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The global banking industry has slowly returned to a position of financial health, but the overall outlook is mixed. On the one hand, nearly every major indicator has rebounded significantly: revenues are up, M&A activity is improving, and the number of bank failures and problem institutions have returned to more normal, pre-recession levels. What’s more, these positive trends should continue in the near future. On the other hand, returns on equity and profitability remain low, and the risk of cyberattacks is growing exponentially.
Further complicating the outlook, a fluid and uncertain regulatory environment has stoked fears that a raft of as-yet-unwritten regulations will unduly restrict the industry’s profitability and undermine the momentum of recent gains. This year brought a record total of penalties and fines, reigniting demands by the general public to break up the largest institutions — those deemed "too big to fail." At the same time, enforcement actions for noncompliance are on the rise, signaling heightened levels of scrutiny going forward. In response, executives are reviewing their business models to identify new sources of revenue. A spike in M&A in 2014 may indicate that banks are pursuing deals to bolster organic growth. Some institutions are investing in digital business models and mobile banking to differentiate themselves in the marketplace.
So how should banks confront these challenges? We believe that a renewed focus on performance and underlying fundamentals can give banks greater capacity and agility to deal with emerging threats and pursue new growth opportunities. Operational optimization,enhanced risk management and strategic investments in technology are key enablers that cut across functions and have far-reaching implications for a bank’s health and prospects. Further, these enablers are interconnected: IT systems help to drive operational optimization by automating processes, for example, but these same technologies can introduce new risks that organizations must address. What’s required is a coordinated effort among business units as well as the vision to manage these tasks in an integrated way.
This report offers an in-depth analysis of the most critical focus areas for the banking industry in the coming year — regulatory compliance and enterprise risk management, including cybersecurity and model risk management. Institutions can boost performance in these areas by optimizing operations, developing sound risk management frameworks and implementing the appropriate technology. When executed successfully, investments in these areas can become strategic assets that position the business for strong growth and profitability.
In the coming years, banks will continue to face a challenging environment characterized by tight operating margins, an evolving regulatory landscape, and a range of known and emerging risks. Recent data and trends suggest that organic growth will remain elusive, particularly with more restrictive regulations. To identify sustainable sources of revenue, some institutions have already begun reassessing their business models and product portfolios. Given this pervasive uncertainty, we believe banks would be well-served by focusing on operational efficiency and risk management as paths to generating additional profits — in essence, optimizing the factors that are within their control. By building capabilities in these areas, banks can also develop the assets to pursue growth opportunities as they emerge. We will continue to monitor banking trends throughout the year and share our thoughts and analysis.
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Taking stock: The current state of the industry
A look back at 2014, including end-of-year revenues and profits, the state of M&A, and the current regulatory environment.
Controlling costs through compliance optimization
Effectively addressing compliance challenges requires a systematic and disciplined approach to implementing change.
Essential ERM: Manage risk or risk disaster
Ever-changing markets. Heightened investor expectations. Increasingly complex financial instruments. Each of these factors contributes to increased risk. Although these activities are interrelated, they are often addressed in a vacuum.
Cybersecurity: A moving target
It’s scarcely an exaggeration to suggest that every bank’s IT systems are under attack and, with cyberattacks becoming more frequent and more sophisticated, the need to enhance cybersecurity is critical.