Credit

Bank CFOs Concentrate on More Cost Cuts

While other industries eye investments and growth once again, commercial banks continue to focus on the expense line.
Vincent RyanApril 19, 2012

Motivated by margin pressures and potentially lower revenues this year, as well as the higher costs of regulatory compliance, U.S. banking giants continued to cut operating costs last quarter. Many banks that have reported first-quarter earnings so far beat analysts’ profit estimates. But investors question whether the profits are sustainable, so finance chiefs have spent a lot of time on earnings calls touting “cost discipline” and plans for more savings.

“Given the operating environment that we’re in, we’re very focused on continuing to drive expense levels down,” said Bruce Thompson, CFO of Bank of America, on the company’s call Thursday.

Having slashed head count by 7,000 full-time employees in the fourth quarter of 2011, though, BofA faces a battle, particularly in its legacy mortgage business. While the bank cut the workforce by a net 3,000 employees last quarter, it also added 2,500 employees to its legacy asset servicing (LAS) business. That business unit performs loan modifications for delinquent mortgage customers and manages the rundown of discontinued mortgage products. It also deals with representation and warranty claims related to securitized loans originated during the housing boom. In the first quarter, LAS expenses were $3.3 billion, about equal to BofA’s global markets business, which generated revenue of $5.6 billion.

Even Toronto-Dominion Bank, a Canadian financial institution that largely escaped the financial crisis unscathed, is taking a new view on costs. “We took a bit of a contrarian view during the crisis: we were defensive on our balance sheet but we wanted to come out of it with our model intact and emerge with momentum,” CFO Colleen Johnston told CFO earlier this month. “Other banks were cutting costs then because it was the one thing you could control.”

TD Bank has robust plans for branch expansion and a drive into U.S. mortgage origination. It also had robust profit numbers in its last reported quarter. However, “as we go into 2012 and beyond, we’re not going to be contrarian,” Johnston says. “We really do feel that the headwinds are there on revenue side, so we’re dialing back the rate of expense growth. Creating permanent cost savings is really important to drive profitability.”

The cuts are also needed to offset higher costs related to tighter regulatory oversight, which is causing some banks to invest more in their risk management and controls infrastructure. “We have to make sure we’ve got industrial-strength systems and processes,” says Johnston. “Regulators are insisting on it.”

Higher personnel costs have also been conspicuous in banks’ earnings reports for the first quarter. Wells Fargo’s compensation expenses rose by more than $700 million from the fourth quarter of 2011, due to higher outlays for employee benefits, deferred compensation, and incentive pay, says Timothy Sloan, the bank’s finance chief. But Wells expects operating costs to fall by a nearly equal amount this quarter, helped by the elimination of some merger-integration expenses. Wells is continuing to focus on efficiency gains, but executives say the bank wouldn’t sacrifice profitable opportunities for the sake of meeting a cost projection.

“If we get to the fourth quarter and if for whatever reason there are all kinds of revenue available in a certain business or a number of businesses, we’re not going to be slavish to any one number,” says John Stumpf, Wells Fargo’s chief executive.