Bermuda bankers are pessimistic about maintaining historic levels of profitability and return on equity in a market of weak demand, low interest rates, increased capital costs and increased capital requirements.

But they have opted for a strong defence against cyber attacks, admitting they expect them to happen.

The just released fourth edition of Insights includes the 2014 KPMG Banking in Bermuda Survey and the Roundtable: Discussions with the CEOs of Bermuda banks.

They include Bermuda Commercial Bank CEO Peter Horton, Butterfield Bank executive chairman and CEO Brendan McDonagh, and then-Clarien bank co-CEO Zoran Fotak and HSBC Bank Bermuda Limited CEO Richard Moseley.

KPMG noted that cyber security and the resultant business and reputational risk have made their way onto the board, audit committee and C-level executive agendas.

Said Mr Horton: “This is a key reputational risk faced by banks globally. It is vital to maintain the trust of customers, and banks need to do what they can to ensure this. Even small banks must be aware and be prepared for attacks that happen on a daily basis.”

Mr McDonagh added: “We consider it to be of critical importance and it has been integrated into our operations and risk appetite. To mitigate the risk, we have executives who are dedicated to ensuring we are ready for threats we are inevitably going to experience. We continue to upgrade our defences in line with industry best practices.”

The bankers agreed they were satisfied that they were doing all they could, but admitted it may not be enough.

Said Mr Fotak: “We are as prepared as we can be. The problem is that even a one percent penetration incidence can have significant negative consequences and a 100 percent defence is just not possible. As such, we also focus on the responses to incidents — because they do occur.”

Meanwhile, Bermuda bankers are looking for new ways to make new money, in a bid to return to the pre-2008 profit levels.

Bermuda Commercial Bank CEO Peter Horton said: “The dynamics of the banking sector have changed over recent years and I see there being two key factors impacting the ability to sustain profits at historical levels.

“Firstly, the increased capital costs and capital requirements post the global financial crisis. Secondly, the continued low interest rate environment.

“The challenge then facing banks is to realign their business models and manage costs of capital and alternative income lines much more effectively going forward.”

Butterfield Bank executive chairman and CEO Brendan McDonagh said: “A range of 15 to 20 percent return on equity in the banking sector performance will be achievable with a reasonable improvement in the economy.

“To achieve a return on equity in excess of 20 percent, a combination of higher interest rates and a lower cost base is needed.”

HSBC Bank Bermuda Limited CEO Richard Moseley said: “The industry as a whole is facing increased regulatory and financial compliance costs, increased regulatory capital costs and demand headwinds. The industry is reforming itself by optimising cost structures, using risk-based pricing mechanisms as well as value based customer segmentation.

“This means becoming selective in customer acquisition and educating stakeholders of the increased costs of doing business.

“Overall, this will enable the industry to return to an acceptable level of sustainable risk and reward balance; however, it is unlikely to lead to a return to historical levels.”

Bermuda’s banks will put much emphasis on technology development providing greater mobile and online access for customers to access bank products.

But Clarien bank Co-CEO Zoran Fotak stated: “Technology implementation without the corresponding updates to work flows can lead to disappointment. “New processes can be threatening to people, so considerable time needs to be spent on appropriate training and development.”

The KPMG report noted banks continue to face an increasing regulatory burden including an increase in the amount and precision of reporting and an increase in capital requirements. Much of this has been enshrined in regulation and statutory instruments such as FATCA (Foreign Account Tax Compliance Act), enhanced KYC (Know Your Customer) and AML (Anti Money Laundering) standards, and the advent of Basel III and its related capital adequacy requirements and liquidity coverage ratios.

Mr Moseley said: “As compliance expectations of banks increase, the demands and costs for sophisticated screening and reporting mechanism(s) increase significantly.”