Bank Executive Business Outlook Survey
The second quarter of 2016 did not offer a lot of answers for bank leaders looking to assess the direction of the economy and their industry. In general, C-level bank executives expressed a degree of optimism about some of the core conditions affecting their institutions. For example, the majority (62%) of Promontory Interfinancial Network's Bank Executive Business Outlook Survey respondents said they expect loan demand to increase over the next year, up from 59% last quarter. Meanwhile expectations for increases in funding costs and deposit competition fell to their lowest levels since this survey was initiated at the beginning of 2015.
On the surface, this seems to indicate the real potential for increased profitability. In fact, from a sheer volume standpoint, banks are continuing to make more loans, and funding costs have remained mostly static.
However, the lack of improvement in interest rates has compressed net interest margins across the industry, at a time when a sizable majority of banks are absorbing additional investments in new technology.
Additionally, a number of external factors have added to uncertainty in the industry. Brexit and the ongoing economic turmoil in Europe have created questions without any easy answers. In America, the 2016 general election has moved into full swing, grabbing headlines and dominating news cycles.
Within this current market environment, many banks are looking at growth in overall size as a necessary strategy to remain viable.
Highlights of the latest survey include:
Fewer respondents expect funding costs to rise in the next year. For the past five quarters, the expectation from more than 60% of bankers has been that funding costs would rise, but this quarter those expectations hit their lowest point, with just 53% expecting funding costs to increase in the next year.
Respondents see growth in asset size as key. More than half of respondents indicated that they see asset growth of at least 10% as being necessary to perform at an optimal level, with nearly one in five banks reporting that they want to grow by more than 50% to reach optimal performance. The primary reason given for the need to grow: scaling up in order to spread the cost of regulatory compliance across a larger asset base.
Banks continue to increase investments in mobile and online banking. As it was last year at this time, more than 97% of respondents reported that they expect to either increase or maintain their current investment in mobile and online banking technology, with 60% expecting to grow their investment in these areas. As reported in prior surveys, most bankers perceive their adoption of these technologies as being vital to the overall success of their institutions.
Flexibility and security seen as strengths, development of new technology perceived as top weakness. In a set of breakout questions on managing digital disruption, 72% of respondents reported that they perceive their banks as flexible in adopting new technology and more than 60% report strength at managing customer security. However, when it comes to developing new technology themselves, banks recognized this as a weakness. Instead, bankers indicated that they rely on partners and vendors to bring them solutions.
Uncertainty in Europe to impact U.S. banking sector. The majority of respondents (62%) believe that economic issues in Europe will negatively impact banking in the U.S. (although only 2% of respondents believe that impact will be significantly detrimental).
The presidential election has become a source of concern. While a year ago banks indicated they were not concerned about the impact of the presidential election (just 7% believed the results of the general election would be harmful to banking), 40% of respondents now believe that the results of the general election will be harmful to the banking industry.
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