Regional banks are not quite done cutting expenses.
On fourth-quarter earnings calls Friday, executives at Regions Financial, U.S. Bancorp and PNC Financial Services Group all said that cost-cutting would be among their top priorities in 2016 at a time when thin margins and, lately, weakening credit quality are weighing on revenue.
Unlike in past years, though, the cuts are aimed less at bolstering short-term returns for shareholders than at funding investments in cutting-edge technologies or new products and services to remain competitive.
The $359 billion-asset PNC, for example, is eyeing investments in payments and blockchain technology. The $421 billion-asset U.S. Bancorp wants to upgrade its mobile banking capabilities and the $126 billion-asset Regions is exploring more partnerships with marketplace lenders, such as the one it recently established with Fundation. Regions is also eyeing more acquisitions of nonbank firms — in areas such as capital markets, insurance and wealth management — that could help it generate more fee income.
On a conference call with analysts, Regions' Chairman and Chief Executive Grayson Hall said the company plans to eliminate $300 million of core expenses, or 9% of its expense base, over the next three years, in part by closing branches. It shuttered 29 branches in the fourth quarter and executives recently told investors that it could close as many as 120 more over the next three years.
"This plan, which is underway, will help us fund our growth initiatives and build sustainable franchise value," Hall said on Friday's call.
U.S. Bancorp Chairman and CEO Richard Davis was less specific about his company's cost-cutting targets, but he told analysts that new employees would not be hired "unless we need them."
Of course, cost cuts would be less of a priority if banks' revenue picture were brighter. Just as net interest margins seemed poised to rise thanks to the Federal Reserve's decision to start hiking interest rates, banks are warning of weakening asset quality tied to the sharp decline in oil and gas prices.
Weaker-than-expected fee income has also tamped down revenues at regional banks.
Though Regions reported strong profit growth in the fourth quarter, aided by gains in loan balances and fee income, executives said that it would expect to charge off $50 million to $75 million in 2016 if oil prices remain at current levels. If energy prices declined even more — some experts predict that oil could fall as low as $20 a barrel — Regions' losses could be even higher, further eating into revenue and profits.
"We continue to prudently build reserves, which now stand at 6% of our direct energy exposure," Hall said on the call "As a result, we are cautious, but we expect the future losses related to this portfolio to be managed."
In the fourth quarter, U.S. Bancorp increased its reserve for oil-related loans to 5%, in line with energy lenders throughout the industry. Energy loans, though, account for just 1% of the bank's total loans, so the bigger worry, Davis said, is the impact falling energy prices will have on the broader economy and, in turn, its customers.
Credit quality has improved over the past year, with declines in delinquencies and nonperforming assets. But the company continues to "stress-test the heck" out of its commercial loan book and monitor borrowers' abilities to repay, Davis said.
"We haven't focused on credit in many years, and I'm putting it right back on the front burner," Davis said.
PNC also boosted its loss provision due to weakness in its energy portfolio, though energy loans represent just a fraction of the bank's overall loan portfolio. For the quarter, its profits and revenue declined from the same period a year earlier due to declines in fees related to mortgages and deposit accounts.
To better contend with its revenue challenges, PNC cut more than $500 million from expenses in 2015 and it plans to cut an additional $400 million this year, Rob Reilly, the bank's chief financial officer, said during a conference call.
However, rather than using the cost savings to lower its efficiency ratio, PNC plans to take the money generated from the cuts and apply it to its ongoing plan to make investments in technology.
"We're interested in distributed ledger blockchain technology. We're interested in some of the corporate payments disbursement technology," Bill Demchak, PNC's chairman and chief executive, said during the call.
U.S. Bancorp's expenses held steady at $2.8 billion. The savings from a year-long efficiency initiative were offset slightly by higher salary costs from annual raises. Overall, expenses grew at a slower pace than revenue, Davis said. The last time that occurred was in the fourth quarter of last year, according to a company spokesman.
Still, the company plans investments throughout the year, executives said. U.S. Bancorp plans to upgrade technology related to payments and mobile banking, Davis said.
Additionally, the company plans to launch a rebranding campaign at the end of the month. But total expenses should hold steady as management shifts priorities, the bank said.
"Don't watch for just a number, watch for the moving parts," Davis said.
Regions also said it plans to use the savings from cost cuts to invest in the future. In recent months it announced acquisitions of an insurance agency, a wealth management firm and a mergers-and-acquisition advisory firm, and Hall said Friday that the bank remains on lookout for similar "bolt-on acquisitions in the nonbank space."
He added that he would not consider bank acquisitions until potential sellers lowered their asking prices.