Welcome to Banking News, the KPMG Ireland quarterly banking newsletter, which brings together useful insights and developments relevant to the banking and capital markets industry.
Economic outlook
Ireland
Growth is expected across all main indicators of activity in 2024 and 2025, according to the ESRI’s Quarterly Economic Commentary for Spring 2024. This growth is expected despite Modified Domestic Demand (MDD) and headline indicators such as GDP and GNP reporting differing accounts of change in Irish economic activity in 2023. MDD is expected to grow by 2.3% in 2024 and by 2.5% in 2025, while the unemployment rate is set to fall to 4.3% in 2024 and to 4.2% in 2025. The unemployment rate is another key indicator of underlying growth in the economy, with the labour market continuing to perform robustly and operating close to capacity. Inflation is expected to decline throughout 2024, bringing about a return to growth in real incomes. The domestic Irish economy will inevitably be influenced by global developments in 2024 and 2025, such as the stabilisation of growth rates and quicker than expected disinflation occurring internationally.
Europe and UK
According to the Office of National Statistics, real gross domestic product is the UK is estimated to have grown by 0.2% in the three months to February 2024 in comparison to the three months to November 2023. The Consumer Price Index (including owner occupiers’ housing costs) rose in the twelve months to February 2024 by 3.8%. The largest downward contributions to annual rates come from food, and restaurant and cafes, while the largest upward contributions come from housing and household services, and motor fuels.
The March ECB staff macroeconomic projections for the euro area economy discusses the stagnation of the economy at the end of 2023 amid tight financing conditions, subdued confidence and past competitiveness losses. Economic growth is projected to gradually pick up throughout 2024 despite incoming information suggesting a slower recovery in the short run than was previously foreseen in the December ECB staff projections. Export growth is expected to catch up with strengthening foreign demand regardless of current shipping disruptions in the Red Sea, resulting in annual average real GDP growth expected to be 0.6% in 2014 and rising to 1.5% in 2025 and 1.6% in 2026. Inflation, while projected to moderate further, is projected to do so at a more modest pace than in 2023
Global
In the February Interim OECD Economic Outlook, the OECD projects global GDP growth to ease to 2.9% in 2014, down from 3.1% in 2024, before recovering in 2025 to 3.0% as financial conditions ease. The IMF predict that by the end of 2025, inflation will be back to its target in most G20 countries. G20 headline inflation is projected to be 6.6% in 2024 and fall to 3.8% in 2025. Geopolitical risks remain high, particularly in relation to the ongoing conflict in the Middle East.
In the most recent World Economic Outlook, the IMF discusses how the global economy has been surprisingly resilient, despite the consistent significant interest rate hikes by central banks to restore stability. The forecasted global growth for five years from now is at its lowest point in decades, at 3.1 percent. Risks to the global outlook are now broadly balanced. A divergence in disinflation speeds among the major economies could cause currency movements that may put financial sectors under pressure. The high interest rates could have a greater cooling effect than originally envisaged, as fixed-rate mortgages reset and households contend with high debt, resulting in increased financial stress.
Overview
In November 2023, KPMG Global conducted a survey of over 200 banking leaders, supported by extensive benchmarking and one-on-one interviews, who are developing the next wave of strategic cost and value optimisation investments. Through this research, it is clear that cost and value transformation continue to be a key priority for banks.
Challenges bank executives are facing in delivering their cost ambitions
- Change programs are challenging to complete successfully despite short-term energy bursts.
- People tasked with delivering the change strategy may need to build or buy additional capabilities.
- Barriers to cost and value transformation Include: leadership, momentum, and stakeholder buy-in.
- Implementing new technology can be complex.
- Understanding the capability of colleagues supporting the new technology transition and the opportunity to upskill in new areas of focus such as data skills and generative AI.
How can KPMG help?
KPMG has developed a 12-lever model that sits alongside Value Analysis/Value Engineering thinking and provides banks with an opportunity to consider their options for increasing value and reducing the cost to serve.
- Value and cost as the primary objectives. In some banks, there is more investment in contact centres or relationship managers to drive differentiated service and increase market share. When tied with AI supported co-pilots, this can be a powerful resource for banks to invest in.
- Design the cultural mechanisms that will have the biggest impact. Including top-down cost boards and cost management units tied to zero-based budgeting concepts and Hoshin Kanri-style concepts to fully align organisations around the highest-impact investments.
- Measure the real costs that exist across entire value chains and the options you have to deploy the 12 levers in a way that will move the value equation in the right direction.
KPMG activity
KPMG recently published Banking and Capital Markets thought leadership on several topics, linked below.
Central Bank of Ireland news
Central Bank consulting on proposals for a modernised Consumer Protection Code: CBI has launched a Consultation Paper to revise the Consumer Protection Code (CPC), aiming to modernise and clarify it while enhancing accessibility. Deputy Governor Derville Rowland emphasised the importance of updating protections to support the current financial system and consumer interests. Proposed revisions include obligations for firms to secure consumers’ interests, along with updated protections to deal with the transformation in financial services which include digitalisation, fraud prevention, vulnerability and climate risk. The consultation period will last until 7 June 2024.
Central Bank revises down forecast for domestic economy this year: Modified Domestic Demand (MDD) is expected to grow by 2.2% this year, down from the previous forecast of 2.5%. Weak global demand and domestic capacity constraints contribute to this moderated pace of growth. Gross Domestic Product (GDP) is predicted to increase by 2.8% in 2024, up slightly from the earlier estimate of 2.5%. Inflation projections have also been adjusted; The Harmonised Index of Consumer Prices is predicted to average 2% for 2024, with domestic price pressures being the main driver.
From laggard to first mover: ECB could be first big central bank to cut rates: In July 2022, the European Central Bank (ECB) was the last of the big central banks to start raising interest rates in the face of surging inflation. Record energy prices had driven inflation across the euro zone and the ECB was criticised for being slow to act. It would go on to increase interest rates a further nine times, the fastest and biggest hike in interest rates ever undertaken by the bank. Now it looks increasingly likely that the ECB may be the first of the world’s big central banks to start cutting rates, a reflection of the divergent inflationary paths now opening up between Europe and the United States, with the first cut expected to come from the June meeting of ECB policymakers.
How KPMG can help
KPMG has a large team of professionals with extensive knowledge and expertise in Financial Services, Banking, Aviation Finance, Insurance and Asset Management. KPMG Ireland can leverage a network of multidisciplinary professionals, stretching across Europe and beyond. Supported by this global network, KPMG Ireland can provide a broad range of support, advice, and guidance on how to address the challenges you face.
Useful links
- Horizons - the latest developments in Financial Services
- KPMG ECB Office - the latest insight into SSM related issues
- Risk & Regulatory Insights - from KPMG EMA Financial Services
- Global Banking M&A Trends - the latest in regional trends and deep dives into key markets in M&A
Owen Lewis
Partner, Head of Management Consulting, Head of Banking & Capital Markets
KPMG in Ireland
