As 2009 comes to a close, analysts are looking ahead to 2010, and trying to decipher what to expect. Banking, which in recent years became a symbol of free spending, seems to have reigned that in. Nearly every major public bank has announced that expense accounts have been cut, holiday parties were cancelled, and employees travelled coach, when it was completely necessary to fly somewhere.
Some may be glad to see the banks suffering with the rest of the economy, but boy are they wrong. If bankers don’t travel, airlines and hotels do not collect their profits. If holiday parties are cancelled, restaurants must lay people off. If expense accounts are cut, sports teams will see season tickets drop. So, banks may stay more profitable as a result of the cost cutting everyone wants to see, but it is really not good for the economy.
When Lehman Brothers fell on September 15, 2008, the question going around was “will panic prevail”? As the worst seems to be over, with all the major banks having paid back their TARP funds, and we see a return to profitability in the Q3 disclosures, what will 2010 bring?
Southeastern banking powerhouse SunTrust (NYSE: STI), for example, is expected to cut its operating expenses, including staffing and advertising, by $1.15 billion next year, or 17%, based on estimates by research firm SNL Financial. Banking giant Citigroup (NYSE: C), which has already managed to find nearly $20 billion in savings over the past year partly through the sale of some of its businesses, is expected to trim almost another $5 billion from its budget by the end of next year, according to SNL.
These cutbacks are not all that surprising given the amount of loans that turned bad, and investors that abandoned the market. But, what is troubling is that banks now face a whole new set of fees and rules next year that pose a big threat to their bottom line.
One of the biggest problems is the $45 billion in insurance premiums that banks had to pay to the Federal Deposit Insurance Corp. this year, to help prop up the dwindling fund used to cover bank failures. At the same time, banks face a whole new set of new restrictions aimed at protecting the American consumer, including one imposed by the Federal Reserve on overdraft fees.
As shown in the rise of derivatives, banks can be creative – so, the cost cutting to come likely will be as well.
