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US banks focused on cost-cutting efforts as efficiency ratios deteriorate

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US banks focused on cost-cutting efforts as efficiency ratios deteriorate

U.S. banks are reexamining their workforces and branch footprints after the COVID-19 pandemic created more opportunities to cut costs and emphasized expense savings efforts as efficiency ratios worsen.

"One thing that COVID has taught us is that we need to be spending a lot more money on technology and on the digital side of the banking industry and honestly, less money on people, branches and real estate," Brady Gailey, an analyst at Keefe Bruyette & Woods, said in an interview.

Salary and benefit expenses for U.S. banks have declined 5.0% over the last 12 months, but other noninterest expenses have increased 6.5% over the same period. While the pandemic bolstered cost-savings efforts such as branch and headcount reductions, the recent digital acceleration created a "double-edged sword" for some U.S. banks trying to cut expenses, Mark Kanaly, corporate and finance lawyer at Alston & Bird LLP, said in an interview.

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"It's not been as necessary to have everyone's branches fully functional with the full number of employees because transactions per branch just continue to be down," he said. "[But] efficiency was really being challenged by every bank's need to up its technological offerings for its customers."

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In addition to expanding digital offerings, COVID-19 also ballooned expenses for U.S. banks in more unique ways. New York Community Bancorp Inc. reported a $2.8 million increase in its "occupancy and equipment" category of noninterest expenses during the third quarter. The increase was primarily related to COVID-19-related costs such as providing personal protective equipment for employees and testing for employees as the bank reopened it headquarters and branches, CFO Thomas Cangemi said on the company's third-quarter earnings call.

Bank of America Corp.'s expenses have risen due to COVID-19-related costs, such as providing child care for employees, Chairman, President and CEO Brian Moynihan said at the Barclays Global Financial Services Conference on Sept. 15. Expenses for the third quarter increased by about $1 billion, partly due to processing "unprecedented" claims for unemployment insurance through the company's commercial card product and the cost of supporting Paycheck Protection Program loans, according to CFO Paul Donofrio said on the company's third-quarter earnings call.

Increasing expenses have contributed to the deterioration of efficiency ratios among U.S. banks during 2020. The aggregate efficiency ratio for U.S. banks year-to-date as of Sept. 30 was 59.2%, up from 56.2% in 2019 and 57.1% in 2018.

Some banks have laid out aggressive cost-cutting initiatives to bring their expenses down. Wells Fargo & Co. had 264,780 employees at Sept. 30, a 0.6% decline in full-time employees quarter over quarter, and the company may soon cut up to a quarter of its workforce. The bank has laid out a plan to cut about $10 billion in annual expenses to bring its efficiency ratio in line with its peers. The company's efficiency ratio was 80.7% at Sept. 30.

Analysts expect more details about Wells Fargo's cost-savings efforts to be announced on the company's fourth-quarter 2020 earnings conference call in January 2021.

Other banks have announced branch consolidation strategies, such as U.S. Bancorp, which plans to close an additional 15% of its branches in 2021, and Truist Financial Corp., which plans to close 104 branches throughout December 2020 and January 2021.

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