It’s hard to imagine a more turbulent year than we experienced in 2022. There is a bit more stability as we enter 2023, but in speaking with KPMG financial services clients, across banking, asset management, private equity (PE) and insurance, they are anticipating more volatility.

Nearly all expect a recession this year, at least in the US, the EU and the UK. It’s the consensus of most economists as well as the vast majority of financial services CEOs we surveyed for the KPMG 2022 CEO Outlook. No doubt, there are a lot of indicators pointing in that direction. 

But will a recession be severe, or mild and shallow? Will the strong labor market in the US and relatively upbeat corporate earnings forestall a recession until 2024, or can a soft landing be engineered? No one knows for sure.

For central banks, recession fears have taken a backseat to fighting inflation. As one KPMG banking client said to me, “central banks are prepared to put the economy into a coma to bring inflation under control.” As it looks now, such drastic measures may not be necessary; inflation has been declining and may drop below 5 percent by mid-year. 

That said, economic conditions remain tenuous as we start the year. So how are financial services organizations responding? There are some consistent themes that I’m hearing.

Almost every conversation with KPMG banking clients includes a discussion of what a recession will mean for loan underwriting. Delinquencies are up, banks’ risk appetite has decreased, and loan standards have tightened. I expect to see continued scrutiny of risk appetite and lending standards as economic conditions likely continue to weaken. 

Across the board, it’s not surprising financial services companies are looking hard at their costs and ways to reduce discretionary spending. More organizations are moving to the cloud not only to better enable their data-intensive businesses, but to reduce ‘technology debt’ in the form of legacy data centers that offer less functionality while eating up more capital. Cloud migration goes hand-in-hand with the move to digitalization, a trend that took off during the pandemic and is expected to continue to accelerate. Open banking, for example, has gone mainstream, with more use of application programming interfaces (APIs) to enable customers to access third-party apps. Insurance, traditionally more of a person-to-person business, is increasingly transacted digitally as are investment decisions with asset management firms. So, acceleration to the cloud, with increased attention to data stability and cyber security, is on the minds of KPMG clients.

The other topic that comes up in virtually every conversation I have with financial services organizations is environmental, social and governance (ESG). Whether it is reporting requirements, carbon-neutral commitments or investments they are making, ESG is top of mind. Three areas that they say are leading the ESG agenda for 2023 are:

-       The need to develop and publish a plan to become a carbon neutral organization. It’s not just about being a good corporate citizen — research shows that becoming carbon neutral can boost a company’s stock price or valuation.

-       Fully understanding and becoming compliant with ESG reporting and disclosure requirements. Regulators are raising the bar, increasingly requiring assurance on ESG reporting. For financial institutions, it’s becoming almost like stress testing — with the need to validate where data comes from, that calculations are correct, and that it’s being reported accurately.

-       Finally, ensuring that the practice of greenwashing does not occur both within a company and in PE/asset management investments. In conversations with asset managers and PE firms, we continue to hear more concern and focus on it.

The organizations I speak with are certainly responding to ESG being an increasing focus of regulators. But they also understand that it also goes to the heart of their reputation and how they are perceived by customers, their employees and every other stakeholder.

Two other trends to watch for in 2023 are around talent and ‘convergence’ — of capabilities and new business models. The war for talent has cooled somewhat, but it is still difficult to hire top technical talent. I hear consistently from KPMG clients that the employee value proposition (EVP) has changed in the past 2 years. They are reevaluating what it takes to attract and retain employees, including continuing to develop and retrain employees to acquire new skills

Most large financial services organizations are exploring ways to ‘converge’ in order to diversify revenue streams and serve clients more holistically. This can be, for example, banks bringing together asset and wealth management, insurance, and perhaps private capital investment as well. Through platform technology, they are also able to embed fintech and other capabilities into their portal to help bring a broader set of services to their customers.

While these are some of the key trends, we are hearing from KPMG clients, if 2022 is any guide, there should be some surprises in 2023 as well. Based on the conversations I’ve been having; I’m encouraged that the financial services industry is taking the steps necessary to help successfully navigate what is bound to be another challenging year ahead.