KPMG survey shows bank CEOs are focused on interest rate and reputational risk

A KPMG survey reveals banking CEOs’ concerns in the current complex economic environment, which focus on interest rate and reputational risk, a change from 2021, when the main worries were cyber security and tax risks. However, the 2022 survey also reveals optimism, in spite of the present challenges. The overall message is that although most banking leaders expect a recession and short term difficulties, many remain optimistic as to their long term business prospects.

In terms of the economic outlook, while 85 percent of the banking CEOs surveyed believe a recession is likely in the next 12 months, 59 percent believe it will be mild and short and 71 percent have plans in place to deal with it. To hedge against an anticipated recession, 52 percent of CEOs have taken steps to boost productivity and 47 percent are reconsidering investment strategies in the coming 6 months to cope with any unprecedented geopolitical issues. However, although banking CEOs are readying for a recession, many also report feeling optimistic about growth prospects over the next 3 years — for the economy more broadly, the banking sector and their own companies. Seventy-two percent indicated they feel either confident or very confident about the global economy’s growth potential, compared with 55 percent in 2021. What’s more, 83 percent said they feel confident or very confident about the sector’s growth prospects, compared with 75 percent in 2021.

Banking CEOs are also increasingly enthused about M&A opportunities, particularly compared to 2020. More than half (55 percent) of those surveyed indicated their appetite for M&A is high and that their companies are likely to undertake acquisitions that will significantly impact their business. Their main strategies for growth include building strategic alliances with third parties (26 percent) followed by managing geopolitical risks (21 percent). This trend of increased M&A activity is more apparent in the banking sector (versus 47 percent among all global CEOs).

Banking CEOs continue to support investments in technology in areas which drive growth, with 74 percent saying that continuing to drive digital transformation at a rapid pace is critical to stay ahead of the competition.  However, short term pressures are leading to a temporary reduction in spending on technology with 78 percent of banking CEOs noting that their businesses are pausing or reducing their digital transformation strategies to prepare for the anticipated recession (46 percent have paused or reduced, and 32 percent plan to pause or reduce over the next 6 months). In fact, 69 percent say they need to be quicker to shift investment to digital opportunities and divest in those areas where they face digital obsolescence.

While technology is still a dominant focus for investment, there has been a shift towards greater weight being given to investment in human resources; 58 percent say they are placing more capital investment in new technology while 42 percent are developing their workforce’s skills and capabilities, compared to 67 percent who prioritized technology investment and 33 percent workforce-related investments in 2021. Cyber security remains an important issue. More banking CEOs recognize they are prepared for a cyber attack, with 76 percent saying they are prepared, up from 66 percent last year. Banking CEOs are significantly more prepared for a cyber attack than most global CEOs in other industries. Recent geopolitical volatility worldwide has heightened the risk of companies of all sizes being hit by cyberattacks.

Environment Social and Governance (ESG) is becoming an increasingly important consideration for banking CEOs. A growing number now believe that ESG programs improve financial performance- 38%, up from 26% a year ago. Moreover, 67 percent see stakeholder demand for increased reporting and transparency on ESG issues up a significant extent (up from 58 percent in August 2021) while 65 percent of banking CEOs believe stakeholder scrutiny on ESG will continue to accelerate.  19 percent of banking CEOs indicate stakeholder skepticism around greenwashing is increasing (up from 9 percent in August 2021). However, the expected recession is having some negative effect on ESG activity, with 46 percent of the banking executives surveyed saying they plan to pause or reconsider their planned ESG efforts over the next 6 months, while 34 percent have already paused or are revisiting their ESG efforts. This is an unwise position to take; banks that step back from their ESG plans, particularly around climate change, are likely ignoring a big opportunity: to be a part of funding the transition. The pause also involves risks. For example, continuing to fund high-carbon industries may leave banks holding stranded assets. Failure to stay the course on ESG could be a strategic and financial disaster for banks.

In terms of employment, the survey shows again that expected negative impacts due to the anticipated recession will be short term. Though 81% of banking CEOs have considered or will consider downsizing their employment base over the next 6 months, 86 percent say they are planning to increase the size of their workforce over the next 3 years. Moreover, 20 percent said that the employee value proposition (EVP) to attract and retain talent is the top operational priority to help them achieve 3-year growth objectives. Two-thirds of banking CEOs (69 percent) agree that the ability to retain talent amid the pressures of inflation/rising cost of living are top of mind. A majority (69 percent) of CEOs now see in-office as the go-to office environment over the next 3 years, although this could make it more difficult to attract employees.

In spite of the current difficulties, this survey shows that many top banking executives see good long term prospects for their banks and their industry. Nevertheless, to succeed, they will need to keep pace with change and, in particular, embrace ESG as a critical element of the operations of a modern business. ESG is not just something which is nice to have- it is vital to long term success and even survival. Turning to the Romanian banking sector, this remains resilient and many players have adapted to the current situation, for instance by offering attractive rates for deposits. Moreover, the Romanian banking sector has seen significant changes in recent years, especially the move to greater digitalization driven both by the pandemic and also by the emergence of new players on the market. Overall, the picture is one of improvement and increased client focus.