Few banks have been able to consistently get more efficient since the mid-1980s, Salomon Brothers concluded in a recent report.
Entitled "Cost Management in Global Banking," the report said most of the 50 leading banks in 11 countries studied were able to get more productive from the mid-1980s to 1991.
But these productivity improvements have not led to improvements in efficiency ratios, which measure the portion of revenues eaten up by operating costs. That's because of rising technology costs and a slowdown in revenue growth stemming partly from a rise in problem loans.
Cost-Cutting Culture
Those banks that have been able to operate efficiently have done so because of a strong commitment to cost cutting.
"The principal lesson from the handful of successful lowcost producers is that a cultural commitment to cost management, invariably driven forcefully throughout the organization by the chief executive, is the single-most-important success factor," the report said.
The best benchmark, the report said, is for banks to have noninterest expenses consume only 50% to 55% of revenues.
Banks singled out as among the most efficient in the world included PNC Bank Corp. in the United States, Credit Suisse and Banco Popular Espanol in Europe, Canada's Bank of Nova Scotia National Australia Bank,and Sanwa Bank of Japan.
Among the reasons why most banks have been unable to match the performance of the most efficient institutions has been poor management of technology, the report said.
This area is of particular concern because technology spending has been growing steadily as a percentage of total operating expenses, the report said.
At many major banks the growth has been in excess of 20% per year. As a result. technology spending now represents "15%-25% of many banks' total operating expense budget," the report added.
This spending has not gone for naught.
According to the report, "the available evidence confirms the widespread view that U.S. banks enjoy productivity standards superior to most of their overseas peers in large part because of higher (technology) investments and their effective reengineering of the retail business."
Wasted Spending
But the report also said that "weak project management skills, the undertaking of overly ambitious blockbuster projects, and the continuing evolution of technology" have caused banks to waste much of their technology spending.
As a result, "mounting depreciation charges from hardware and software investment" and the cost of streamlining operations have "offset productivity improvements."
"The net result of much of the massive [technology] investment of the past decade has been a significant but unquantifiable waste of human and financial resources." the report said.
The report also noted, however, that the use of an especially effective technique for cutting costs, called "business process reengineering," in which companies use technology to effect a big change in the way they work, is spreading rapidly.
Additionally, the report said that most of the banks studied are confident that they can become more efficient in the future, and that they will get closer to the best-practice benchmark.
Banks that are already at the benchmark, however, believe that "sustaining their present lean cost ratios would be a sufficient challenge in the future."
