• United States



by Roy Harris

Bankers See Regulatory Reforms Spurring M&a

Jun 23, 20114 mins
Data and Information SecurityEnterpriseMergers and Acquisitions

Banks may well turn to dealmaking as a result of the pressure they're getting from regulatory reforms, a survey of bank executives indicates.

Banks may well turn to dealmaking as a result of the pressure they’re getting from regulatory reforms, a survey of bank executives indicates.

Other conclusions reached from the banking survey, based on May and June responses from 100 senior bank executives polled by KPMG LLP, are that most expect economic improvement — and better circumstances for bank revenue and hiring — in 2012. Still, they are cautious about the long term, and don’t see a full economic recovery until at least 2013.

The bank executives participating in the survey were weighted toward large companies, with 62% being with $10-billion-plus institutions. Another 23% represent banks with annual revenues in the $1 billion to $10 billion range, wit 15% of them serving banks with revenues under $1 billion.

The question of whether more mergers and acquisitions are likely this year prompted a positive response from 69% of the banking executives — who said their institutions could be either buyers or sellers. Roughly the same percentage identified the main driver of increased M&A activity being regulatory change or reform, with other factors behind dealmaking being new geographic markets (42%) and access to new technology and products (30%.)

“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,” according to 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.”

Business Models Under Review

Among the respondents, 87% said regulatory hindrances are causing their banks to reexamine their business models in order to recoup lost revenue, while 78% said that regulatory and legislative pressures were the main obstacles facing them as they seek to grow.

The banking business is primed to grow, the survey indicates, with 82% of executives saying they have significant cash on their balance sheets, and 43% projecting that their banks’ capital spending will increase. Capital spending was projected to be flat next year by another 43%, with only 23% percent saying spending would decrease.

Asked where spending will increase most in the next year, half the executives identified information technology. Compliance or control was cited by 43%, and new products or services rated by 26% and acquisitions by 23%. And overall, 78% of the banking executives expect IT spending to increase to some degree over the next year, again as a result of regulatory reform.

“IT investment has languished for years,” said Carl Carande, national account leader of KPMG LLP’s Banking and Finance practice, “but banks are now looking to get leaner and streamline operations, processes and systems by investing in transformational IT projects.” He added, “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.

Executives identified a number of individual initiatives that commands the time of bank management, led by “navigating changes in the regulatory environment,” chosen by 32%, and, in fact, scoring twice as high as the second-largest factor, “investing in organic growth.” Cost initiatives were identified by 14%. Capital and liquidity requirements related to the Dodd-Frank Act and Basel III were also noted, as were consumer protection and federal supervisory changes.

Long-Term Caution

But even if regulatory concerns dominated their minds, the majority of executives held their positive expectations for economic conditions and their own business revenues and employment for 2012 — with 57% saying their bank’s current revenue is higher than last year, and 70% anticipating higher revenue next year. Overall, 56% see an overall improved economy, with 41% planning to add personnel.

The long-term caution is reflected in their feelings about when a full economic recovery will come, with 61% percent expecting that recovery to come by the end of 2013 or 2014, or even later. Asked when they expect their own company’s domestic employment to return to pre-recession levels, 41% say that likely will happen now earlier than 2013, while 23% say that already has happened, or is expected to by this time next year. it already had or by this time next year, with Another 24% said they didn’t believe U.S. headcount would ever reach pre-recession levels at their institutions.

Added Anzevino: “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.”