Executives at regional banks are divided over the best route to profitability: keep cutting costs, or spend more money to make more money.
For the last few years, cost-cutting has been a top priority for banks and this continues to be true for institutions such as SunTrust Banks, BB&T and First Horizon National.
However, management at Huntington Bancshares in Columbus, Ohio, is taking a different view and is following the same philosophy expressed by JPMorgan Chase executives this week pay up for revenue growth. Huntington officials said during their third-quarter earnings call on Friday that expenses could increase by 2% to 4% next year, even as it closes some traditional branches and cuts jobs.
"We are investing in the business," Steve Steinour, Huntington's chief executive and chairman, said in an interview before the call. "Those investments are being offset in part by revenue but in others areas we are managing expenses, and I think we are doing both prudently."
Huntington, which has $58.7 billion of assets, said that it would save $30 million to $35 million a year by cutting 26 branches by yearend and eliminating nearly 200 positions. Still those cost savings would be partly canceled by the acquisition of two dozen branches from Bank of America in September and an accelerated plan to add 50 branches in Giant Eagle and Meijer grocery stores in 2015.
Recently the company has also heavily invested in two technology projects a new teller platform and transitioning to imaging-enabled automated teller machines.
All of this plays into the bank's attempt to attract more customers by offering more convenient services. For example, Steinour touted the in-store branches, which are open seven days a week with extended hours, as a way to reach a larger audience at a lower cost.
These efforts seem to be paying off. In the third quarter, Huntington increased the number of its consumer checking account households by more than 10% from a year earlier. Almost 49% of those customers had at least six products or services with the bank.
"Convenience is still the No. 1 reason customers select a bank," Steinour said. "If you view the store itself as your branch and that's how we approach it that gives us tens of thousands of customers in the store that are Huntington customers or prospects."
Still, some analysts questioned the need for the added expenses. Noninterest expenses rose 13%, to $480.3 million, from a year earlier as Huntington recorded almost $23 million in costs tied to acquisitions, branch closings and job cuts.
Steven Alexopoulos, an analyst with JPMorgan, noted during a conference call that the projected expense increase seemed high, especially since the company was cutting in other areas.
"We think it is a very important part of our distribution strategy going forward as we think about optimizing distribution and really getting the right costs and the right investment going forward," Howell McCullough III, Huntington's chief financial officer, said in response.
Steinour said during the interview that the company routinely closes branches, including the shuttering of 22 in the third quarter of last year. Management also emphasized that it would maintain positive operating leverage for the year and pledged to do the same for 2015.
"We've had very good revenue growth and expenses are being managed," Steinour said. "We have momentum. We said our second half of the year would be better than our first and we are delivering on that."
In contrast, several other regional banks remained in cost-cutting mode. SunTrust in Atlanta launched an expense-reduction initiative more than a year ago and has improved its efficiency ratio to 61.9% at Sept. 30 from 73.5% at Sept. 30, 2012. The savings have come through job cuts, reducing corporate travel, renegotiating leases and other measures. (The lower the efficiency ratio, the lower a bank's expense burden.)
"The expense efforts that we've been working on over the last several years are actually paying off," William Rogers, SunTrust's chairman and CEO, said during a conference call Friday.
BB&T announced Thursday that it eliminated about 800 jobs during the third quarter, across its 12-state territory, BB&T spokesman David White said. The cuts came largely in its community bank and mortgage areas, the Winston-Salem Journal reported. That's on top of 450 jobs BB&T cut in the second quarter.
But achieving efficiency goals remained elusive for both banks. The $187 billion-asset SunTrust is aiming to improve its efficiency ratio to below 60% but the potential rate of improvement remained uncertain, Rogers said.
"The speed at which we commit to trend down will be dependent on a lot of things, not the least of which is the interest-rate environment and our expectations of an interest-rate increase on the short-term side," Rogers said.
Earlier this year, BB&T said it wanted to improve its efficiency ratio to 56% by Dec. 31 but during a conference call on Thursday discussing earnings, Chairman and CEO Kelly King said that 57% was probably a more realistic goal. The $187 billion-asset company's ratio was 58.7% at Sept. 30.
First Horizon in Memphis expects to move into an intensified phase of cost-cutting.
The $24 billion-asset company reported noninterest income of $246 million for the third quarter, and while that amounts to a significant year-over-year decline, it was actually an increase over the second quarter. First Horizon's efficiency ratio of 77.4% remains significantly higher than the industry average.
"We believe we have more work to do on becoming more efficient," Bryan Jordan, First Horizon's chairman and CEO, said in a conference call Friday to discuss quarterly results. He added that the company intends to cut costs by $20 million to $50 million over the next three years through a combination of process improvements and branch closures.
One area that will not be touched by cost-cutting is technology. Jordan said First Horizon would continue to spend to improve systems and beef up cybersecurity. Overall, however, Jordan said any offsetting spending increases would be relatively small.
"We expect our expense base to continue to decline as we make these [technology] investments," he added.
Andy Peters and John Reosti contributed to this story.