The big squeeze: Banks pushed to hike pay at inopportune time

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Banks large and small are likely to keep feeling pressure this year to raise employee wages and salaries, making cost control even harder at a time when investors are demanding executives rein in spending.

The industry’s labor costs have been on the rise for several years now. Banks spent $56.7 billion on salary and benefits in the third quarter of 2019, the most recent aggregate figure available from the Federal Deposit Insurance Corp. That was an 18.4% increase from five years earlier.

And the forces behind wages continue to gather momentum. Politicians and the public are demanding employers pay a living wage, and extremely low unemployment rates — 3.6% in January — are making it harder for banks and others to retain and recruit workers. Meanwhile, several big banks have raised their minimum wages in recent years. Bank of America, the second-largest U.S. bank, is poised to pay workers a minimum of $20 per hour.

Salary and benefits at banks

Wage inflation adds another layer of cost to institutions that are already under pressure to be prudent. Finding ways to cut expenses and generate revenues in the low-interest-rate environment continues to be a challenge for banks, many of which are investing significant dollars in technology upgrades to strengthen efficiency and modernize their offerings.

Darren King, chief financial officer at M&T Bank in Buffalo, N.Y., said M&T expects low-single-digit growth in expenses in 2020, primarily because of salary inflation. Beyond that, it is anyone’s guess. In response to an analyst’s recent question about how 2021 expenses might shake out, King said this:

“Who knows where wage inflation ends up through 2020? If the unemployment rate stays this low, who knows where we will end up? But we continue to believe that in the banking business, efficiency matters and being cost-effective matters. So we pay a lot of attention to that.”

Some industry watchers are predicting higher-than-expected expenses this year. Analysts at Janney Montgomery Scott used Bloomberg data to analyze more than 100 public banks and determined that median noninterest expenses among those banks are expected to rise 3.64% in 2020. The firm looked only at banks that did not undergo mergers in 2019, are not expected to complete mergers in 2020 and had three or more Street estimates for 2020 earnings.

Christopher Marinac, director of research at Janney Montgomery Scott, said technology costs are only part of the picture.

“Can you also attribute [the rise] to salary increases? I think you can,” Marinac said. “Banks have to be thoughtful about what they’re paying employees. … It’s easier to pay workers slightly more — give them an increase or a rate change or change salaries — because it’s expensive to replace them.”

The topic of wage growth and the impact on overall expenses came up during at least two other fourth-quarter earnings calls.

Robert Gorman, chief financial officer of Atlantic Union Bancshares Corp. in Richmond, Va., said that the savings bank expects expenses to increase about 4% this year as it continues to invest in technology, digital products and people, including a wage inflation of 3%.

Meanwhile, Popular Bank Chief Financial Officer Carlos Vazquez said quarterly expenses in 2020 should be around $383 million, up from an average $362 million the year before, partly because of personnel costs driven by a tight labor market in Puerto Rico and parts of the U.S. where the bank has operations.

James Chessen, chief economist at the American Bankers Association, noted that banks are always trying to find ways to keep expenses in check. But it has been difficult, especially for smaller banks that cannot spread costs among a larger base of customers.

“This is a tough situation for banks and all businesses, managing expenses when it’s hard to raise the prices of the goods you sell,” he said.

Pay for lower-level employees has gone up in particular. According to the U.S. Bureau of Labor Statistics, the average hourly wage for tellers rose 4.3% from May 2017 to May 2018, when it climbed from $13.89 an hour to $14.49 an hour. In 2016, the average was $13.49.

The passage of the federal Tax Cuts and Jobs Act in late 2017 is responsible for some of the increase. After the law took effect in January 2018, dozens of banks announced plans to use anticipated tax savings to raise their minimum wages and pay one-time bonuses to certain employees.

JPMorgan Chase, which operates the nation’s largest bank by assets, said its starting pay would rise about 10% on average to between $15 an hour and $18 an hour, depending on geography. Bank of New York Mellon bumped wages to $15 an hour, as did KeyCorp, which also contributed $1,000 to 401(k) retirement savings plans of all full-time employees making $100,000 a year or less and $500 to the plans of all part-time employees.

By the end of the first quarter, Bank of America is set to implement a corporatewide minimum wage hike from $17 an hour to $20 an hour. It originally planned to roll out the increase in 2021, but in November 2019 decided to accelerate the plan by one full year.

Bob Shaffer, the director of human resources at Fifth Third Bank in Cincinnati, said it had no immediate plans to raise its minimum wage this year. It has already raised it twice in the past two years, with the latest shift happening last October when the rate rose from $15 an hour to $18 an hour.

To enact the new minimum wage, the bank is spending $15 million a year, Shaffer said.

In terms of lifting salaries for higher-level employees, he said:

“We continue to benchmark our compensation across our peer group and market and other companies in our market. It’s basically a zero unemployment economy we’re functioning in and the competition for talent is high. I think we’re going to be in a very low-unemployment-rate environment as we go through the year and into next [year] so we will continue looking at our compensation practices in order to be the best in line to attract and retain top talent.”

Labor costs are the single largest expense for banks. The total varies by season, usually coming in higher in the first quarter as companies make salary adjustments and pay certain performance bonuses.

In 2019, salaries and compensation were 59% of banks’ total noninterest expenses, Marinac said.

Brian Klock, an analyst at Keefe, Bruyette & Woods who covers regional banks including M&T, said banks in general have been “pretty efficient” coming out of the financial crisis, even as they invest in technology. But there will come a time when they cannot trim anything else, leading to higher expenses.

“A lot of banks have been cutting headcount and trying to get expenses down, but at some point there’s only so much you can get out of expenses before you have to invest back into the business,” Klock said. “And 2020 might just be the year where banks say that revenue generation is so tough there’s no way they’re going to generate positive operating leverage, so let’s make investments to set up for 2021.”

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Minimum wage Expense management Revenue and expenses GSIBs Regional banks Community banking Recruiting Bank of America Fifth Third