US banks eye more cost cuts amid global growth con­cerns

The Pak Banker - - COMPANIES/BOSS -

Gold­man Sachs Group Inc and other US banks are look­ing at ways to slash ex­penses fur­ther this year as mar­ket tur­moil, de­clin­ing oil prices and con­cerns about Ger­many's Deutsche Bank have sent the sec­tor's shares down sharply.

"We can ab­so­lutely do a lot more on the cost side if we have to, es­pe­cially now, when you have to de­liver a re­turn," Gold­man Chief Ex­ec­u­tive Of­fi­cer Lloyd Blank­fein said at the Credit Suisse fi­nan­cial ser­vices fo­rum in Mi­ami.

"We take a par­tic­u­lar and en­er­getic look at con­tin­ued cost cuts when rev­enues are stalled," he said. " ... Ne­ces­sity is the mother of in­ven­tion." U.S. Ban­corp Chief Fi­nan­cial Of­fi­cer Kathy Rogers echoed Blank­fein's com­ments at a sep­a­rate panel, say­ing her bank would keep cut­ting costs this year. She cited a smaller chance that in­ter­est rates would rise, which would have in­di­cated a stronger econ­omy and more rev­enue for the bank.

BB&T Corp (BBT.N) CEO Kelly King said the bank has re­jected broad­based lay­offs so far and re­mains fo­cused on man­ag­ing ex­penses in a way that will not hurt busi­ness in the long-term.

"Cut­ting ex­penses with a butcher's knife and a bad at­ti­tude is not go­ing to pro­duce good re­sults," he said.

As ex­ec­u­tives were speak­ing at the con­fer­ence, Deutsche Bank shares hit a record low, fol­low­ing their 9.5 per­cent plunge on Mon­day. Al­though the bank has said it has suf­fi­cient re­serves, in­vestors have wor­ried that it will not be able to re­pay some bonds that are com­ing due. The bonds, called AT1 se­cu­ri­ties, con­vert into equity in times of mar­ket stress. Deutsche Bank's woes re­flect broader con­cerns about the health and prof­itabil­ity of euro zone banks. Last week, San­ford Bern­stein an­a­lyst Chi­ran­tan Barua said Bar­clays Plc (BARC.L) should spin off its in­vest­ment bank in an ef­fort to re­vive its core UK retail and com­mer­cial busi­ness.

Ma­jor Wall Street banks have also had a bru­tal start to 2016, with the KBW Nas­daq Bank in­dex down 18 per­cent on con­cerns about prof­itabil­ity. Most of the large U.S. banks ended trad­ing on Tues­day with shares flat, while Mor­gan Stan­ley (MS.N) closed up 1.2 per­cent.

Since de­mand for U.S. bank shares be­gan to weaken in late Novem­ber, the sec­tor's top five stocks have lost 20 per­cent of their mar­ket cap­i­tal­iza­tion, or around $120 bil­lion. Al­most 70 per­cent of the banks deemed glob­ally sig­nif­i­cant are trad­ing below their tan­gi­ble book val­ues, or what they would be worth if liq­ui­dated. An­a­lysts say if this con­tin­ues, banks may have to re­struc­ture more dras­ti­cally to cut costs. In­vestors said bank ex­ec­u­tives would need to look at other ways to boost prof­itabil­ity now that hopes for fur­ther in­ter­est rate hikes have faded. "They're go­ing to have to come up with other levers to pull, whether it is in­vest­ing in tech­nol­ogy or re­duc­ing head­count," said John Fox, chief in­vest­ment of­fi­cer at Fein­more As­set Man­age­ment, which in­vests in fi­nan­cials. "There will be more pres­sure on ex­penses be­cause of the in­ter­est rate en­vi­ron­ment."

Banks have al­ready en­gaged in ma­jor cost-cut­ting over the last sev­eral years, as low in­ter­est rates and strict reg­u­la­tions have crimped prof­its in ar­eas like fixed in­come trad­ing.

At Gold­man, head­count in its trou­bled fixed-in­come trad­ing busi­ness has al­ready de­clined 10 per­cent since 2012, Blank­fein said. The bank has trans­ferred many jobs to lower-cost lo­ca­tions like Ben­galuru, In­dia, Salt Lake City and Dal­las, where 25 per­cent of its em­ploy­ees are now based.

Gold­man is also look­ing for ways to re­duce pay­ments to out­side ven­dors.

Other U.S. banks have been tak­ing sim­i­lar steps. Mor­gan Stan­ley said in Jan­uary it planned to cut an­other $1 bil­lion in costs by 2017 by lean­ing more on tech­nol­ogy and in­creased out­sourc­ing. Last year, it elim­i­nated about 25 per­cent of jobs in its fixed in­come divi­sion as it tries to lift its prof­itably to 10 per­cent. JPMor­gan Chase & Co's (JPM.N) in­vest­ment bank is in the middle of a $2.8 bil­lion ex­pense-re­duc­tion pro­gram.

Bank of Amer­ica Corp ( BAC.N) is look­ing to keep quar­terly core ex­penses below $13 bil­lion, which it has ac­com­plished five out of the last six quar­ters, Chief Fi­nan­cial Of­fi­cer Paul Donofrio said last month. That tar­get comes af­ter years of cost re­duc­tions. Of­fer­ing his out­look on Tues­day, Blank­fein said he be­lieved global mar­kets would im­prove, "but we aren't hold­ing hands and singing 'Kum­baya' to get bet­ter."

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