Lemons or lemonade? How bankers feel about their environment
February 10, 2017 12:29 PM
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Lemons or lemonade? How bankers feel about their environment
Some execs have plenty to be sour about (enforcement actions, compliance headaches, cost cutting), but others are emphasizing the sweet possibilities amid today's economic and political realities. Their contrasting plights and mindsets were on full display at a Credit Suisse conference this week.
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Cost-cutting blues
Wells Fargo was long known for emphasizing revenue growth over cost cutting. But Wells recently announced plans to target $2 billion in expense savings by the end of 2018, including at least 400 branch closures.
When asked about the change in focus, Wells Chief Financial Officer John Shrewsberry noted that this is not the first time the company has set a specific target for expense cuts. It also did so following its 2008 acquisition of Wachovia.
Still, Shrewsberry acknowledged that it can be difficult to find expenses that make sense to cut, since they are not adding sufficient value to the company.
"That is a cultural change — not that people haven't always thought that was important, but finding it and driving toward it, because it's not always obvious where it lies, that's the change," he said.
When asked about the change in focus, Wells Chief Financial Officer John Shrewsberry noted that this is not the first time the company has set a specific target for expense cuts. It also did so following its 2008 acquisition of Wachovia.
Still, Shrewsberry acknowledged that it can be difficult to find expenses that make sense to cut, since they are not adding sufficient value to the company.
"That is a cultural change — not that people haven't always thought that was important, but finding it and driving toward it, because it's not always obvious where it lies, that's the change," he said.
But we could spend the savings here …
SunTrust Banks plans to cut another 10% of its branches this year, but it is playing up that it plans to pour a lot of the cost savings into several technology-related investments. Those include two online products — LightSmart consumer lending and SummitView wealth management; a new cloud-based banking system for commercial lending; as well as process-automation technology and improved analytics, Chief Financial Officer Aleem Gillani said.
Simon Dawson/Bloomberg
Timing's right for online unit …
To hear CEO Lloyd Blankfein tell it, Goldman Sachs is in the catbird seat when it comes to expanding the online consumer bank it opened last year. It's not the first thing many people think when Goldman, a famed investment bank, is mentioned. "It's ... perhaps somewhat uncomfortable for me to think of you as a lender, to the consumer in particular," Credit Suisse analyst Susan Roth Katzke said. Blankfein responded that it's a "virtue" that Goldman is not saddled with "thousands of stores and a lot of infrastructure and a big credit card" business like other banks. "We're liberated from having to develop market share. ... We can pick the best opportunities that we regard as accretive," he said.
… Our timing? Not so much
Discover Financial Services is trying to build out an online bank, too, but a big regulatory challenge has hampered the effort.
The Riverwoods, Ill.-based firmintroduced a checking account in February 2013 — initially offering the product only to existing customers, while planning for a wider rollout in 2014.
Four years later, the checking account is still available only to consumers who are already Discover customers. Discover Chief Financial Officer Mark Graf said Tuesday that the product's wider rollout has been delayed by ongoing regulatory issues related to Discover's anti-money-laundering program.
In a 2014 pact with the Federal Deposit Insurance Corp., Discover agreed to establish a new anti-laundering compliance regime.
"It didn't seem a prudent decision on our part, when we were being asked to enhance that anti-money-laundering capability, to broadly launch a product that is the largest single product used for money laundering activity, that being a transaction account," Graf said at the Credit Suisse forum. "So we felt we should get our ducks lined up before continuing to really push that product."
The Riverwoods, Ill.-based firm
Four years later, the checking account is still available only to consumers who are already Discover customers. Discover Chief Financial Officer Mark Graf said Tuesday that the product's wider rollout has been delayed by ongoing regulatory issues related to Discover's anti-money-laundering program.
In a 2014 pact with the Federal Deposit Insurance Corp., Discover agreed to establish a new anti-laundering compliance regime.
"It didn't seem a prudent decision on our part, when we were being asked to enhance that anti-money-laundering capability, to broadly launch a product that is the largest single product used for money laundering activity, that being a transaction account," Graf said at the Credit Suisse forum. "So we felt we should get our ducks lined up before continuing to really push that product."
Nick Vedros
Still a SIFI? No problem
If Congress lifts the threshold for being designated a systemically important financial institution, as many regional banks are hoping, the beneficiaries could include Discover and American Express.
Both of those credit card issuers have less than $250 billion of assets — a benchmark that has frequently been floated as an alternative to the current cutoff of $50 billion — while competitors including Capital One Financial sit above the quarter-billion-dollar threshold.
But Capital One CEO Richard Fairbank argued that his $345 billion-asset company has found a favorable spot — big enough to take advantage of its size, but not so big that it has to comply with certain regulations that apply to the largest institutions.
Fairbank said that the digital revolution is bringing bigger advantages to companies that have scale.
"Very purposefully, we have built a national business model for all the businesses that we choose to be in," he said. "When I look at the smaller banks, I don't see a big competitive advantage that they have."
Both of those credit card issuers have less than $250 billion of assets — a benchmark that has frequently been floated as an alternative to the current cutoff of $50 billion — while competitors including Capital One Financial sit above the quarter-billion-dollar threshold.
But Capital One CEO Richard Fairbank argued that his $345 billion-asset company has found a favorable spot — big enough to take advantage of its size, but not so big that it has to comply with certain regulations that apply to the largest institutions.
Fairbank said that the digital revolution is bringing bigger advantages to companies that have scale.
"Very purposefully, we have built a national business model for all the businesses that we choose to be in," he said. "When I look at the smaller banks, I don't see a big competitive advantage that they have."
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Rate hikes? No problem
Rising rates have already led to a sharp decline in banks' business of refinancing mortgages. But some banks, including Regions Financial in Birmingham, Ala., say they are less threatened than others. Regions' mortgage business is split 70% on new-purchase mortgages and 30% on refinance, consumer banking head Logan Pichel said. "Rising rates won't affect us much," he said.
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Cybersecurity's drain on resources
Protecting a giant bank from cybercriminals isn't cheap. U.S. Bancorp spent $955 million on technology and communications in 2016, up 8% from a year earlier. And that doesn't even include salaries for its 550 information-security employees, located in 34 cities and six countries around the world.
During a presentation Tuesday, Jason Witty, its chief information security officer, said that U.S. Bancorp has invested heavily in cybersecurity in recent years and should see those costs flatten out in the future. But the trick with budgeting for information security is that you never know what will happen next.
"Being a chief information security officer is kind of like being a weather predictor, but it's like being a weather predictor on a planet where there's a new type of weather every quarter, and none of the old types of weather go away," Witty said.
To keep close tabs on its network, the $446 billion-asset bank monitors 3.8 billion events per day and processes approximately 1.3 petabytes of information. To put that context, imagine digitizing the entire Library of Congress, putting all of that text in storage, and then multiplying that by 20, Witty said. That's one petabyte.
During a presentation Tuesday, Jason Witty, its chief information security officer, said that U.S. Bancorp has invested heavily in cybersecurity in recent years and should see those costs flatten out in the future. But the trick with budgeting for information security is that you never know what will happen next.
"Being a chief information security officer is kind of like being a weather predictor, but it's like being a weather predictor on a planet where there's a new type of weather every quarter, and none of the old types of weather go away," Witty said.
To keep close tabs on its network, the $446 billion-asset bank monitors 3.8 billion events per day and processes approximately 1.3 petabytes of information. To put that context, imagine digitizing the entire Library of Congress, putting all of that text in storage, and then multiplying that by 20, Witty said. That's one petabyte.
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Still battling the paper blob
Bank of America has been slashing expenses for years, by laying off staff and closing branches, but like a lot of banks it's still trying to stem the costly tide of paper.
Consider monthly bank statements. It's not printing and mailing them that's expensive; rather, it's the cost of maintaining a large system of storing, printing and mailing the paper that weighs on the bottom line, Dean Athanasia, co-head of consumer banking, said at the conference.
"Remember, it's not just [customers] going to automation, which is great for us," said Athanasia, who is also president of small-business banking. "But then we don't have to track it all the way through — we don't have to store it, we don't have to retrieve it."
There's also the matter of paper checks. Even as consumers move away from check-writing, favoring cards and mobile payments instead, many of the systems used to print and process checks remain in place.
"We may never get out of checks in the next five years," Athanasia said, noting that it takes "giant systems, printing and sending out checks, and check readers" to support the process.
Efficiency across the industry will improve once banks are able to "retire all the systems and technology" used in paper-intensive businesses, he said.
Consider monthly bank statements. It's not printing and mailing them that's expensive; rather, it's the cost of maintaining a large system of storing, printing and mailing the paper that weighs on the bottom line, Dean Athanasia, co-head of consumer banking, said at the conference.
"Remember, it's not just [customers] going to automation, which is great for us," said Athanasia, who is also president of small-business banking. "But then we don't have to track it all the way through — we don't have to store it, we don't have to retrieve it."
There's also the matter of paper checks. Even as consumers move away from check-writing, favoring cards and mobile payments instead, many of the systems used to print and process checks remain in place.
"We may never get out of checks in the next five years," Athanasia said, noting that it takes "giant systems, printing and sending out checks, and check readers" to support the process.
Efficiency across the industry will improve once banks are able to "retire all the systems and technology" used in paper-intensive businesses, he said.
