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Banks Deepen Cost Cuts in Push to Juice Profits

Banks Deepen Cost Cuts in Push to Juice Profits

Banks have apparently resigned themselves to the fact that the economy is still sluggish.  Creditworthy borrowers are harder to come by than ever, leading to a decline in lending and therefore no big revenue recovery for the Banks.   To combat the sluggish growth in profits, banks are clamping down on expenses to keep investors and analysts calm.  Banks attempting to strike a delicate balance between cutting costs enough to bolster the bottom line, yet not too much to be unprepared if/when the economy rebounds.  In the meantime, it seems to be a popular plan to curb risk-taking until the economy gains momentum.


Source: Wall Street Journal, Thursday July 21, 2011 by Robin Sidel & Aaron Lucchetti

From closing lackluster branches to moving employees to cheaper cities, U.S. banks and securities firms are intensifying efforts to cut costs as the sluggish economy, weak loan demand and new regulations eat into profits.

“Until we see sustainable, repeatable growth in revenue, we’re going to continue to be very careful on our expenses and be very watchful, so that’s one thing you don’t have to worry about with this company,” U.S. Bancorp Chairman and Chief Executive Richard Davis said Wednesday.

The Minneapolis bank reported a 57% jump in second-quarter profit and said noninterest expenses, which include labor costs, rose just 2% compared with a year earlier. U.S. Bancorp also is squeezing more revenue out of every dollar it spends to run the bank.

Signs of belt-tightening are just about everywhere as financial firms report second-quarter results. Cost cutting is rampant at big banks like Wells Fargo & Co., securities firms such as Goldman Sachs Group Inc. and small lenders like State Bancorp Inc., of Jericho, N.Y., with just 17 branches.

“The word today in banking, which is a word that bankers aren’t used to, is ‘productivity,'” said Ken Landis, a financial-services consultant at Deloitte.

The cost-cutting moves are a sign that executives are resigned to anemic loan demand, sluggish Wall Street trading volume and low interest rates. With few other places to turn for profit growth, many financial firms are trying to reassure investors and analysts that they are clamping down on expenses.

“We are going to continue each quarter to reduce our expenses and work hard at doing that,” Tim Sloan, Wells Fargo’s chief financial officer, told analysts Tuesday.

Wells Fargo, based in San Francisco and one of the nation’s largest consumer lenders, is aiming for a 12% cut in noninterest expenses, or $1.5 billion, by the end of next year. Much of that will come from a program called “Project Compass” that zeroes in on “removing unnecessary complexity and eliminating duplication,” Mr. Sloan said.

Even before earnings season, it looked like a slight rebound recently in total employment at U.S. banks and savings institutions was sputtering. They had 2.093 million employees as of March 31, compared with 2.087 million at the end of 2010, according to SNL Financial, a research firm that tracks the industry. That puts overall banking-industry employment just below 2004 levels.

Last summer, many bankers had hoped that the economy would gain enough momentum to increase demand for loans and other products. Instead, banks now say they are having a hard time finding credit-worthy borrowers. And it is getting harder to boost the bottom line through improved credit quality.

To be sure, some banks are bulking up in areas where they see opportunity. J.P. Morgan Chase & Co. plans to add 2,000 branches to its network of 5,340 over the next five years. Other banks are hiring commercial lenders in anticipation of an eventual rebound in loan demand.

KeyCorp said Tuesday that it has made so much big progress with a cost-cutting program dubbed “Keyvolution” that the Cleveland-based regional bank has decided not to provide investors with future updates. The push is now “part of our normal operating rhythm,” KeyCorp CEO Beth Mooney said.

Bank of America Corp., the largest U.S. bank by assets, told analysts Tuesday that it expects to complete about half of its cost-cutting program soon. The Charlotte, N.C., bank hasn’t disclosed a specific cost-savings target, but it has been closing some branches.

As of June 30, Bank of America had 5,742 branches, down 158 from a year earlier.

On Wall Street, firms are starting to lay off employees and take other steps as a result of dismal trading activity and new rules that curb risk-taking.

Glenn Schorr, an analyst at Nomura Securities, estimates that Wall Street firms will cut expenses by reducing head count 3% to 4% from current levels.

“No one is going to come in with a big machete and cut 15%,” he said, because executives are concerned that they might cut too deep and miss out when conditions improve.

At Bank of New York Mellon Corp., expenses “are too high,” Chief Executive Robert Kelly said Tuesday. The bank said it likely will move more employees to cities such as Pittsburgh and Manchester, England, where costs are lower than the company’s New York headquarters.

BNY Mellon also wants to reduce the number of buildings it occupies and technology systems it uses. More details will be disclosed this fall. A spokesman declined to comment on whether layoffs will be part of the plan.

In June, Credit Suisse Group AG started laying off investment-banking employees as part of a belt-tightening that affected about 600 people. Barclays PLC last month eliminated 100 jobs in its investment bank. The latest cuts are on top of 600 layoffs in January.

Morgan Stanley, set to announce quarterly results Thursday, said last month that it might let its number of retail brokers slip below the previous range of 17,500 to 18,500. The Wall Street firm also is trying to cut $1 billion in annual costs within the next three years, partly by reducing the number of its legal entities and prodding employees to spend less when traveling.

The cost-cutting plan, announced in February, is run by the company’s chief operating officer and a group dubbed the “office of re-engineering.”

At Goldman Sachs, Chief Financial Officer David Viniar told analysts Tuesday that he hopes 1,000 planned job cuts at the securities firm aren’t just “a first swipe, because it is painful to do, and we don’t want to do this more than once.”