Flurries of new regulations are adding expenses. Failing loans are cutting into revenue. It’s a recipe for continuing budget cuts for many banks.
A report by research firm SNL Financial confirms that cost-cutting is the new normal in banking these days.
In 2010, according to estimates by research firm SNL Financial:
Citigroup (C) is expected to trim nearly $5 billion from its budget by the end of next year. This is in addition to the nearly $20 billion in savings the financial services giant has realized over the past year partly through the sale of some of its businesses.
Even while the industry is under intense pressure from the White House and Congress to increase lending, many banks continue to keep operating costs under control.
Such cutbacks, of course, are hardly a surprise given the turmoil banks have endured over the past year, namely the billions of dollars lost to bad loans.
What’s even more troubling however, note experts, 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. Banks will have to account for a third of that money in fiscal 2010.
Banks also face a whole new set of new restrictions most notably regarding overdraft fees. Starting next July, banks will no longer be able to automatically enroll customers in overdraft protection programs.
Overdraft and non-sufficient fund fees have been a big business for the banking industry. Current projections suggest that lenders will rake in $38.5 billion from those two areas in 2009, according to Moebs Services, an economic research firm.
A big drop in those fees will likely leave most lenders feeling the pinch, note experts.
“I think you are looking at a fairly sizeable blow to revenues,” said Seamus McMahon, a long-time industry consultant who runs his own firm McMahon Advisors LLC.
And in the face of so many headwinds, don’t be surprised if lenders try to cook up a whole new set of fees aimed at revitalizing their business.
Banks certainly have any number of ways they could save a buck or two, including selling off parts of their business, trimming marketing budgets or telling external consulting firms to take a hike.
But industry experts argue that some lenders may have little choice but to take aim at their biggest source of costs — employees. On average, salary and benefit expenses tend to make up about half of their operating expenses.
“Over the last year there has been a concerted effort by most financial institutions to bring in expenses through headcount reduction,” said Frank Barkocy, director of research at Mendon Capital Advisors, a money manager that invests primarily in bank stocks.
“I think that will be a continued theme as we go forward.”
One problem in all this, note experts, is that lenders have already drastically cut staff levels, and implemented other cost-cutting measures in recent years in an effort to stay ahead of the recession.
Citigroup, for example, has trimmed its worldwide staff by 100,000, or approximately a quarter, over the past two years, partly through the sale of some of its businesses.
The embattled lender also moved to ban off-site meetings late last year, in addition to telling employees to scale back on their use of color copies.
“It’s not like these guys have been sitting on their hands for the last couple years,” said McMahon.
By cutting too much further, lenders run the risk of going too far and hurting their performance.
