Banking executives are more intently considering merger and acquisition strategies and reexamining their business models to address growth challenges raised by regulatory reform, according to a recent survey by KPMG LLP, the audit, tax, and advisory firm.

In the KPMG survey, 78% of the banking executives expect IT spending to increase over the next year as a result of regulatory reform.

More specifically, 82% of survey respondents say their bank has significant cash on their balance sheets. In addition, in the next year, 43% project capital spending will increase, while 23% said it would decrease and 34% said it would remain the same. Executives identified IT (50%), regulation compliance/control environment (43%), new products or services (26%), and acquisitions (23%) as the areas in which spending will increase most over the next year.
 
“IT investment has languished for years, but banks are now looking to get leaner and streamline operations, processes, and systems by investing in transformational IT projects,” said Carl Carande, national account leader of the firm’s Banking and Finance practice. “The pent-up demand to complete these projects is the result of various factors such as legacy, inefficient, and incompatible IT systems resulting from previous mergers and acquisitions, the need to develop products and services particularly in the mobile space, various cost reduction initiatives, and regulatory compliance efforts.”

“Regulatory changes are clearly driving the bank agenda and having an impact on the strategic decisions banks are making, with M&A and business models being key areas of focus,” said Tony Anzevino, national leader of KPMG LLP’s Banking and Finance practice. “The execs do paint a picture of continuing health in the short term, in terms of revenue and investment, but do not see a significant rebound in the national economy anytime soon.”

Assessing the business outlook, banking executives surveyed expect improvements in revenue, the economy, and hiring in 2012, but remain guarded longer term, not seeing a complete economic recovery until 2013-2014 or later.

Seventy-eight percent of the respondents identified regulatory and legislative pressures as the most significant barriers to growth, while 87% said regulatory changes are causing their banks to reexamine their business models in order to recoup lost revenue.
 
In addition, 69% of the banking executives said it is likely their institution will be involved in M&A activity as a buyer or seller in the next two years. The key driver of increased M&A activity, according to 67% of the executives, is regulatory change/reform, followed by access to new geographic markets (42%) and access to new technology and products (30%).

When asked to identify the single initiative that bank management will be spending its time and energy on in the next two years, 32% cited “navigating changes in the regulatory environment,” which was more than double the responses of “investing in organic growth,” at 16%, and “focusing on cost initiatives,” at 14%. The respondents said capital and liquidity requirements from the Dodd-Frank Act and Basel III were having the biggest impact on their business, followed by consumer protection and federal supervisory changes.

Despite the concerns over regulation, the majority of banking executives expect the economy, revenue, and employment to improve next year. Fifty-seven percent said their bank’s current revenue is higher than last year and 70% anticipate that their revenue will be higher one year from now.

The executives do see an improved economy and hiring in the next year, with 56% expecting better economic conditions and 41% saying they plan to add personnel.
 
But their longer term outlook remains guarded. Only 9% expect a full economic recovery to happen by this time next year, with 61% expecting it by the end of 2013 or 2014, or even later. Furthermore, when asked when they expect their company’s U.S. headcount to return to prerecession levels, 23% said it already had or by this time next year, with 41% saying by the end of 2013 or 2014 or later. Meanwhile, 24% said their bank’s U.S. headcount would never return to pre-recession levels.

“Banking leaders see things moving in the right direction, but they understand how the general economy impacts their business and they have their work cut out for them in terms of developing sustainable and profitable growth,” added Anzevino.

http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Press-Releases/Pages/Banking-Execs-Regulatory-Reform-2011-Survey.aspx