Banks enter era of 'no regrets' cost cutting
Limited growth opportunities and rising credit costs are pushing more banks to get aggressive — and creative — to boost bottom lines.
Asset sales and divestitures could factor into efforts to reduce cost structures and bring in revenue. Acquisitive banks are apt to revisit deals once the industry gets a better handle on potential loan losses.
But expense control is front and center right now as the economy contracts and national unemployment nears 15%. Creditworthy borrowers are in short supply, and emergency rate cuts have put immense pressure on loan yields.
“You can get tougher in certain expense categories,” Jamie Dimon, JPMorgan Chase’s chairman and CEO, said at a May 26 conference hosted by Deutsche Bank. “It's just kind of what I call ‘no regrets’ expense management.”
“You've got to keep looking at your expense base,” Bruce Van Saun, chairman and CEO of Citizens Financial Group, said a day later at a Bernstein conference.
“We've got to go back again and look for even more [cuts] because clearly we didn't anticipate that the Fed was going to go” so low with rates, Van Saun added. “That'll create more pressure on the top line.”
Cost-cutting makes sense, industry observers said.
“Banks will focus on what they can control — as opposed to taking any undue risks as they work through all this,” said Kevin Fitzsimmons, an analyst at D.A. Davidson. “Given the difficult revenue environment, and inevitable credit challenges, costs will be the one area that banks can control.”
Bankers have spent recent weeks working with borrowers on modifications and forbearance, while putting in long hours and late nights navigating the ins and outs of the federal government’s Paycheck Protection Program.
Many are finally starting to transition to longer-term planning.
While a number of bigger banks have vowed to avoid layoffs this year, small and regional banks are likely to look at ways to reduce headcount.
New Peoples Bankshares in Honaker, Va., is firing about 12% of its workforce, a move that the $715 million-asset company said would save it $1.6 million a year. It also said it would not hire a new chief operating officer after Frank Sexton announced plans to leave later this month.
Sexton was paid a $189,000 salary and a small bonus in 2018, according to New Peoples’ most recent proxy statement.
While the “changes are difficult,” New Peoples said in announcing the job cuts, they are “necessary to achieve the long-term goals of the company” and “proactively address operational challenges during the current COVID-19 pandemic.”
Other banks are evaluating marketing expenses.
Banc of California in Santa Ana terminated its long-term stadium naming rights deal with the Los Angeles Football Club. The decision should save the $7.7 billion-asset company $7 million annually over several years.
The company will pay $20.1 million to walk away from the deal at the end of this year.
Though Jared Wolff, Banc of California's president and CEO, said the change was on the table before the pandemic struck, analysts said they viewed the move as well timed.
Banc of California lost $9.7 million in the first quarter after recording a $15.8 million loan-loss allowance, largely to address concerns about the pandemic.
Divestitures are a way to reduce overhead and bring in cash.
Associated Banc-Corp in Green Bay, Wis., agreed last month to sell its insurance and consulting unit to USI Insurance Services for roughly $266 million in cash in a deal set to close in the second or third quarter. The unit employs about 400 people.
Capital gained from the divestiture will “create an added buffer during these trying economic times," Philip Flynn, Associated’s president and CEO, said in a press release announcing the sale.
PNC Financial Services Group in Pittsburgh sold most of its remaining stake in the asset manager BlackRock last month, bringing in nearly $5 billion in cash. The $446 billion-asset company set aside $914 million in the first quarter to cover potential loan losses.
Acquisitions, which have been few and far between over the last two months, will likely resume as beleaguered banks “throw in the towel,” said Billy Weber, CEO of Checkpoint Capital. M&A deals could allow banks to lower costs by eliminating redundant branches and other expenses.
Branch cuts seem certain even without M&A, particularly given the increased use of digital banking services stemming from shelter-in-place orders and social distancing guidelines.
"As time marches on in this uncertain — but clearly slower-growth — environment, we expect more banks to revisit their branch footprints," Scott Siefers, an analyst at Piper Sandler, wrote in a recent client note.
While digital services require ongoing investment, Fitzsimmons said they are more efficient to operate than extensive branch networks.
Park National in Newark, Ohio, recently announced plans to shutter a fifth of its nearly 120 locations during the third quarter. The $8.7 billion-asset company will convert three other branches to drive-through-only locations.
The move will lower annual operating expenses by about $6.5 million.
Citizens is also studying ways to offer more digital services as part of a broader “war on paper,” Van Saun said. That could include the use of virtual advisers removed from branches.
“The next frontier of what we're looking at would relate to how can we expand the digitization [to] become more efficient while also delivering a better customer experience,” he said. “We're starting to work on … that program and you'll just have to stay tuned as we develop that.”