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 a recent survey by KPMG LLP, the audit, tax, and advisory firm.   

In the KPMG Banking Outlook Survey, 69 percent of respondents identified regulatory and legislative pressures as the most significant barrier to growth over the next year, while 43 percent said that bank management will be spending most of its time and energy on initiatives related to increasing operational efficiency and reducing costs in the next two years.

"Banks are still in recovery mode after the financial crisis and coming to grips with the new regulatory environment in which they now operate, which is impacting revenue and driving up compliance costs," said Brian Stephens, national leader of KPMG LLP's Banking and Capital Markets practice.  "'The new normal' for the industry seems to be slow and steady growth as banking leaders streamline costs and evaluate strategies to drive future revenue."

According to the KPMG survey, banks are anticipating modest headcount gains in the year ahead, with 39 percent adding to the payrolls and 32 percent decreasing jobs.   Stephens feels that hiring will more firmly take hold "when business conditions improve and loan demand picks up."  In the past year, 44 percent of the banking executives said they reduced headcount and 31 percent said they added jobs.  "Headcount increases and reductions will be sporadic and largely depend on the mix of businesses within each bank," said Stephens.   

A year from now, 6 percent of respondents expect revenue to be significantly higher with the majority (69 percent) eyeing moderate revenue growth. 

"Banking leaders understand that the focus on streamlining can only go so far and that growing the top line is critical as traditional banking services are not nearly as profitable," said Stephens.  "While bankers await an increase in loan demand, their growth strategies, operating models, and products and services will continue to evolve in an environment that's plagued with lots of uncertainty around regulatory matters and the economy."

Growth Strategies, Opportunities, and Threats 
When asked if their bank had re-examined its operating model as part of their growth strategy, 46 percent of banking executives in the KPMG survey said they had already done so.  Thirty-four percent said they were in the process of doing so and 10 percent said they had plans to do so, while only 10 percent said they had no plans to do so.

Banking leaders said the customer segments that present the greatest growth opportunity for their bank include the mass affluent (37 percent), young rising professionals (23 percent), and the underserved market (20 percent), comprised of the unbanked consumers with no transaction account and underbanked consumers without access to incremental credit.

While 32 percent of respondents said national banks represented the biggest threat to their organization, 28 percent cited new market entrants such as PayPal and retail outlets such as Walmart.

IT Investment a Priority 
When asked to identify the three areas where their bank would most increase spending over the next year, 58 percent of the KPMG survey respondents said information technology (IT), followed by new products or services (37 percent), acquisition of a business (32 percent), and business model transformation (20 percent).  Among those respondents who said their bank had significant cash on its balance sheets, the most likely time frame for investment was this year (39 percent) or next year (40 percent), while 21 percent said 2014 or later.

"Banks are interested in making investments in IT to further increase operational efficiency and regulatory reporting, better connect their various platforms and systems, and gain a more holistic view of their customers who may use several of the bank's products and services," said Judd Caplain, national account leader of KPMG LLP's Banking and Capital Markets practice.  "Projects that utilize data more effectively to inform risk management decisions, support strategic initiatives, and comply with regulations, as well as enhancing technology platforms that touch the customer, are also an area of focus."

Platform simplification (IT infrastructure, applications) was identified by 58 percent of the banking executives as the most important IT-related project for their bank in the next year, followed by mobile payments (39 percent), leveraging data more effectively for regulatory requirements (38 percent), and creating an integrated view of customer accounts (37 percent).

When asked to identify the channels commanding the most capital investment from their bank, KPMG survey respondents cited investing in mobile banking / payment platforms for mobile devices (38 percent), purchasing more branches (24 percent), and investing in online banking platforms for laptops / desktops (23 percent).

"The shift away from investing in the traditional branch customer channel to the channels utilizing mobile technology is noticeable, and we expect this trend to continue at an accelerating pace," added Caplain.

Revenue, Lending, and Economy 
According to the KPMG survey respondents, the biggest drivers for revenue growth over the next one to three years will come from traditional services such as loans, savings and mortgages (56 percent), cross-selling services (42 percent), and asset and wealth management (40 percent).  

Troubled mortgages (39 percent), followed by the Durbin Amendment and new capital requirements coming out of various regulatory reform initiatives (both at 14 percent), were identified by respondents as having the greatest negative impact on their bank's revenue. 

A year from now, 69 percent of the respondents expect the U.S. economy to improve, but 71 percent do not expect the economy to recover as a whole until 2014 or later.  In the coming year, 80 percent said they will increase commercial lending, while 84 percent said they will increase consumer lending.

"While banks plan to increase lending, they also are taking a more disciplined approach, evidenced by more stringent loan requirements and risk management practices," said Stephens. "Demand also is a question mark, so it's unclear whether this will help spur growth."