Banks Try to Curb Expenses

U.S. financial institutions budget for the possibility of leaner margins and slower growth next year.
Vincent RyanNovember 18, 2011

Although 2012 is still a month and a half away, banks are getting a head start on cost containment and reduction. Citigroup, Bank of America, and UBS all recently announced staffing cuts, and the consensus is that more layoffs are coming from other commercial banks.

“It’s going to be a very ugly year for cost containment,” said Adam Schneider, executive director of the Deloitte Center for Financial Services, at a mergermarket financial services M&A symposium this week.

The gloominess is caused by the recognition that banks will struggle to grow revenues in 2012 and may face a host of new regulatory expenses that will eat into profit margins.

“Feeling that revenue is going to be constrained as we move into 2012, we have more of a focus than we’ve had historically on expenses,” says Steve Boyle, CFO of TD Bank. “But we’re fortunate that it’s more about reducing the growth rate of expenses than decreasing them.”

For banks that have already been through scores of layoffs and divestitures, the low-hanging fruit is gone. “It really comes down to people — that’s your lowest controllable expense,” says Brian Hagan, a senior consultant at CCG Catalyst.

If banks slash head counts any deeper, though, it could negatively affect the services they provide businesses, Hagan says. The other choice is to outsource or offshore noncore functions. While many banks have outsourced data processing, more outsourcing of call centers, loan origination, and documentation could be on the horizon, he says.

But there’s a limit to how much banks will offshore to reduce overhead. “It’s not what’s viable and possible, but more of a political question,” said Deloitte’s Schneider. Indeed, after the federal government bailout of banks, large-scale offshoring could compound the public relations problem the industry already has.

Containing costs will require a tricky balance for those institutions seeking to grow revenue.

Novato, California-based Bank of Marin is growing assets, so “infrastructure needs to grow along with it,” says CFO Christina Cook. “We will have cost increases, but we have to make sure we do it in the appropriate way.”

Banks love to focus on lowering their efficiency ratio — what it costs to earn each dollar of revenue. But many bank CFOs have squeezed as much out of the numerator as they possibly can.

Bank of Marin, for one, has an efficiency ratio of 56%. That’s a stellar achievement, but it wouldn’t be prudent to go a lot lower. “It’s been in the low 50s [in the past],” says Cook, “but when it was, we were at a point where we really needed to invest in infrastructure.”

Still, Cook has discovered ways to offset the cost of some new investment. Recently she renegotiated property leases that were coming up for renewal. The money saved covered the cost of opening new branches, she says. And automating the bank’s processes around its wire transfer service next quarter is expected to bring head-count benefits. “That will free up people to do other things — we’re creating more capacity for revenue,” says Cook.

At TD Bank, which has acquired other banks and lenders during the past two years, the focus will be on process improvement. “Better handoffs, a more efficient flow of information — those kinds of things will help to reduce our expenses or reduce the growth of them,” says CFO Boyle.