May 21, 2013 - Regulation is top of mind for banking executives and is viewed as the primary impediment to growth and traditional bank business models, while the likelihood of mergers and acquisition (M&A) activity within the industry declined, according to a recent survey by KPMG LLP, the audit, tax, and advisory firm.

In the KPMG Banking Outlook Survey, 35 percent of respondents said that bank management will be spending most of its time and energy over the next year on initiatives related to navigating significant changes in the regulatory environment, compared with 18 percent in last year's survey. Seventy-two percent identified regulatory and legislative pressures as the most significant barrier to growth over the next year, while 77 percent said political and regulatory uncertainty posed the biggest threat to their bank's business model.

"It's no surprise that bank executives continue to remain focused on dealing with regulatory-related matters due to the pervasive impact they are having on their respective institutions and, as a result, many are strengthening their risk management and compliance programs," said Brian Stephens, national leader of KPMG's Banking and Capital Markets practice. "Exams and interactions with regulators are increasing and we don't see any indication this will end any time soon, as hundreds of rules coming out of the Dodd-Frank Act -- including the Volcker Rule, living wills, and consumer protection -- are still being written and less than 40 percent overall have been finalized to date."

Regulatory compliance costs (58 percent) and other Dodd-Frank related compliance requirements such as consumer protection (47 percent) were cited by respondents as having the greatest negative impact on their bank's growth.

M&A Activity Seen as Less Likely

When asked about the likelihood their bank would be involved in M&A next year, 35 percent said their bank would likely be involved as a buyer, while 8 percent said their bank would likely be involved as a seller. Both figures represent declines over last year's findings.

"The fact that bank executives view M&A activity as less likely over the next year is somewhat counterintuitive, as the economy and business fundamentals are improving, the value of bank currency in the form of stock has increased, aeased, and liquidity on bank balance sheets remains high," added Stephens. "But the findings reinforce what we've been seeing in the marketplace as banking executives perceive deals as more difficult to get done due to the large gap between bid and ask prices, regulatory-related issues, and targets' balance sheet issues."

Fifty-seven percent of KPMG survey respondents believe anticipated regulatory actions or issues are the greatest impediment to M&A in the banking industry.

Growth

According to the KPMG survey respondents, the biggest drivers for revenue growth over the next one to three years will come from cross-selling services (46 percent), traditional commercial banking products such as loans and mortgages (39 percent), and asset and wealth management (32 percent). The focus on traditional banking products represented a significant decline, as they were cited as the top driver (56 percent) in last year's survey.

Bank executives cited the mass affluent (25 percent), young rising professionals (24 percent), and commercial customers (18 percent) as the customer segments representing the greatest growth opportunity for their banks.

"Banks are no longer relying on their 'bread and butter' for growth, but looking at numerous ways to grow the top line including new products and services and expansion into new geographies and customer segments," said Stephens.

Operational Efficiency

"Bank executives also are continuing to focus on increasing operational efficiency and various streamlining initiatives to further reduce costs and improve the bottom line," added Stephens.

When asked what aspects of their banks' operating model changed as a result of the economy and regulatory pressures, re-engineering internal processes and systems (62 percent), offering new products to their customer base (42 percent), and expanding to new or different customer segments (33 percent) were the top actions cited.

IT Investment Still a Priority

When asked to identify the three areas where their bank would most increase spending over the next year, 54 percent of the KPMG survey respondents said information technology (IT), followed by regulation and control environment (44 percent), and geographic expansion (37 percent).

Leveraging data to optimize customer development was identified by 41 percent of the banking executives as the most important IT-related project for their bank in the next year pertaining to customer growth followed by investing in and leveraging mobile banking and payments (33 percent).

Leveraging data more effectively for regulatory requirements and platform simplification (IT infrastructure, applications) were each identified by 32 percent of the banking executives as the most important IT-related project for their bank in the next year pertaining to infrastructure and compliance.

"Banks are becoming more actively engaged in using data and analytics to extrapolate insights that help improve risk management and compliance, drive customer growth, increase operational efficiency, develop and refine product offerings, and more," said Judd Caplain, KPMG's Advisory Industry Leader for Banking and Diversified Financials. "We expect this trend to continue as banks hire more data and analytics experts that can utilize information to help enhance business functions."

According to the KPMG survey, bank executives said their institutions were best using data and analytics for risk management (51 percent), operational excellence including operations and supply chain (33 percent), and acquiring customers (32 percent). However, only 34 percent of respondents said their bank had high data and analytics literacy.

Additional KPMG Survey Findings

A year from now, 60 percent of the respondents expect the U.S. economy to improve, down from 69 percent last year.

In the coming year, 76 percent expect their bank's revenue to increase.

Thirty-one percent expect their bank to increase headcount a year from now, while 40 percent expect it to decrease. Twenty-nine percent expect it to remain the same.

Thirty-one percent said their banks are thinking about exiting or reducing their mortgage servicing business in light of changes to capital requirements and increasing compliance costs.

The KPMG Banking Outlook Survey

The KPMG survey was conducted in the spring of 2013 and reflects the responses of 100 senior executives in the banking industry. Based on revenue in the most recent fiscal year, 58 percent of respondents work for institutions with annual revenues exceeding $10 billion, 23 percent with annual revenues in the $1 billion to $10 billion range, and 19 percent with revenues in the $100 million to $1 billion range.