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“It could be worse.” Many bank CEOs may have started the year expecting that 2022 would offer appealing results, even if they weren’t as strong as the previous year’s. There were reasons for the cautious optimism: Pandemic restrictions have been winding down; markets are predicting rising interest rates, which have historically driven higher net interest margin1; and PwC analysis shows that loan performance has been trending better than before COVID-19. But now, geopolitical uncertainty in Ukraine and elsewhere has many people reconsidering their promising analysis.
Let’s start with the basics: Historically important factors may not be nearly as important to banks as they once were. Certainly, some financial firms will likely look back on 2022 as the year that their strategy started to fall into place. But for many banks, the current signs of stabilization can mask some serious challenges ahead. This is our look at what’s next in banking and capital markets: the trends and the current industry landscape, the platforms that leaders can use to help drive growth and some strategic choices that may lie ahead.
US banking industry landscape
After a challenging 2020, when many banks tightened lending in response to shutdowns and job losses across the US economy, 2021 turned out to be more favorable. Thanks to government stimulus programs and better-than-expected credit performance, many firms rebounded, and bank ETFs outperformed the broader market. PwC analysis shows that larger banks with diversified revenue sources — including mortgage lending and banks with active capital markets or wealth management businesses — did particularly well. But it may be tougher to repeat that performance in the year ahead as the market evolves, causing some high-performing product categories to face new headwinds.
In 2022, with GDP expected to slow2, US banks are looking at a low-to-moderate growth outlook. The recent pick-up in loan growth may not be sustainable, fintech firms are edging deeper into the banking landscape, and customer expectations are being reshaped in ways that legacy firms may have trouble matching. The verdict is still out on whether pursuing M&A for scale can deliver the same ROI as acquisitions that address a specific strategic purpose. Deposits have grown, but this may reflect monetary policy and temporary shifts in consumer and business behavior more than anything banks have done. Finally, the combination of growing inflation and supply chain issues can put increased expense pressures on banks and their customers.
The bottom line:
- Investors continue to prioritize growth over cost-savings.
- Growth could be challenging for banks that aren’t laser focused on specific market segments or businesses.
What’s your growth story?
Banks know they’re facing macroeconomic pressures, squeezed between fintechs and some megaplayers. Many will likely miss growth opportunities because complex strategies have them trying to fight multiple fires at once. But some banks with truly differentiated offerings are taking deposit market share from peers, growing top- and bottom-line growth faster than their competitors and being rewarded by investors (e.g., market-leading tangible book value per share).
These banks are developing and implementing an end-to-end strategy with a clear idea of exactly who they want to serve, and why. Some are also willing to explore divestitures if it will let them double-down on that strategy. They are moving from a product-first to a customer-first experience, drawing on modern technology to help meet client expectations. And they are working to enhance trust with employees, regulators, investors and other stakeholders by keeping pace with changing rules and societal values.
While the banking and capital markets sector is more complicated than ever, there are still opportunities for firms of all sizes. Here’s our view of what’s next in banking and capital markets, and how you can use these forces to help shape your own growth story in 2022.
What’s next: Transformation that puts the customer at the center
Know what value you’re adding, or customers may hollow out their relationship with your bank
During the pandemic, a growing number of people realized that they had stopped going to branches to deposit checks or get cash at ATMs — and it was okay. They learned that electronic payments really were easy, both in virtual stores and peer-to-peer. It’s not just cash: from mortgages and foreign exchange to personal loans, saving and investing, consumers have started buying into alternative banking. It’s time to ask yourself a hard question: What — and who — is your bank for?
Some banks still struggle with the basics. Our most recent Digital Banking Consumer Survey shows that customers are more open to digital acquisition than ever, even when it’s not an option. For example, 20 to 25% of consumers would prefer to open a new account digitally but are unable to do so today. As customers become more comfortable with digital interactions, they want services that add more value than just online account opening and bill payment.
Unfortunately, banks that have moved slowly toward cloud transformation are finding it difficult to add these capabilities, regardless of whether they buy or build them. Meanwhile, industry leaders are moving far more quickly to deploy innovative products and services to target clients through partnerships with fintechs and via the early benefits associated with internal cloud investments. In the coming year, we expect to see more leading banks of all sizes look for opportunities to expand faster while moving toward specialized customer offerings by using these cloud-based services.
What we may have learned most during the pandemic, and as we move toward a new digital banking model, is that your engagement strategy matters. As customers have fewer human contacts with your bank, each one matters more. To be clear, most consumers do still want to work with real bankers along with technology — especially during initial acquisition and onboarding activities — as long as it’s on their own terms. But “phygital” banking, at the intersection of physical and digital, means different things to different users, and this can be a likely area of focus in 2022.
However, much of this is a marketing challenge. Customers increasingly want to see offers and services that are relevant and tailored to a segment of one: themselves. While the industry has moved away from one-size-fits-all product design, few banks have the capability to analyze what their customers really want. It doesn’t help that many banks may still struggle with data systems built for a simpler, more siloed time.
Fortunately, a new crop of low- and no-code workarounds has emerged, such as Customer Link, a PwC product. In the coming year, we’ll be hearing a lot about tools like these, which let companies use multiple data sources to help develop an integrated view of how to make each customer touchpoint count.
To deliver more value from those touchpoints, the appropriate software tools and data strategies should be on your 2022 agenda. Admittedly, it’s an evergreen topic: Over the years, we’ve worked with banks of all sizes to help design and implement modern technology architectures. What has changed is the emphasis on the cloud to deliver always-on connectivity.
To stay competitive, your bank must be able to provide a seamless onboarding and service experience across channels, for customers and employees alike. Increasingly, this means turning to business partners for best-of-breed solutions, which requires a greater emphasis on integration. The goal: To update your service architecture to enable scalable offerings that can “plug and play” with new capabilities from anywhere, so you can give your customers the differentiated experiences they want.
Key takeaways:
The pandemic has led many banks to rethink their interaction with their clients. While it can be challenging to understand your stakeholder expectations, it's an essential part of designing a winning growth strategy.
Cloud and fintech partnerships are becoming essential parts of the delivery strategy / experience, and you may need to adapt to make this cohabitation possible.
You’ll need effective data strategies to align your bank’s products to the markets and customers you target.
What’s next: Banks cultivate trust through an emphasis on ESG
Pressure rises on banks to become forces for good
While many companies are paying more attention to environmental, social and governance (ESG) concerns than ever, these topics aren’t new to financial institutions. Banks make choices every day that are pivotal to society, so they have long grappled with issues of corporate social responsibility and what it means to be part of a community. Similarly, banks have been working for more than a decade to improve governance and increase transparency in the wake of the 2008 financial crisis. Now, as climate concerns grow, the “E” has become far more important to financial firms, especially as stakeholders realize how much influence banks could have on the environment — and how much being part of the solution could provide opportunities.
Of course, the industry hasn’t been waiting for others to tell it what to do. For example, the Risk Management Association recently announced3 that a group of leading US and Canadian banks are working together to find more consistent ways for banks to integrate climate risk management throughout their operations. Many banks have designated a head of climate risk under the Chief Risk Officer, they’ve identified potential exposures and are well underway in modeling and measuring their risk profile.
This is an important step, because physical and transition risks may turn out to have a much greater impact on financial institutions than they realize. For example, greenhouse gas emissions associated with lending, underwriting and investment activities are more than 700 times higher, on average, than a financial institution’s direct emissions. If you want to lower your bank’s carbon footprint, you also need to understand the scope of your financed emissions.
Whether your firm is taking a leadership role or a purely pragmatic approach to ESG challenges and opportunities, data is the key to reliable reporting. Banks will need to do more to bridge the gap between historical ways of measuring performance and the new, longer-term concepts coming with ESG. ESG data is different from traditional financial metrics, and it may be harder to collect, manage, validate and disseminate the data you’ll use to tell a fact-based, credible ESG story. Tools like ESG Pulse, a PwC product, can help uncover issues related to data availability, accuracy, controls and governance to help you swiftly fill in gaps, enhance reporting capabilities, drive transparency and build trust.
This isn’t just about what you should do; there is also a fair amount of self-interest involved when banks get more aggressive about pursuing ESG-related revenue opportunities. For example, global ‘green bond’ issuance topped US$500 billion in 2021 — but lenders are increasingly being asked to demonstrate that so-called sustainable bonds represent meaningful progress toward ESG goals.
Some retail banks hope to differentiate their offerings with products explicitly linked to ESG goals. Commercial banks have been more nuanced in their outreach, such as by hiring loan officers who reflect the growing diversity of their client base. But revenue opportunities may appear as a carrot or a stick: Soon, investment managers could insist that banks disclose staff diversity data to participate in underwriting opportunities. Finally, you’ll want to be sure you are being tactical with tax credits, as these can change the dynamics of a transaction. PwC has developed a database of incentives to help keep up with the growing number of programs designed to encourage a commitment to ESG principles.
Key takeaways:
- Climate change is increasingly important to your bank’s strategy and stakeholders. This is about more than risk management.
- Stakeholders need to trust the way you explain your ESG story, so you may need to change how you measure and report results to make sure your data is accurate and reliable.
- There are enormous financing needs tied to the coming “green” transition. Is your bank prepared to compete?
What’s next: Deals that look beyond scale
Expect to work harder to find fairly priced deals — and to make them work
This has been one of the busiest markets for acquisitions, divestitures and partnerships for the banking industry in nearly a generation. PwC teams have been working around the clock helping banks hone their deals strategy; identifying ways to use technology, tax and operational synergies to generate more value; and then bringing those strategies to life from negotiation to deal closing and beyond. What we’re seeing tells us a lot about what could be ahead for banking deals.
After a dip in activity in the first half of 2020, the market snapped back. Both the number and size of deals (as reported) are now in line with where we were before the pandemic began. There are far fewer banks today than there were 20 years ago, but there’s still a lot of room for further consolidation and more surgical transactions. Much of the current activity has fallen into one of the following three categories:
Foreign banks reevaluating the US banking landscape
Regional banks continuing to consolidate, seeking scale
Banks of all sizes adding specialty businesses to fill perceived gaps.
While scale deals will likely continue to be popular, many are based on assumptions about cost synergies and buying behavior that are rapidly changing. As we noted in our Banking and capital markets: Deals 2022 outlook, there’s clearly a lot of capital available for deals, but all the dry powder and bank stock currency won’t help if valuations don’t make sense. In the coming year, we expect banks to pay closer attention to analyzing value creation options — both before and after a deal closes.
For some, this will likely mean veering into new territory. This involves thinking about how to compensate key producers differently, spotting unmet needs in a new customer portfolio, using tax strategy to unlock hidden value and turning an integration management office into an agent for change. But there are usually a broad range of levers that can turn what could have been an underperforming deal into a transformative one — from performance improvement to strategic repositioning and asset optimization.
Along with buying and selling, we expect to see banks move more aggressively this year to leverage partnerships for rapid scale, distribution or infrastructure. Banks could find it increasingly difficult to identify valuable fintech solutions through acquisitions, and given capital constraints, they may find that partnerships and joint ventures can offer better value. While these deals don’t often make business headlines, they can be just as important to your bank’s future, especially as fintechs expand their abilities to disrupt. In 2022 and beyond, we expect leading banks to concentrate on making smarter partnership decisions and making them more quickly.
We’re also seeing new regulatory attention, as Federal Deposit Insurance Corporation (FDIC) board members have sought public comment on the Bank Merger Act, arguing that the current review framework may be outdated. We’ve seen indications that regulators and other officials are increasingly eager to evaluate bank M&A on the basis of its societal impact. In response, banks have been more reluctant to close local branches in an acquired entity, reduce front-line staff or cut community engagement. All of these moves can put more pressure on profitability and back-office staffing. This, in turn, means we’re likely to see banks leaning into value creation efforts and managed services for non-core capabilities.
Key takeaways:
The banking M&A market is still hot, but it’s harder to find fairly priced deals.
Cost synergies alone may not generate adequate returns; it’s time to think differently about value creation options.
As regulators look more closely at how bank mergers affect communities, some cost-cutting options are off the table, making other deal levers likely more important.
What’s next: a renewed focus on Regulation
With new teams in place, banks are seeing more attention from regulators and lawmakers
Consumer protection: The Department of Justice (DoJ), with the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC), has begun a new initiative to address redlining, in support of the Biden Administration’s goal of combating mortgage discrimination. The CFPB has also asked for new information about “Buy Now, Pay Later” (BNPL) credit services and, along with the OCC, it will begin looking at banks’ reliance on overdraft fees, which might impair consumers’ “financial health.”
Many banks already have programs in place to address these concerns, including several recent announcements by large banks about limiting some insufficient funds fees. Still, you’ll want to be sure you have adequate data analysis in place to satisfy examiners — and by shoring up these practices, you can also build more trust with consumers, potentially avoiding reputational harm.
Cybersecurity: Cybercrime has become everyone’s problem, and last fall the government announced new efforts to fight ransomware. These include new threats from Treasury’s Office of Foreign Assets Control (OFAC) to punish those who facilitate ransom payments to sanctioned parties. In addition, the Federal Reserve (Fed), OCC and the Federal Deposit Insurance Corporation (FDIC) approved a rule taking effect in May 2022 that will require banks to notify their primary federal regulator within 36 hours of any material cyber incident. Many banks have already developed reporting systems to identify and report on events quickly due to an existing 72-hour reporting rule from the New York Department of Financial Services (NYDFS), but now they'll have to double their speed. Firms also need to be sure they stay on top of potentially overlapping regulatory requirements to quickly assess and report any exposure as needed.
Climate risk: There is growing talk about new banking industry regulations to help address climate change. Fed Chair Jerome Powell has said it’s one of the three biggest risks facing the financial system, and Vice Chair nominee Lael Brainard has said that climate scenario analysis could be as transformative as the Fed’s stress testing efforts. The Financial Stability Oversight Council (FSOC) has issued recommendations for addressing climate-related risks, while the NYDFS has formed a new climate division, the OCC has suggested questions for boards to ask and proposed a set of principles on climate-related financial risk management, and the Securities and Exchange Commission (SEC) seems to be moving toward climate disclosure requirements that would affect publicly listed banks. Watch this space: A lot can happen here in 2022.
Taxation: Banks will want to stay on top of changes in the global tax landscape and how they might be affected by changes to foreign tax credit rules. Changes proposed by the Organisation for Economic Co-operation and Development (OECD) could be implemented by various jurisdictions and effective as soon as 2023. If so, certain tax incentive regimes in the US and abroad could run afoul of the new OECD rules, resulting in incremental tax.
New tax regulations released late last year would deny foreign tax credits for certain so-called “digital services taxes.” The newly enacted rules are much broader, and they can deny foreign tax credits in a variety of situations where they were allowed under previous law. In response, some banks will likely be expected to arm their clients with increasing levels of tax-relevant information to enable those customers to comply with changing laws. We expect firms to pay particular attention in the coming year to managing the impact of global tax changes — and to update systems and processes to enable necessary tracking of tax-relevant information.
Digital assets: Ready or not, rulemakers are also addressing digital assets such as cryptocurrency and non-fungible tokens (NFTs), with both the SEC and the Commodity Futures Trading Commission (CFTC) looking to oversee aspects of this emerging asset category. There has been US legislation around tax information reporting on these assets, and taxation of these assets and the income they produce continues to evolve — both at home and abroad.
The US hasn’t been as aggressive as some countries in developing a Central Bank Digital Currency (CBDC). But even as some regulators have encouraged laws to rein in so-called stablecoins, a newly announced consortium to launch a bank-minted stablecoin4 shows that the market is moving quickly. Similarly, the SEC declined to block bitcoin exchange-traded funds (ETFs), which are now trading. Many of our clients have been asking about cryptocurrency risks, tax implications, accounting rules and the many potential roles for financial institutions. From the potential for OECD tax action in this space to efforts by the Fed, OCC and FDIC to clarify expectations around crypto custody, bank capital and liquidity standards, loans collateralized by crypto assets and more, 2022 will likely be a busy time for digital assets.
Key takeaways:
Banks face a new group of more consumer-friendly regulators; you’ll need good data to support your lending and fee policies.
Cybercrime and climate change risk are both attracting new attention, with changes likely for how banks report on each.
Markets may be moving more quickly than regulators on digital assets, but banks face many related questions on risk, tax, accounting and more.
Nothing delays a growth agenda faster than a regulatory matter. There are opportunities to use bank risk models strategically to enable growth.
What’s next: Cloud technology pivots from cost toward value
The banking industry finally gets a cloud designed and built for the banking industry
In most conversations about bank strategy today, bank leaders are likely to bring up “migrating to the cloud,” with 38% of the financial services executives in our recent US Cloud Business Survey reporting that cloud is central to their business strategy and critical to revenue growth. At the same time, the survey also shows that executives haven’t been getting the value they’d anticipated. It can be frustrating, but not surprising; this is what we’d expect from the first phase of an industry’s cloud modernization. However, things are about to get a lot more interesting.
Until now, cloud investments have largely been focused on cost and, in some cases, resiliency, with an emphasis on uploading data. Instead of using their own data centers, early adopters leased computing resources from service providers offering lower costs while reducing operational risk. These are important benefits, but they’ve been offset by a built-in inefficiency. Bank applications that were designed to operate in a corporate data center may face performance tradeoffs when they’re “lifted and shifted” to the cloud, retrofitted to a different technical environment.
Leaders have begun to “refactor” their applications, rewriting the code for optimal performance in today’s distributed computing environment (see “Cloud migration and application modernization explained”), but few have gotten far. Many bankers see data risk management as key to a successful deployment, and they’ve been cautious about not running afoul of regulators with regard to securing transactions and processes and managing customer information. Typically, we see banks choosing carefully, moving some applications, then testing and learning. They may wind up using multiple cloud service providers, which have different strengths in different markets. But this can lead to siloed implementations because there are few tools to help banks manage and operate their multi-cloud footprint in a cost-effective and risk-controlled manner. At this rate, even first movers could be operating both in the cloud and across local data centers for years.
Fortunately, banks don’t have to make the same risk/reward trade-offs they once did, because the technology and regulatory environment has advanced quickly. The buy/build conundrum has changed too, and banks now have more good choices on how they’ll serve their customers. Dozens of technology infrastructure companies have emerged, with modular tools that can be used on demand, for underwriting, risk management, authentication and fraud-prevention, RegTech, compliance, payments and more. Many can replace legacy bank capabilities, and they’ve been designed from the start to run efficiently and securely “as-a-service.” This lets banks make more intelligent decisions about how to provide more customer insights and add more value, and some late adopters may find that they can even leapfrog ahead of their competition.
What’s next for banks in the cloud: The conversation is moving from “how do we move our data” and “which applications should we rewrite first” to “how do we get more value from digital transformation?” The key is using utilities and pre-built integrations to bring together the dozens of functionalities that make a bank what it is, whether built or bought: origination systems, linked to treasury systems, linked to trading systems, linked to the compliance and control systems, all of which happen to be purpose-built for the cloud. We could see the growth of managed service offerings too, with cloud tools enabling banking-as-a-service, at scale. And this is how bank executives will soon see value from their cloud investments: when the discussion moves from cloud migration to decisions that set a bank apart from its competition.
Key takeaways:
Many banks now use some cloud-based services, but they’ve faced performance hurdles because their applications were not designed to run in a distributed, cloud-based environment.
Some banks are re-coding software, designing it to run efficiently in the cloud. Meanwhile, there are many fintech providers building and bundling applications that, through partnerships, could accelerate traditional bank cloud strategies.
- What’s next: banks using pre-built integrations and utilities to connect banking capabilities that are purpose-built for the cloud, capable of working across service providers, and integrating homegrown and best-of-breed offerings.
What’s next: Banks and the coming opportunities
The factors we’ve highlighted in this year’s report — transformation, ESG, deals, regulation and cloud technology — can pose some of the biggest opportunities for growth in the coming year, as well as some of the biggest challenges. However, these opportunities will need to be managed carefully. The market continues to evaluate how to manage the complexities of rising compensation costs, tax strategies, talent acquisition and retention, geopolitical uncertainty, global tax changes, cyber risks and macroeconomic volatility as the pandemic evolves. While not all new, these are among the top banking industry concerns, and they’re reflected in PwC’s 2022 CEO Survey.
While 2022 could be a challenging environment for many, virtually any bank, regardless of size or geography, can benefit from sharpening its focus in these five areas:
Use digital transformation tools to give your customers what they value most.
Build trust and prepare for new growth opportunities tied to ESG principles.
Look at value creation strategies to identify strategic deals at fair prices.
Retune your processes to adapt to a changing environment for regulation.
Jump ahead with a cloud strategy that can help you do more, more quickly.
There are plenty of opportunities to execute a targeted growth strategy in 2022. We’re here to help. Let’s talk.
1 Terris, Harry and Khole, Rucha. “Big US banks poised for guidance reset in Q4'21 reports after rates increase,” SNL Financial Extra, January 12, 2022, accessed on Factiva on March 4, 2022.
2 Dougherty, Danny and Barnett, Andrew. “Consumer Pessimism Grows as Inflation Accelerates; U.S. consumer spending is now being tested by Omicron's persistence, waning fiscal stimulus, inflation and stock-market volatility,” The Wall Street Journal Online, February 1, 2022, accessed on Factiva on March 4, 2022.
3 Vanderford, Richard. “Big Banks Band Together to Measure and Manage Climate Risk; A consortium of 19 banks will develop standards to integrate climate risk management throughout their operations,” The Wall Street Journal Online, January 12, 2022, accessed on Factiva on March 4, 2022.
4 Crosman, Penny. “Banks form consortium to mint USDF stablecoins,” American Banker, January 13, 2022, accessed on Factiva on March 4, 2022.
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