The costs of major U.S. banks jumped by more than $ 6.6 billion in the last quarter, as the intensifying battle for talent and the growing threat from new fintech rivals forced executives to rise. their expenses.
The 10% increase in costs over last year at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup surprised analysts. Many had predicted that spending would decline modestly this year as the additional expenses associated with doing business during the pandemic wore off.
However, in a series of conference calls to discuss quarterly earnings, executives forecast higher annual expenses due to bankers’ salary increases and larger investments in technology and marketing.
“There is nervousness among investors that it is the cost of doing business to keep customers from bleeding fintechs,” said Brian Foran, banking analyst for Autonomous Research.
Cost increases at most US banks are outpacing revenue growth as banks grapple with historically low interest rates and a sharp slowdown in lending.
Spending at the five banks rose 21% in the second quarter compared to 2019, before the pandemic hit, according to the latest earnings releases. But second-quarter revenue only increased 10% from 2019.
Although technology spending has been on the rise for years, accelerated digitization during the pandemic has forced executives to scramble even harder.
“The urgency and importance of talking to the executives of the bank seems to be increasing day by day,” Foran said.
The increase in spending represents a change from the banks’ reaction to the last financial crisis, when many relied on cost cuts to boost profits. But the stimulus packages have helped banks avoid the wave of pandemic-related loan losses that executives expected, meaning they have extra cash to spend.
“We are identifying, particularly given the pace of the recovery, real strategic opportunities to invest in the franchise,” Citigroup CFO Mark Mason said last week after the bank reported a 7-month increase for percent of costs. “We are not going to miss this window of opportunity.”
Banks face increased competition in virtually every aspect of their business. Private equity firms now have the capital to execute large transactions on their own without depending on banks, and FinTech firms are eroding their margins in the wealth management industry and driving some consumers away from traditional banks with lower costs and benefits.
Jamie Dimon, chief executive of JPMorgan, warned of the banking sector’s declining share of the U.S. financial system in his annual letter to shareholders in April. The bank this week raised its annual spending forecast by 1% to $ 71 billion.
“If we can find more money to spend, we’ll spend it,” Dimon said during the bank’s earnings call.
Compensation, by far the biggest expense for the industry, increased 7 percent at all five banks in the second quarter compared to last year as they paid for talent.
Investment banks like Citigroup and JPMorgan have raised salaries for junior investment bankers who complained of burnout during the pandemic, and Bank of America has pledged to raise its minimum wage to $ 25 an hour .
Companies like investment banking with performance-linked pay have also beaten expectations this year, which should push up bonuses.
As part of the technology push, banks are increasingly recruiting engineers and data scientists, which increases their median salaries, said Jan Bellens, global leader in banking and capital markets at EY.
Quarterly marketing spend also climbed 46% year-on-year across the group, as lenders pushed for promotional credit card offers in an attempt to boost lending growth and bankers returned to potential customers after last year’s lockdown.
“The banks are all in the ring and they are all ready to fight for income. Fighting for revenue means spending more for growth, ”said Mike Mayo, banking analyst at Wells Fargo.
Other bank-specific factors are also fueling expenses such as integration expenses for Morgan Stanley following two major transactions and regulatory costs at Citigroup.
Banks hope this latest round of tech spending will perform better than previous efforts. Years of earlier technology spending failed to significantly reduce the cost of doing business for banks, with lender efficiency ratios – a measure of costs as a proportion of income – remaining stubbornly above 50 percent for years.
Higher spending in the face of revenue pressures could be a tough sell to bank investors who have been watching profitability metrics closely.
“It’s really difficult for investors to understand the long-term value of the technology investments being made today,” said Vivian Merker, consultant at Oliver Wyman. “Partly because historically there have been too many promises and underachievement and partly because no one knows the future. “