Radical restructuring has become standard operating procedure for banks trying to cope with sluggish revenue growth. Last week's announcement by Chemical Banking Corp. of plans to slash 3,700 jobs and to prune expenses by $440 million over two years is only the latest in a string of such cost-cutting moves. And it's likely not to be the last.
Chopping Back Number Expense of jobs savings cut In millionsChemical 3,700 $440Banking Over two yearsFleet 3,000 $300Finance In oneGroup yearFirst 3,000 $167Interstate In 18Bancorp monthsBanc 4,300 $140One In one year
Sources: Individual banks
"The only recourse this industry has to try to remain competitive is to gain a bigger piece of a shrinking pie, and second, to use expense reduction as a way to maintain profitability so they can continue to attract capital," said Dean Witter bank analyst Anthony R. Davis.
But these sweeping cost-cutting programs have also attracted critics, who argue that slash-and-burn tactics may actually imperil revenue growth. Consultant Bruce W. Morgan said conventional accounting systems, which measure transactions rather than value, may mislead bankers into reducing needed investment.
"Getting your earnings up in the short term may actually undermine shareholder value in the long term," said Mr. Morgan, who is based in Falls Church, Va.
Critics aside, 1994 was a big year for massive cost-cutting programs. The major announcements other than Chemical's came from:
* Providence-based Fleet Finance Group Inc., which said in March that it would cut $300 million of expenses and lay off 3,000 employees within a year.
* Los Angeles-based First Interstate Bancorp, which in september unveiled a plan to reduce annual costs by $167 million within 18 months with a full-time work force cut of 3,000.
* Banc One Corp., which said in November that it would eliminate 4,300 full-time employees and close 100 branches over the next 18 months. Banc One, based in Columbus, Ohio, estimates the program will save $140 million a year.
The 1994 announcements followed earlier initiatives at Riggs National Corp., Washington, D.C. and Midlantic Corp., Edison, N.J.
Howard I. Atkins, Midlantic's executive vice president and chief financial officer, said his company had reduced its core operating expenses by $100 million a year, or 20%, in 1993. "Perhaps most importantly, we have been able to keep those expenses off, so they never crept back," Mr. Atkins said.
Sanford C. Bernstein's Ronald I. Mandle agrees that the massive cost-cutting programs do contribute to the bottom line. "I think the risk in restructuring," he said, "is that you do anger people and lose either corporate or retail customers, so it has to be managed carefully. But generally, they seem to have been reasonably well done."
Raphael Soifer, at Brown Brothers Harriman, also believes the cost-cutting is necessary, particularly when it involves downsizing branch networks. But he objects to the way that banks take all the charges up front.
"What many banks seem to be doing is, in effect, bundling up necessary expenses of modernization, calling them one-time restructuring charges, and then booking the savings," Mr. Soifer said. "I think it would be more forthright to simply provide for these expenses as expenses, to pay-as-you-go for them."
Dean Witter's Mr. Davis also questions whether shareholders really benefit from the cost-cutting programs, since bank stocks generally remain out of favor. "It's clearly benefited capital and the balance sheet. But the issue is whether the market is willing to pay for cost-reduction earnings growth," he said.
Dennis C. Bottorff has taken the gradualist approach at Nashville-based First American Corp., which has held expenses roughly flat in recent years. "Yes, you can go in and cut the fat out of the system, and you can do that in the short term," said Mr. Bottorff, First American's president and CEO.
"But if you're going to be successful over a long term, then you have to have a program that deals with process changes and actually lowers your unit cost and still produces the kinds of things the customer desires."
