The recent rash of bank layoffs and other cost-cutting measures is leading some skeptics to say that the moves have more to do with pleasing the stock market than with actual operational improvements.
With expenses rising and revenue-growth expectations slowing, these observers say, bank managements are running out of options. Some worry that the banks may be repeating a mistake of making cuts that hurt revenue- generating capacity more than they help efficiency and productivity.
The static revenue outlook has, in fact, been one of the factors in the mergers of recent years. But throughout the continuing economic expansion, now in its ninth year, banks have taken advantage of stock repurchase programs and lower loss reserves to amplify earnings.
As a result, bank stock investors "have gotten too used to mid-teenish earnings growth," said analyst Michael A. Plodwick of Lehman Brothers in New York. Not surprisingly, bank managements fear the negative reactions that could follow from any suggestion that profits may rise at a slower annual rate.
Meanwhile, costs are rising.
"Qualified people are hard to find and expensive to keep" in a vibrant economy, said industry consultant Edward E. Furash, chairman of Monument Financial Group, Alexandria, Va.
Fixing computers' century-date problems also carries a few extra ramifications. "Many people expected a sort of 'Y2K dividend' when those expenses were past," said Mr. Plodwick. "In fact, other costs will have been put off and can be expected to return with a vengeance."
At the same time, "expense saves from previous acquisitions have slowed down" for many banks, said Katrina Blecher of Brown Brothers Harriman & Co., New York.
With loss reserves at minimally adequate levels, and with banks unable to raise stock buyback levels more than incrementally, executives are initiating some of the largest expense-reduction programs since early in the decade.
This week, PNC Bank Corp. said it plans to slice 5% of annual costs, or $200 million, with an unspecified number of job losses. Republic New York Corp. plans cuts over the next two years and a 10% staff reduction. Last month, First Union Corp. said it would cut its staff by 5% to 10%.
"All of a sudden, it looks as if banks are being squeezed a bit more," said Lawrence W. Cohn, research director at Ryan, Beck & Co., Livingston, N.J. "That means either settling for lower earnings, which their shareholders are unwilling to do, or getting the earnings by cutting expenses."
But Mr. Cohn questions whether many of the cuts are wise. "Our view is that most banks frankly don't know how to do this," he said.
"Most of the restructuring programs over the years have been done in such inept fashion that revenue potential has been cut in the process of cutting expenses, he said. "At least some of the slow revenue growth the industry is experiencing today is a reflection of prior rounds of expense cuts that weren't properly focused."
Mr. Cohn said some bank managements are skilled at cost reduction and control, "but there are still far fewer of those than there ought to be."
"Everyone stresses cost control and promises it to the (Wall Street) analysts," Mr. Furash said. "But if the industry pursues cost control the way it has in the past, it will have the same old effect of hurting revenues, employee morale, and customer service."
"The industry is being cramped again by compressed net interest margins and higher costs," Mr. Furash added. "With a few exceptions, it has not yet built a sufficient fee-revenue structure and is pushing again for cost reduction, but it is essentially trying to redesign old-fashioned delivery systems."
Mr. Furash calls this "reengineering illusion" and said he thinks that in the past decade "most cost cutting has been directed at producing quick earnings improvement" rather than "finding entirely new ways of doing business so as to create a competitive advantage and build revenue."
Mr. Plodwick was a bit kinder, saying: "This round of cuts seems better targeted and left more to line managers. There are not as many across-the- board-type moves being imposed from above, and not as much of the ham- handedness seen in the past."
