational efficiencies and reduce costs. To support such initiatives, executives plan on investing more in IT to simplify platforms, manage changing regulatory requirements, utilize data more effectively, and enhance customer relationships.
Conclusion
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Banking Industry Outlook Survey | 21
While financial executives are cautiously optimistic about the future, the continued challenging environment requires that banks and other financial institutions adjust to, and actively manage, the changes impacting performance.
For decades, KPMG’s global Financial Services practice has been recognized for its presence in and commitment to the industry. Through our international network of member firms, we have the global reach and experience to serve clients anywhere in the world. Comprised of Banking and Finance, Insurance, Investment Management, and Real Estate, our Financial Services practice includes professionals with the knowledge, experience, and skills to help our clients address their most pressing challenges, sort through today’s complex business problems, and achieve their goals.
KPMG: A Leader in Serving the Financial Services Industry
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Key Contacts:
Brian StephensNational Sector Leader, Banking & Finance T: 202-533-3534 E: [email protected]
Judd CaplainNational Account Leader, Banking & Finance T: 212-872-6802 E: [email protected]
Bill ClineNational Account Leader, Capital Markets T: 704-335-5300 E: [email protected]
John DepmanNational Segment Leader, Banking & Finance T: 267-256-1631 E: [email protected]
Mark PriceNational Tax Leader, Banking & Finance T: 202-533-4364 E: [email protected]
David ReavyNational Audit Leader, Banking & Finance T: 212-909-5496 E: [email protected]
Peter TorrenteNational Client Leader, Banking & Finance T: 212-872-5815 E: [email protected]
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