Community banking executives are optimistic about their growth prospects despite the current regulatory and economic environment, according to a recent survey by KPMG LLP, the U.S. audit, tax, and advisory firm.
In the 2013 KPMG Community Banking Outlook Survey, 85 percent of respondents said their bank’s revenue will increase a year from now. Fifteen percent expect revenue to increase 11 to 20 percent, while 70 percent expect it to increase 1 to 10 percent. Regulatory and legislative pressures were deemed by 42 percent of respondents as the most significant barrier to growth over the next year, down from 47 percent in last year’s survey.
“Community banks are exhibiting a great deal of resiliency in light of the challenging regulatory and economic environment they’ve faced the past several years,” said John Depman, national leader of Regional and Community Banking for KPMG. “Regulatory compliance requirements are negatively impacting their operating costs, but this is accepted as the new normal, and community banks are taking steps to ensure their viability and growth or evaluating whether it’s the right time to sell.”
M&A Interest Increases
According to the KPMG survey, 65 percent of respondents said it was likely their bank would be involved in a merger or acquisition in the next year as a buyer (40 percent) or seller (25 percent). These figures are an increase from last year’s survey in which 57 percent said it was likely their bank would be involved in a merger or acquisition in the next two years as a buyer (42 percent) or seller (15 percent).
For banks with M&A as part of their growth strategy, 28 percent said they would target a bank with $1 billion to $3 billion in assets, while 25 percent said a target bank would be in the $500 million to $1 billion asset range. Fifteen percent said they would target a bank with $250 million to $500 million and 10 percent said a target bank would have more than $3 billion in assets.
Target banks’ balance sheet issues (37 percent) and regulatory restrictions (32 percent) were said to be the greatest impediments to M&A in the industry.
“Many have been predicting a flood of M&A activity in this industry over the past several years, but it’s been more like a steady drip,” said Depman. “The fact is that it’s tough to get a deal done. The bid-ask price spread, the regulatory environment, and targets’ balance sheet issues are all real challenges to overcome.”
Impact of Regulation
Sixty-one percent of respondents said political and regulatory uncertainty posed the biggest threat to their bank’s business model. When asked to identify the percentage of their bank’s total operating costs that are driven by regulatory compliance requirements, 37 percent said 11 to 20 percent and another 37 percent said 5 to 10 percent. Fifteen percent said less than 5 percent, while 6 percent said 31 percent or more and 5 percent said 21 to 30 percent.
Fifteen percent said that bank management’s top initiative in the next year will be navigating significant changes in the regulatory environment, down from 27 percent who said it would be the top initiative over the next two years in last year’s survey.
Capital and liquidity requirements from various regulatory initiatives such as the Dodd-Frank Act and Basel III (39 percent) were identified as the regulation most hindering community banks. However, 55 percent of respondents said their bank was not yet prepared to manage the impact of Basel III.
“Many community banks are utilizing IT-based solutions to better analyze the impact of various regulations and improve regulatory compliance,” said Depman. “Some also are interested in investing in IT platforms like mobile banking and payments to enhance the customer experience and data and analytics capabilities to help them better understand customer behavior.”
IT Investment a Focus
Sixty-one percent of community banking executives said they would increase capital spending over the next year with information technology (46 percent), new products or services (37 percent), and their regulatory and control environment (24 percent) the top areas of investment.
Mobile banking and payments (40 percent), leveraging data to optimize customer development (22 percent), social media (15 percent), and investing in their online banking platform for laptops and desktops (15 percent) were identified as the most important IT-related projects pertaining to customer growth in the next year.
“Technology is rapidly evolving and it’s changing consumer expectations about how their banks should be serving them,” said Depman. “Community banks that embrace technology as a means to better interact with and serve customers, and meet their evolving needs and habits, can win market share.”
When it comes to data and analytics, only 13 percent of respondents said their bank has high data and analytics literacy, while 28 percent said they were rapidly moving towards it. Fifty-one percent said their bank had average or low data and analytics literacy and 4 percent said they had none.
In other survey findings, 37 percent of community banking leaders said they were slightly concerned or not concerned at all that their bank may be vulnerable to a cyberattack, while 15 percent were extremely concerned and 48 percent were moderately concerned.
The KPMG Community Banking Outlook Survey
The KPMG survey was conducted in October 2013 and reflects the responses of 105 CEOs and senior executives in the community banking industry. Based on asset size, 38 percent of respondents work for institutions with $1 billion to $5 billion in assets, 27 percent with $5 billion to $10 billion in assets, and 35 percent with $10 billion to $20 billion in assets.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 152,000 professionals, including more than 8,600 partners, in 156 countries.