Preview 2022: Bankers' views on crypto, M&A, big tech

December 13, 2021 6:00 AM

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For nearly two years, banks have been navigating the COVID-19 pandemic and the fallout from shuttering the world’s economy.

It now appears that a full recovery may finally be within reach, according to a survey of 175 bankers and fintech executives, which would usher in a new post-crisis financial landscape.

There’s always the possibility that omicron or another COVID-19 variant will slow the return to normal life. Despite that uncertainty, survey respondents, who ranged from CEOs and high-level executives at big, global firms to non-management employees at small community banks, offered their predictions for the industry in 2022.

The survey was conducted in October by Arizent, the parent company of American Banker. It covered a broad range of issues — from when a full economic recovery might materialize to worries about inflation, how banks are planning for cryptocurrencies and potential mergers, and their outlook on technology spending and cuts to branch networks.

What follows is a detailed breakdown of the executives’ answers.

Waiting on a rebound

The U.S. economy has yet to bounce back fully from the downturn caused by the ongoing COVID-19 pandemic, and most of the executives surveyed don’t expect a complete recovery until the back half of 2022 — at the earliest.

About one in three industry executives said they expect a full recovery by that time, while 44% aren’t planning for a full recovery until 2023, according to the survey.

The results indicate cautious planning for much of next year even amid some bright signs, like a 52-year low in

jobless claims

reported by the Labor Department on Dec. 9.

The executives were almost unanimous in their worry about inflation, with 92% of those surveyed saying they were at least a little concerned about the impact rising prices could have on their customers.

The consumer price index climbed 6.8% on an annual basis in November, the highest 12-month increase since the Reagan administration, the Bureau of Labor Statistics

said Friday

. Several bank CEOs

expressed concern

about inflation during an industry conference hosted by Goldman Sachs last week.

“Inflation is very, very real,” Wells Fargo CEO Charlie Scharf said at the conference.

Preparing for digital currencies

Only 2% the industry executives who responded to the survey said their institutions already offer cryptocurrency transactions, but more are preparing to make the leap.

One financial institution that has already embraced crypto is the $107 billion-asset Signature Bank in New York, which has

gone beyond

offering one-off transactions and is holding billions in reserves for crypto companies.

More financial institutions are making plans to enter the crypto market, with 25% of those surveyed saying they were “somewhat likely” to enable these transactions in the next three years and 11% saying they were “very likely” to do so, according to the survey.

As U.S. regulators get their arms around crypto, about two in three executives said more policy work could spur competition on products like stablecoins. But there is work to do. PNC Financial Services CEO William Demchek warned during an Oct. 15 earnings call about “

suspicious collateral

” around some stablecoins.

By the middle of 2022, the Basel Committee on Banking Supervision is expected to release a “consultative proposal” for how crypto assets should be treated under existing capital rules, according to a recent research report by Fitch Ratings.

U.S. banking agencies have started “policy sprints” to understand the risks from digital assets, the researchers noted.

“We expect the agencies to provide further clarity on managing risks associated with digital assets, including crypto-assets, in 2022 — noting that in-flight legislative efforts may significantly alter the regulatory landscape,” the Fitch researchers said.

Afraid of Big Tech

Many financial industry executives fear that large technology companies are finally coming for more of their business, but the worry varies somewhat based on a company’s size.

Nearly half of the executives surveyed said they expect big tech companies to be a “major competitor” in the next three years. This anxiety has been brewing as Google, Apple and Amazon have

explored ways

to get into traditional banking services like checking accounts and credit cards.

Researchers at Moody’s Investors Service said in a Dec. 2 report that large tech firms could pose some competitive risk to banks.

“Technology firms excel at attracting and servicing clients in their ecosystems, increasingly disintermediating banking services,” Moody’s warned in the report. “Banks will have to keep investing in digital ecosystems to keep pace.”

Regional banks appear to be the most worried. Some 64% of executives from mid-sized banks expected giant tech companies to be a major threat, compared with 35% of bankers at large global firms.

Bloomberg

Still hungry for deals

A tougher stance on bank mergers from the Biden administration doesn’t appear to have diminished the industry’s appetite for deals.

Of the executives surveyed, 9% said a merger or acquisition is a “definite certainty” for their company in 2022, while another 14% said an M&A deal is “very likely” for them next year. Another 26% said a deal is at least “somewhat likely,” while about one-third of those surveyed described the possibility as “very unlikely.”

The White House this summer called on the Justice Department and federal banking regulators to take a fresh look at how they approve bank mergers with an eye toward tamping down on consolidation. Some deals have already

run into delays

because of red flags raised by regulators.

The issue was further complicated on Thursday when Democratic members of the Federal Deposit Insurance Corp.'s board

broke away

from Trump-appointed Chair Jelena McWilliams and approved a review of bank merger policy.

What it all means for potential deals in the near term remains uncertain.

“The fear is out there, but I think it’s still unknown,” said Christopher Marinac, an analyst at Janney. “You could have those scuffles, and we still proceed on the transactions.”

Whither the branch?

The industry is split on what to do with its brick-and-mortar branch networks.

About 38% of the executives surveyed said they expect “some reduction” in their number of branches or to “substantially shrink” their physical locations next year.

One company with aggressive plans, the $55.5 billion-asset Synovus Financial in Columbus, Georgia, said in

a recent presentation

that it will close 40 branches, or about 15% of its total network, in 2022.

Other banks

have decided to keep more branches open

than might have been expected last year.

Of the executives surveyed, 23% said they expect to increase the size of their branch network next year. A small number, about 1%, said they plan to “substantially add” to theirs.

Strategies vary by size. About 58% of executives at regional banks said they expect to reduce their branches, while just 28% of community bank executives and 17% of executives at credit unions expect to shrink their networks.

Thumbnail for Video: Whither Bank Branches?

Ryan McVay/Getty Images

Paying more for technology

Financial industry executives are generally expecting to spend more on technology upgrades in 2022.

About 18% of the executives surveyed said they expect a “significant increase” in tech spending over 2021 levels, while 67% said they anticipate at least a “moderate increase.”

Most of the spending is going toward new products or enhancing existing ones, as banks try to keep up with fintechs. But in the next three years, 61% of the executives surveyed said they expect their customers will be using biometrics like facial or fingerprint recognition, and they will need the underlying tech to support those innovations.

In a Dec. 2 report detailing the challenges ahead in 2022, researchers at Fitch Ratings said that how banks juggle their spending may prove complicated, even as long-awaited income from rising interest rates could arrive.

“Expense management may prove challenging over the next year despite efficiency initiatives to rationalize headcount and branch networks, as the need to invest in technology ramps up to stay competitive,” the Fitch researchers wrote.

Bank of America CEO Brian Moynihan faced questions last week at the Goldman Sachs conference about how his bank will handle expense management next year. He said expenses will be up “a few hundred million dollars in the fourth quarter” and that BofA is investing “as fast as we can” in technology that he believes will pay off.

“It’s the stuff you ought to cheer for,” Moynihan said.

Building new in-house capabilities

Industry executives, for the most part, feel good about whether their teams have the skills they need to reach their goals, but a sizable number of firms are dealing with at least some skills gap.

About two in 10 executives polled said their teams did not have the skills they needed. While about two-thirds of respondents said they “mostly” had the right skills and another 15% said they “100%” did, there remain concerns about the gap and how to address it.

Some banks have

started programs

to train existing employees on the technology needs of today, but new hires are also needed.

According to the survey, 74% of the executives surveyed said that hiring new talent was a step they expect to take over the next three years. About 63% said they would be “upskilling” existing workers, while about one-third of those polled said they would continue to rely on outside vendors.