2015 banking outlook: The current state of the industry

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Revenues and profits

Since 2010, the global commercial banking industry has demonstrated steady growth. By Q3 2014, revenues had already eclipsed 2012 totals, realizing returns of $2.3 trillion. And while the industry saw a dip in revenues in the United States in the wake of the economic recession, by Q3 2014 revenues had grown to more than $425 billion — a 37% increase over 2012 figures. Meanwhile, investment banking has also rebounded impressively, with over $33 billion in revenues as of Q3 2014. Significantly, investment banks have achieved these returns despite sharply lower revenues.

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In the United States, the number of M&A deals in the banking industry rebounded sharply in 2014; through October, 240 deals had closed, making it the busiest year by number of deals since 2007.1 An increase in M&A may signal that some banks are looking to augment their prospects at a time when organic growth has been incremental. According to a recent report by CNBC, “Each of the top 20 fastest-growing banks is either in the small- or mid-cap space, and most have used M&A as their primary engine.2” Institutions are pursuing this strategy despite the fact that regulatory scrutiny has made M&A a much longer process.

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Problem institutions and bank failures

Over the past five years, bank failures in the global banking industry have declined significantly, thanks to an improving economy. The U.S. market mirrors this trend: The number of institutions on the FDIC’s “Problem List” declined from 411 in Q1 2014 to 354 in Q2, the smallest number since Q1 2009. That total represents a 60% drop from the recent high-water mark of 888 problem institutions in Q1 2011. Similarly, bank failures are at their lowest point in five years, with the number of failed institutions—16 this year thus far—equal to just one-tenth the total in 2010.
An FDIC study of 10 states that experienced 10 or more bank failures from 2008 to 2011 found that small banks, which made up one-fifth of all failed banks, were particularly susceptible to commercial real estate losses.3 Steady economic growth, a stable housing industry, greater federal oversight and increased capital requirements contributed to this trend.

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U.S. Attorney General Eric Holder famously noted that there are two kinds of companies: “those that have been hacked and those that don’t know they have been hacked.” The Identity Theft Resource Center’s Data Breach Report cited 24 breaches in the banking, credit and financial sector as of Oct. 21, 2014. This figure accounts for 3.9% of the total number of U.S. breaches for the year to date, but the mere threat of cyberattacks has a far-reaching impact on organizations. The Ponemon Institute estimated that a single breach can run in the tens of millions of dollars for U.S. companies, so it’s critical for financial institutions to take the proper precautions. As a result, banks have increased their investments in IT security, monitoring and crisis management to be well-prepared for potential breaches. Indeed, Jamie Dimon anticipates that Chase will double its annual computer security budget, currently at $250 million, over the next five years. So while financial institutions might represent a high-profile target, trends indicate that banks are also well-aware of the threat and are enhancing their security capabilities.

Save the date

The following timeline highlights the dates when new regulations go into effect in the United States.

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Regulatory environment

Regulatory activity accelerated in 2014, with banks facing new Basel III capital requirements and liquidity ratios. In the United States, the Final Rule of new capital regulatory requirements took effect on Jan. 1 for the largest banks, followed by quantitative metrics and reporting on Sept. 2. The coming year brings the implementation of the Volcker Rule, which prohibits banks from engaging in proprietary trading, among other requirements, as well as new mortgage-disclosure guidelines courtesy of the Consumer Financial Protection Bureau. None of these deadlines came as a surprise, as bank executives have been preparing for the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) since its passage in July 2010. Instead, it’s the ongoing and pervasive uncertainty regarding full implementation that’s at issue. Consider that, in December 2014, the House passed a budget bill that rolls back a key provision of the Dodd-Frank Act.6

This perpetual game of wait-and-see has forced banks to focus less on specific deadlines and more on building the capability to address the incremental rise of regulations on a consistent basis. Many regulations are finally flowing downstream to smaller institutions, which will need to retool their compliance functions and invest in talent to adapt to new processes, methodologies and enablers.


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1 The M&A Monitor, Olsen Palmer, November 2014.
2 Cox, Jeff. “Small banks are doing some really huge deals,” CNBC, Nov. 10, 2014.

3 Financial institutions: Causes and consequences of recent bank failures, U.S. Government Accountability Office, January 2013.

4 2014 cost of cybercrime study: United States, Ponemon Institute, October 2014.

5 “Dimon sees JPMorgan cybersecurity costs doubling,” Bloomberg, Oct. 10, 2014.

6 Parker, Ashley and Pear, Robert. House Narrowly Passes Bill to Avoid Shutdown; $1.1 Trillion in Spending, The New York Times, Dec. 11, 2014.