US banks' efficiency ratio improves as fee income surges, expenses drop

The US banking industry's aggregate efficiency ratio in the first quarter dropped from the previous quarter's sharp increase but remained elevated from historical levels.

US banks posted an aggregate efficiency ratio of 58.5%, down 7.3 percentage points from the linked quarter but up 5.6 percentage points year over year, according to S&P Global Market Intelligence data.

The efficiency ratio — derived from dividing noninterest expenses by net interest income and noninterest revenue — measures the amount of overhead it costs to generate $1 of operating revenue, where a lower number indicates higher efficiency.

The sequential improvement was thanks to a sharp drop in noninterest expense and a sizable jump in noninterest income. Net interest income dropped quarter over quarter but not enough to offset the impact of the other components' turnarounds.

US banks' noninterest income jumped by over $10 billion to $77.89 billion from $67.58 billion in the prior quarter.

At the same time, noninterest expenses totaled $146.35 billion, excluding goodwill impairment and intangible assets, down from $159.92 billion in the fourth quarter of 2023. Of the top 20 banks by head count, 16 lowered noninterest expenses quarterly.

The fourth-quarter 2023 rise in expenses was due to the Federal Deposit Insurance Corp.'s special assessment to replenish the Deposit Insurance Fund following the bank failures in spring 2023.

Although that payment is now in the rearview mirror for large banks, expenses are still a pain point for the industry overall. The first-quarter total is well above the previous year's total of $138.74 billion and $132.77 billion in the first quarter of 2022.

Net interest income fell quarter over quarter to $172.51 billion from $175.48 billion. Annually, net interest income declined 2.4% from $176.69 billion.

Efficiency ratios rally

Much like the industry trend, efficiency ratios at 18 of the top 20 banks by head count improved quarterly.

Citigroup Inc. had the biggest drop at 23.9 percentage points quarter over quarter. The decline was partly thanks to an 11.2% decrease in noninterest expenses sequentially, the sixth-largest drop among the banks in the analysis. Citigroup is working through an extensive organizational overhaul, including job cuts and management elimination.

The next-largest drop in efficiency ratio was for Bank of New York Mellon Corp. with 15.7 percentage points, followed by Bank of America Corp. and Goldman Sachs Group Inc., tied with 13.8 percentage points.

Conversely, Toronto-Dominion Bank had the greatest rise in efficiency ratio, up 7.3 percentage points. TD was one of just four banks in the analysis to post an increase in noninterest expenses. TD's 11.1% rise in noninterest expenses, which was the largest among the group, comes as the bank grapples with regulatory issues related to its anti-money laundering compliance.

Head count continues to slide

The banking industry's aggregate head count slipped just 0.2% from the linked quarter to about 2.07 million employees, continuing a trend of shedding workers. The industry head count has fallen 0.7% since the first quarter of 2022.

Three of the Big Four US banks by head count hired sequentially quarter over quarter, with Citigroup bucking the trend to shed 1% of employees during that period. Head counts for JPMorgan Chase & Co. and Wells Fargo & Co. rose 0.7% sequentially, and ticked up 0.1% for Bank of America.

Of the top 20 US banks by head count, 13 reduced employee count and seven hired quarter over quarter. Truist Financial Corp. reported the biggest drop of 3.3%, and State Street Corp. reported the largest increase of 9.1%. Bank of New York Mellon trailed Truist with the second-biggest drop quarter over quarter at 2.2%.