"Financial regulation is expected to have a significant impact on the financial services industry," said Scott Marcello, deputy leader of KPMG LLP's Financial Services practice. "While the impact will vary depending on the final form of the legislation, it is likely to have sweeping implications - including governance, risk, compliance, and capital - for financial institutions.
"Despite the reality of impending financial reform, banking and financial services executives are bullish about their business prospects in the current year and 2011, with many investing for long-term growth and specifically focused on traditional services, emerging technologies and M&A as a means to generate growth."
Further Improvement in Business Conditions
Most executives believed business conditions in their sector are better now than one year ago and the vast majority expected conditions to continue to improve over the next year.
According to the KPMG survey, better than 60 percent of banking and financial services executives said quarterly revenue and profitability were better than a year ago and more than 75 percent said both would be better in 2011. More than 50 percent said their company's ability to get financing and raise capital over the past six months had improved.
Employment Picture Improving
When asked specifically about headcount for 2010, 50 percent said they expected to add headcount, while 22 percent expected to make headcount reductions. When aggregated, the net change in headcount for 2010 is expected to be an increase of 1.4 percent, according to the KPMG survey.
When asked about the 2011 employment picture, 48 percent expected it to be better and 42 percent expected it to be the same, while only 10 percent thought it would be worse.
Investing for Growth
According to the KPMG survey, banking and financial services executives said they were placing their current strategic emphasis on investing for long-term growth (65 percent) instead of cost-cutting for survival (35 percent).
When asked to identify the top three biggest drivers of revenue growth for the next one-to-three years, nine out of 10 respondents and 100 percent of banking executives cited traditional services such as checking and savings accounts, credit cards, and standard investment vehicles. Executives were also looking to emerging technologies (66 percent) and mergers and acquisitions activity (60 percent) as significant revenue growth areas.
When asked to identify the three most likely factors to hinder economic recovery in their sector, continuing high national unemployment (62 percent), the distressed real estate market (46 percent), and increased government regulation (43 percent) were cited most frequently.
"Clearly, there are still obstacles to a full-blown financial industry recovery," said Tony Anzevino, partner-in-charge of KPMG LLP's Banking and Finance practice. "However, the banks and financial services institutions that get a head start on preparing for the impending regulation and remain focused on growth opportunities in this environment may gain a competitive advantage.
"Banks focused on traditional services will need to continuously manage costs relative to their peers in order to grow profitably - while providing competitive products and excellent customer service."
Additional Write-downs and Bank Failures Expected
The KPMG survey also found that 71 percent of banking and financial services executives expected more than normal write-downs related to their real estate assets, while 42 percent expected more than normal write-downs related to other assets.
When asked to forecast the number of bank failures in 2010 compared to 2009, 40 percent of respondents expected there to be more, 31 percent expected about the same amount, and 29 percent expected less.
Other Regulatory Developments Deemed Likely
According to the KPMG survey, 84 percent of respondents believed that regulation related to improved quality and transparency with respect to capital is likely to be enacted as is regulation to address unregulated or minimally regulated parts of FS. These regulations were ranked by respondents as the third (35 percent) and fourth (31 percent) most likely regulations to impact their businesses if implemented respectively.
Fifty percent of the respondents believed that regulation limiting the size of financial institutions is likely; it also ranked as the fifth (25 percent) most likely regulation to impact their businesses if implemented.
At least three quarters of the executives also cited the expansion of fiduciary responsibilities, the "Volker rule," assessing fees and taxes on banks that received Troubled Asset Relief Program (TARP) funds, and proprietary trading limits not covered by the "Volker rule" as likely to be enacted. However, less than one quarter of the executives believed these regulations would be among the most impactful on their businesses.
Additionally, 43 percent of respondents said the most important hindrance to lending in the financial sector was regulations requiring increased capital.
Investment Management Findings
Over the next 12 months, respondents indicated that investor capital would likely go into the following types of investment offerings proportionally: traditional long-term funds (35 percent), private equity funds (19 percent), real estate funds (14 percent), venture capital (13 percent), hedge funds (12 percent), and others (7 percent).
When asked about the likelihood that additional government regulation of the investment management industry would improve trust between clients and advisors, 40 percent of respondents said it was likely and 60 percent said it was unlikely.
THE KPMG INDUSTRY PULSE SURVEY
The KPMG survey was conducted in April/May 2010 and reflects the responses of 134 CEOs and other C-level suite executives in the banking and financial services industry. There were 69 respondents amongst banks and 65 respondents from other financial services companies. About 29 percent of respondents work for institutions with annual revenues exceeding $1 billion; 25 percent have annual revenues in the $250 million to $1 billion range; and 46 percent have revenues below $250 million. Clarion Research Inc. conducted the survey and compiled the data.