US banks' efficiency ratios hit 3-year low as net interest income spikes in Q3

The banking industry's aggregate efficiency ratio improved for the third consecutive quarter, dropping to its lowest level in three years.

The three-year low in U.S. banks' efficiency ratio was thanks to a spike in net interest income that outpaced the uptick in expenses.

Banks get more efficient

U.S. banks posted an aggregate efficiency ratio of 56.0% in the third quarter, down from 58.5% in the second quarter and 60.2% in the year-ago period, according to S&P Global Market Intelligence data. The improvement marks the lowest aggregate efficiency ratio for U.S. banks since the third quarter of 2019.

As a whole, the industry posted aggregate efficiency ratio improvement of 2.5%.

Among the top 20 U.S. banks by head count, 15 reported a quarter-over-quarter decline in their efficiency ratio, which is a measure of noninterest expenses divided by net interest income and noninterest revenue. TD Group US Holdings LLC reported the greatest improvement at -26.3% quarter over quarter.

Conversely, five of the top 20 U.S. banks by head count reported a quarter-over-quarter increase in their efficiency ratios.

Net interest income growth outpaces rising expenses

U.S. banks posted $137.9 billion in other noninterest expenses in the quarter, excluding goodwill impairment and intangible assets, up from $133.8 billion in the linked quarter and $127.1 billion in the year-ago quarter. Of the top 20 U.S. banks by head count, only eight reported a quarter-over-quarter decline in noninterest expenses.

Still, despite rising expenses in the third quarter, a spike in net interest income helped improve banks' efficiency ratios. The industry posted $169.6 billion in total net interest income in the third quarter, up from $152.0 billion in the second quarter and $135.3 billion in the year-ago period.

Meanwhile, total noninterest income held steady with U.S. banks reporting $76.8 billion, largely in line with the prior quarter and the third quarter of 2021.

Banks' head count keeps rising

The third quarter marked a full year of consecutive head count increases for U.S. banks. The industry reported a 0.7% increase in full-time employees quarter over quarter and a 2.8% increase in full-time employees year over year.

Three of the "Big Four" U.S. banks reported a higher head count, rising 3.5% at JPMorgan Chase & Co., 2.1% at Citigroup Inc. and 1.7% at Bank of America Corp.. Wells Fargo & Co. was the only bank of the "Big Four" to see a decline in head count with a drop of 1.8%, the biggest decline among the top 20 U.S. banks by head count.

In recent months, Wells Fargo has taken to layoffs in its mortgage department as home lending activity has slowed. Despite the company's head count reduction in the quarter, noninterest expenses rose 11% from the linked quarter. The increase was largely due to settling historical regulatory issues, and the company warned of more to come.

Meanwhile, 16 of the top 20 U.S. banks by head count posted a quarter-over-quarter increase in full-time employees, while three reported a decline and one reported no change. American Express Co. posted the largest increase, at 5.3% quarter over quarter.