By Peter Rothwell, Head of Banking, KPMG UK
Banks in the United Kingdom are heading into 2026 with the wind shifting. Strong balance sheets and higher interest rates have provided a significant boost to profitability in recent years, but these conditions cannot be relied on indefinitely. Banks are mitigating the impact of lower rates by investing in diverse, non-interest-income revenue streams, more active management of their balance sheets and the adoption of emerging technologies and artificial intelligence (AI) to enhance the customer experience, create resilience and deliver cost synergies. This is critical to maintaining performance and supporting current valuations, as without action, future returns on equity (ROEs) are at risk.
At the same time, the challenges facing the industry are intensifying: persistent economic uncertainty, heightened geopolitical volatility, the disruptive impacts of new technologies and a global regulatory landscape that is becoming ever more fragmented.
The year ahead will be defined by five forces: growth, resilience, efficiency, regulation and the future workforce; the sector will need to make clear choices about how to respond.
The year ahead will be defined by five forces: growth, resilience, efficiency, regulation and the future workforce; the sector will need to make clear choices about how to respond.
Growth: Niche, scale and diversification
For decades, UK banks have relied heavily on net interest income (NII) as the backbone of profitability. The recent era of higher interest rates has offered a welcome uplift in revenues and margins, but no institution can afford to be a hostage to the rate cycle alone. The challenge for 2026 is one of growth—of revenues and returns—to deliver sustainable franchise value.
A number of strategies stand out. Some banks are adopting the niche approach, identifying areas in which they can serve specific segments, such as SME (small and medium-sized enterprise) lending, thereby earning higher returns and fuelling the lifeblood of the UK economy. There’s also a move towards fee income through offerings such as tailored wealth services. Alternatively, the volume approach, in which institutions accept lower margins but pursue scale, also has its admirers. These models can work, but each requires clarity of purpose and careful execution. Banks that attempt to straddle them risk being caught in the middle, unable to offer either meaningful scale or sufficiently differentiated propositions.
In this context, further consolidation remains a likely feature of the future landscape. There is also a drive to diversify away from residential secured lending into higher-margin business banking and unsecured lending to manage risk-weighted asset (RWA) density and, therefore, returns better.
Consolidation offers benefits in efficiency and reach, but it also demands cultural alignment and discipline in integration. Equally important is the ability to diversify into fee-based income; payments, wealth and asset management, and advisory services offer more stable earnings across economic cycles. Banks are investing heavily in areas that create additional revenue streams—that are through the cycle (TTC), are capital efficient and offer a potential cross-sell opportunity.
But it is not just about revenue growth. Creating greater velocity of traditional assets on the balance sheet is driving enhanced returns. The growth of “originate to distribute” models through private-credit partnerships has been a key recent accelerator, while we have also noted significant growth in risk-transfer deals, as banks seek to optimise and redeploy capital.
Customer acquisition and experience are also critical growth levers. For younger generations, established brands often lack the digital agility and innovation of challengers. Expectations of seamless onboarding, personalised services and 24/7 functionality are now standard. Banks must invest in both technology and brand positioning if they are to remain attractive to this demographic. Partnerships with fintechs (financial-technology firms) and technology firms may accelerate progress, but smooth execution and trust remain central to success.
The emergence of digital assets and stablecoins presents a further growth frontier. These instruments offer the promise of inclusivity and frictionless global transactions, but they also carry the risk of disintermediation. If consumers are drawn into alternative stores of value that offer attractive returns, banks may see liquidity drain from traditional deposits. The task ahead is to engage with this ecosystem constructively, while protecting the foundations of the traditional banking model.
Resilience: Defending against new and old risks
Resilience is a key enabler of growth. Significant disruptive events can cause reputational damage, divert management attention and increase regulatory scrutiny. Events of the past decade have made it clear that operational resilience and cyber-defences are no longer back-office concerns; they are board-level priorities. As banking evolves to become more digital, the potential for disruption increases, as do the potential impacts on customers and the wider economy.
Cybersecurity is the most visible resilience challenge. State-sponsored attacks, fraud and criminal networks all present growing risks. Investments in monitoring, prevention and rapid incident response are not optional. Boards must treat cybercrime as a strategic risk that shapes customer trust, regulatory scrutiny and ultimately financial stability.
Operational resilience is another key area of focus—but it brings with it transformational opportunities that offer reduced operational costs, optimised capital and liquidity management, and new revenue streams. For example, legacy payment systems and ageing infrastructure give rise to periodic outages, and the friction within them creates cost inefficiencies. Newer technologies, such as distributed ledgers, tokenised assets and smart contracts, offer greater resilience and transparency. However, they also introduce new risks, such as financial crime, requiring an uplift in risk management to address them.
Finally, resilience is increasingly being assessed at the systemic level. Regulators are widening their lens beyond banks to include non-bank financial institutions (NBFIs) and private-credit markets, recognising that shocks in one part of the financial system can quickly transmit to others. Banks must prepare for greater supervisory scrutiny, not just of their individual resilience but also of their roles in supporting the resilience of the whole financial system.
Efficiency: Harnessing AI and digital transformation
The pressures on cost-to-income ratios are unrelenting. However, the task is not simply to cut costs but to fundamentally re-engineer processes to deliver sustainable franchise value, greater resilience and cost efficiency.
The pressures on cost-to-income ratios are unrelenting. However, the task is not simply to cut costs but to fundamentally re-engineer processes to deliver sustainable franchise value, greater resilience and cost efficiency.
Digitisation and automation are essential. Manual processes remain embedded in many core banking activities, slowing services and raising costs. Opportunities in managed services performed on a build-operate-transfer (BOT) basis—whereby the outsourcing partner uses technology and artificial intelligence to transform the current process, operate and refine it over time, and then pass it back to the bank for ongoing management—are growing.
AI is at the forefront of this transformation, along with the potential of quantum computing to fundamentally alter the speed and precision of product pricing, better manage financial-crime risks and optimise risk and collateral management. Already, AI is being used extensively for fraud detection, document processing and regulatory compliance.
Efficiency gains have been significant, and as generative AI (GenAI) matures, its applications could extend to advisory services, risk modelling and personalised customer engagement. However, this not only highlights opportunities but also raises ethical and governance questions.
Efficiency also means striking the appropriate balance within a multi-channel delivery model, including optimising digital capabilities, physical footprints and workforce models. Branch closures are likely to continue, reflecting changes in customer behaviour. However, they must be managed carefully to avoid reputational harm and ensure a physical brand presence through, for example, pop-up branches and concessions. Headcount reductions are also likely, but redeployment into higher-value roles can ensure that efficiency gains do not come at the cost of customer service.
Beyond individual institutions, efficiency may increasingly come from alliances and ecosystems. Global banking networks could allow institutions to share infrastructure and deliver services more efficiently. The logic of cooperation and shared platforms is compelling and may be essential for banks seeking to stay competitive in a rapidly changing landscape.
Regulation: Fragmentation, complexity and innovation
The regulatory landscape is more complex than ever, with the multi-decade process of global alignment being replaced by divergence and fragmentation. Regional jurisdictions are pursuing divergent agendas, creating challenges for institutions that operate across multiple geographies.
This regulatory balkanisation complicates optimisation for global banks, requiring jurisdiction-specific strategies for new products and digital assets. For UK banks, this means planning for more variability and less predictability in regulatory requirements.
ESG (environmental, social and governance) regulation is a clear example. Europe continues to intensify requirements, the United States has taken a step back, and the United Kingdom occupies a middle ground. While climate remains a central focus, challenges related to economic growth and energy security are changing the narrative. Additionally, questions of fairness are rising in prominence, particularly regarding the relative burden placed on developing economies.
In addition, regulators are emphasising interconnectivity risks—whether the relationship between financial risks and non-financial risks or the relationship between banks and non-bank financial firms. For the former, cyber, data and operational resiliences, and how they potentially impact financial risks, now feature prominently in supervisory agendas. With respect to the latter, the desire for enhanced regulatory understanding of the modern-day financial ecosystem is here to stay—supported by system-wide stress tests implemented by regulators that probe the risks to financial stability from the growth of non-bank financial institutions and the emergence of new innovative technologies and products, such as stablecoins.
AI will be a key regulatory concern. Supervisors are already demanding that banks demonstrate explainability, fairness and bias safeguards in AI-driven decision-making. However, such concerns need to be balanced with the benefits that these capabilities bring, not only in terms of the speed, quality and consistency of customer outcomes but also the power of technology, data analytics and AI to support the industry’s transition from reactive risk detection to proactive risk prevention, using predictive analytics to identify problems before they arise.
The workforce of the future
Technology is transforming not only banking processes but also the skills required to manage them. The workforce of the future is, therefore, central to the sector’s ability to succeed.
A key challenge is the widening skills gap. In many cases, junior staff are more technologically fluent than senior leaders, which creates tensions and slows innovation. Leadership development must adapt to ensure that tomorrow’s decision-makers are equipped with both financial expertise and technological fluency.
Equally important is diversity of thought. Too often, strategic decisions are made within echo chambers, with a narrow set of voices dominating. Broader inclusion—across genders, backgrounds and experiences—is essential to strengthening decision-making and reducing blind spots.
Embedding AI and other technologies safely will require not just technical skills but also strong governance and a risk culture that prioritises the ethical use of data. Without this, technological deployment risks undermining trust and resilience.
A year of pivotal choices
For UK banks, 2026 will be a year of pivotal choices. Decisions about where and how to grow, how to manage new risks, how to harness technology to drive efficiency, how to adapt to an increasingly fragmented regulatory landscape and how to build future workforce skills will shape the sector’s trajectory for years to come.
The winners will not be those that try to do everything but those that set a clear course and execute it with conviction. Clarity, agility and conviction will define success in the year ahead. The foundations of UK banking remain strong, but strength alone is not enough. Banks must act decisively to deliver the future they want to see.
Peter Rothwell is the Banking Sector Lead for KPMG UK. Over his 15 years with KPMG, he has built significant experience of advising banks on treasury, risk and regulatory matters. Prior to joining KPMG, Peter spent 12 years in the banking industry in roles across both front and back office at Deutsche Bank, Morgan Stanley, ANZ and National Australia Bank.