Page 5 - Banking Outlook 2014 - An Industry at a Pivot Point

Banking Outlook 2014: An Industry at a Pivot Point | 3

Still, the earnings improvements of the past several years have been attributable in large part to rapidly
declining expenses for loan losses and aggressive cost cutting. Now, while problem loans continue to
decline, the impact of shrinking loan-loss reserves on the bottom line is diminishing—and, given the trend
we see now in the credit cycle, the issue could be exacerbated as lending ticks upward gradually, possibly
leading to higher credit losses. More aggressive lending, fueled by competition among banks, could tempt
some banks to lower credit standards, potentially leading to higher credit costs, and even more scrutiny
from regulators concerned about deteriorating underwriting standards.

Flat Revenue; Steep Decline in Loan-loss Provision

$180 $100
162.3 163.3
$160 $90
$140 $80
$70
$120
62.9 $60
$100
$50
$80
$40
$60
$30
$40
$20
$20 5.8 $10
$0 $0
09 Q3 09 Q4 10 Q1 10 Q2 10 Q3 10 Q4 11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3

Net Operating Revenue Loan Loss Provision © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. NDPPS 227982

Source: Federal Deposit Insurance Corp., December, 2013.
And therein lies the rub. Because for all they have been able to accomplish throughout this four-year
recovery—scrubbing and bolstering balance sheets, adapting to new regulatory regimes, cutting costs—
one thing banks have not been able to do, collectively, is grow their top line.
And so we have reached a pivot point—a crossroads at which hundreds and perhaps thousands of the
country’s banks must—in addition to their current focus on cost reductions and continued process
improvement—include in their business strategy a major focus on selling products and services.