Listen to any bank earnings call these days and odds are that, at some point, executives will discuss how they are addressing the persistent lack of revenue growth by simultaneously cutting expenses and investing in new business lines.
McKinsey & Co.'s Fritz Nauck has a suggestion for any bank taking this two-pronged approach: pick one or the other and stick with it.
Citing recent McKinsey research, Nauck says that only about 20 percent of the world's 500 largest banks have been successful in recent years at both cutting costs and growing revenue. He says most banks would be better off putting growth plans on hold until they have meaningfully cut expenses, or investing in growth first with the cost cuts coming later.
"There's got to be a sequencing," says Nauck, a senior partner in McKinsey's financial institutions group. "It's very tough to sell the message that you are growing and you are cutting. Which is it?"
The message can be especially confusing to employees tasked with carrying out the strategy. "It's very hard to ask front-line employees to sell more to current customers and gather new business at the same time you're telling them that two tellers and two platform bankers will be going away," Nauck says.
Publicly traded banks in particular are under immense pressure to cut costs, and unless they are hitting it out of the park on the revenue side analysts don't want to hear much about investments in new business lines.
On its third-quarter earnings call in October, Regions Financial highlighted investments it is making in wealth management and other businesses, but analysts mainly wanted to ask about plans for trimming overhead and improving the efficiency ratio. KeyCorp, Synovus Financial and other regionals with growth ambitions were similarly grilled about their cost-cutting plans.
Nauck says that if cost cuts are the primary goal, banks need to make clear decisions on how they intend to streamline processes and reduce headcount, and then use quarterly earnings calls to detail their progress. Not until they have made sufficient headway should they start focusing on revenue expansion, he says.
Conversely, if revenue growth is the goal, then banks that have sufficient capital should pursue it wholeheartedly. After all, if revenues are growing rapidly enough, investors are unlikely to squawk about rising expenses.
A case in point is Signature Bank in New York. Its expenses have been increasing by double digits each quarter as it continues to invest heavily in hiring teams of bankers away from rival banks, but analysts and investors aren't complaining because the bank has posted record profits for 16 straight quarters.
This article first appeared in American Banker Magazine.