Austerity has come to the banking sector, as some of the country’s biggest banks take a hard look at their operations for ways to cut back on expenses in an era of historically low interest rates.
The once-lofty profit margins enjoyed by the banks have come under intense pressure over the past year, as the sector grapples with slowing revenue growth. In response, the banks are now looking at ways to reduce expenses in order to keep profits from slipping.
As Canadian banks now close the books on first-quarter earnings, expense containment has become a buzzword inside their operations. While the sector isn’t expected to undergo the deep cost cutting seen in the United States, where thousands of banking jobs have been axed and expansion plans put on hold, several Bay Street banks have deployed cost-cutting teams to scour their operations.
Royal Bank of Canada chief executive officer Gord Nixon said in an interview Wednesday that his bank has appointed a cost reduction team to cut expense growth by 50 per cent in the year ahead. While that won’t result in the bank’s expenses being lower, it will mean they grow more slowly than originally planned.
“To the extent that revenue growth slows, which is what everybody is expecting across the industry over the next year, then it’s very important that your expense growth slows as well,” Mr. Nixon said. “From our perspective we’re focused on utilizing technology to improve efficiency, as opposed to a mass head count reduction.”
Several of the big-five Canadian banks have pulled back on advertising and marketing spending, and are looking at slowing down the expansion of their branch networks, or putting renovations on hold, according to sources inside the industry. Other measures being looked at closely are cutting back on travel and using software to increasingly automate basic functions such as credit applications and approvals.
Toronto-Dominion Bank chief executive officer Ed Clark said in a recent interview that tackling expense growth is the new reality for banks, since interest rates won’t be going up in the near future. That means banks can’t make as much on the deposits they collect from customers by investing the money elsewhere.
“We as an industry have to say that’s the world we live in ... That chequing account is not yielding us the same profit it was yielding us last year, so can we deliver it for less and restore the profit growth that way? I think that’s really what you are left with,” Mr. Clark said.
“We’ve got due notice that in 2013, we have to deliver that chequing account for less than in 2012. That means we’ve got to go into our back rooms and technology and say okay can we take some of those costs out by just running things better or more effectively.”
At Bank of Montreal, executives have been increasingly using new teleconferencing technology to save on non-essential travel costs. Similar efforts are under way at some of Canada’s other major banks. However, analysts say the two biggest ways for the banks to cut expense growth is through staff and branch operations. Most Canadian banks have plans to build new branches in the next few years, or renovate old ones, which may now be scaled back slightly.
However, this is not an area the banks are eager to cut into. Mr. Clark was asked at an investor conference last month whether TD would look at slowing its branch expansion plans in the United States, where it has grown rapidly in order to capture market share along the East Coast. “You’re going to look at everything,” Mr. Clark said. “But I think the thing we would look at most reluctantly is to slow down our branch growth.”
Few banks can escape the pressure of slimming margins these days. In the United States, staff numbers are being looked at as the most likely place major banks will cut in order to slow expense growth. U.S. bank analyst Dick Bove, of Rochdale Securities, sent waves through the industry in December when he predicted American banks could be faced with 150,000 layoffs in 2012, both on the retail and investment banking sides of their operations.
Gerald Cassidy, U.S. banking analyst for RBC, said he doesn’t think the numbers will be quite that high, but noted the quickest way banks will be able to cut costs in order to preserve margins is to trim employees and scale down branches. JPMorgan Chase & Co. recently changed course on a plan to open 250 new branches, cutting that number in half.
“This is going to be a big area of focus for the banks, not just in the next year but in the next 36 months,” Mr. Cassidy said, adding that slumping loan growth in the recession is also hurting revenue. “The retail banks have the highest overhead because of all the branches and the people. And if they can’t get the loan growth, what are they going to do?”
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