Page 6 - Banking Outlook 2014 - An Industry at a Pivot Point

4 | Banking Outlook 2014: An Industry at a Pivot Point

This raises legitimate questions for investors and other stakeholders, who eventually may chafe at funneling
money into an industry where returns in the third quarter of 2013 amounted to 0.99 percent of assets, down
from 1.06 percent in the third quarter of 2012 and 1.36 percent in the same period in 2003. High on their list
2
of questions is this: Can the banking industry actually succeed in building its top line at a time when many of
the macroeconomic, regulatory, and geopolitical trends that have been pressuring revenues for the past four
years are poised to extend into 2014 and beyond?
Although the forecast for the U.S. economy is for continued growth, it is for growth only slightly above
the roughly two percent rate averaged over the past three years. That sluggish pace suggests the Federal
3
Reserve will continue to keep short-term interest rates low at least through 2014—and even beyond, putting
continued pressure on banks’ net interest margins.

Net Interest Margin 1984–2013 (%)

5.00
4.80
4.60

4.40
4.20
4.00
3.80
3.87
3.60

3.40
3.20
3.21
3.00 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. NDPPS 227982
01/84 03/85 05/86 07/87 09/88 11/89 01/91 03/92 05/93 07/94 09/95 11/96 05/96 01/98 03/99 05/00 07/01 09/02 11/03 01/05 03/06 05/07 07/08 09/09 11/10 01/12 03/13
Source: Federal Reserve Bank of St. Louis, used with permission.
Prospects for political reforms that might help the economy—prudent measures to reduce the nation’s long-
term debt, an overhaul of the tax code, a sensible alternative to the next round of sequestration spending cuts
in the federal budget—are constrained by the prospect ongoing for political stalemate in Washington, DC.,
auguring poorly for the sort of “grand bargain” the business community has been seeking. Though near the
end of 2013, there was some movement toward political compromise on budget considerations that could
help economic growth, serious concerns remain that the politics of the past several years could get in the way
of real economic progress that is needed in the months, and possibly years, ahead.
Meanwhile, the costs and time stresses created by the regulatory environment are not going away, and
will continue to affect four areas for banks: strategy and business models, interactions with customers and
client assets, data and reporting structures, and governance and risk capabilities. Still, banks that continue to
concentrate first on regulatory issues will be focused on solving yesterday’s problems. Those that are ahead of
the curve are already looking to the next challenges.
Encouragingly, the industry has demonstrated resiliency in dealing with past crises, and leading banks have
already begun many of the transformations necessary to compete in the current postcrisis environment.
The question this time around, when a digital economy is driving lightning-quick change and consumers
have become accustomed to new, faster, and more mobile ways of doing business, is how fast the industry
can change this time. Banks that embrace change and systematically transform themselves to meet new
customer demands will achieve a competitive advantage in the marketplace. Those that continue to ponder—
or worse yet, resist—change will suffer.

2 FDIC: “Quarterly Banking Profile, Third Quarter 2013.”
3 “Fourth Quarter 2013 Survey of Professional Forecasters,” 11/25/13 –
http://www.philadelphiafed.org/research-and-data/real-time-center/
survey-of-professional-forecasters/2013/survq413.cfm