January 26, 2015 | KPMG LLP's Liz L'Hommedieu and Mark Price provide their insights on three themes that tax executives at banks could face in 2015: (1) continued regulatory pressure affecting bank operating models; (2) growing likelihood of M&A activity within the banking industry; and (3) an increase in technology spend to update systems and platforms, harness all customer data available, and retain existing and win new customers.
Liz L'Hommedieu: The outlook in the banking industry for 2015 has some similarities to previous years and some new things as well. KPMG annually conducts surveys of officers and directors from global, national, regional, and community banks. The surveys identify common themes across the banking industry. Three themes are very consistent this year: one is the continued regulatory pressure on banks; another is the growing likelihood of the long-anticipated wave of M&A activity; and the third is the increase in technology spend.
Mark Price: Regulatory pressure has continued to be a theme in banking, and we expect a lot of change. Regulatory pressure will continue to drive banks' operating models. The industry has accepted that increased regulatory requirements are part of the new normal, but they are still having to adapt to it. Regulatory costs remain one of the top expenditures in banks. These costs constrain merger activity and these costs drive many business decisions.
Another factor in the regulatory environment is Basel III. The adoption of Basel III in the U.S. has required tax departments to focus on the regulatory impact of deferred tax assets and liabilities. This development has made it more imperative that tax departments be engaged in the discussions around corporate strategy, as the tax consequences of acquisitions or dispositions of lines of businesses or entities can have a meaningful impact on regulatory capital.
Additionally, the expansion of stress testing has added a significant burden to tax departments in meeting their annual compliance obligations. Meeting this new obligation has placed a greater demand on automation, new skills in the tax department, and possibly additional resources.
L'Hommedieu: There has been talk of bank consolidation for many years now. M&A activity is expected to increase in 2015. So, 2015 may be the year. There are several reasons for merger activity in the current environment, including expanding customer base; entering new geographies; gaining additional fee-based businesses; maintaining balance-sheet health; and for certain banks, the need to stay alive under the weight and cost of increasing regulation means having to grow in size.
The primary forces constraining merger activity have been diminishing. We see the gap between buyers and sellers on multiples is narrowing, stock price appreciation is now giving banks more "currency" to acquire, and banks are finally working through the issues that have caused regulators to limit acquisition activity.
The new M&A wave may be more challenging from a tax perspective though than prior deals. Targets may be saddled with loss limitations from prior deals. Targets may also have participated in TARP or acquired institutions with FDIC assistance. And both of these raise issues not seen in prior M&A waves.
Finally, given the focus on capital, tax attributes of targets could have impact on the acquirer's regulatory capital, and these attributes may affect the structure of a deal or the accounting method and other elections made.
Price: The increase in technology spend is consistent with the overall economy. Technology spend is imperative in the immediate future. The majority of banks are anticipating big spend to update their operating systems and their core platforms.
For many, weathering the financial crisis and implementing new regulatory processes meant deferring many other technology projects. We now see banks focusing on this deferred maintenance as well as improvement projects. Technology spend is also an imperative to harness and use all of the customer data available. And finally, it is critical for retaining existing customers and winning new customers.
Tax departments need to stay on top of these trends. Some spend may be eligible, for example, for favorable tax treatment, including tax credits or accelerated expensing.
In addition, we’ve seen how tax departments can internally benefit from this technology spend. Tax departments can benefit from integrating their data needs to enhance and streamline compliance, and also to improve planning.
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