Growth: 2022 Banking Industry Survey

Credit risk

At the top is credit risk, which has become increasingly volatile as banks are confronting potential asset-quality issues due to the recent rapid rise in inflation and accompanying interest rate increases aimed at trying to blunt it.

Downside risk has increased in part due to the Federal Reserve Board’s aggressive rate hikes this year, the most recent being an increase of 75 basis points in July – the fourth hike this year. There is speculation that another 75 basis point hike could come when the Federal Reserve meets again in late September.

The surge in inflation, for example, has the potential to increase corporate funding costs, especially as central banks are considering more interest rate hikes through 2023. That, and other factors, such as the sanctions created at the outset of the Russia-Ukraine war may place considerable importance on credit risk management practices.

On the positive side with respect to credit risk management, banks have invested heavily in risk management systems over the past decade and are much better positioned today than the previous cycle.

Action steps

“Generating top-line (growth) is getting harder,’’ said Dylan Roberts, a KPMG partner in the financial services strategy and performance transformation practices. “Loan growth was hard to come by for much of the current economic expansion, and higher rates, inflation, and broader uncertainty are likely to dampen demand. Higher-rates will ‘re-flate’ net interest margins but may also reduce deposit stickiness over time. It’s a challenging environment.”

Roberts suggested that banks consider two steps to unlock growth. First, focus on the “innovation bar”— which he defines as “the level of new thinking, value propositions, and delivery mechanisms required to access market growth.’’ That bar “has continued to rise and now exceeds internal capacities” at many banks. Second, although the expected recession has (probably) not yet arrived, Roberts suggested that banks begin actively planning for the recovery. “Banks are going to face near-term cost pressure, and in many cases will have to cut originations and servicing capacity. But the institutions that are able to preserve origination capacity will also be the ones that are fastest out of the gate in the recovery. Banks that have to re-hire and re-build capacity when the recovery arrives risk missing out on three or four quarters’ growth.”