The cost of a major U.S. bank in the last quarter compared to the same period last year when executives paid for talent and technology to strengthen their business against intensifying competition from almost every angle. It surged by more than $ 6.6 billion (10%).
Increased spending at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup surprised analysts. Many predicted that banking costs would decrease slightly this year as the additional costs associated with doing business during the pandemic disappeared.
However, when discussing quarterly revenues in a series of conference calls this week, executives predict that higher salaries for bankers and increased investment in technology and marketing will increase annual expenses.
“Investors are nervous that this is the cost of doing business to prevent bleeding of clients into fintech,” said Brian Foran, a bank analyst at Autonomous Research.
While cost growth at most US banks outweighs earnings growth, banks are tackling historically low interest rates and a dramatic slowdown in lending.
According to earnings released this week, the costs of the five banks were 21 percent higher in the second quarter compared to 2019 before the pandemic. However, second-quarter revenue increased by just 10% compared to 2019.
While spending on technology has increased over the years, the acceleration of digitalization during pandemics has forced executives to become even more confused.
“The urgency and importance of talking to bank executives seems to be increasing day by day,” Foran said.
Increased spending represents a shift from banks’ response to the last financial crisis, where many relied on cost savings to increase profits. However, the stimulus package helped banks avoid the pandemic-related bad debt wave that executives expected.
Citigroup Chief Financial Officer Mark Mason said after banks reported a 7% increase in costs, “some true strategic strategies for investing in franchises, especially given the pace of recovery. We are identifying the opportunity. ” “We will not miss this opportunity.”
Banks face intensifying competition in almost every aspect of their business.Private equity firms now have the capital to carry out large-scale transactions on their own Without relying on the bank, And fintech companies are eroding the margins of their wealth management business, pulling some consumers away from traditional banks. Lower rates and perks.
Jamie Dimon, CEO of JP Morgan, warned in an annual letter to shareholders in April that the banking industry’s share of the US financial system would shrink. Banks raised their annual expense guidance by 1% to $ 71 billion this week.
“If we can find better money to spend, we’ll spend it,” Dimon said in a bank earnings statement.
Compensation, the industry’s biggest expense to date, increased by 7% compared to last year as it paid talent at five banks in the second quarter.
Investment banks like Citigroup and JP Morgan have raised the salaries of complaining junior investment bankers Burnout Syndrome During the pandemic, Bank of America promised to raise the minimum wage to $ 25 per hour.
Businesses like investment banks with performance-related rewards could also exceed expectations this year and boost bonuses.
Jan Bellens, EY’s leader in the global banking and capital markets sector, said banks are increasingly hiring engineers and data scientists as part of their technology push, resulting in higher median salaries. ..
Quarterly marketing spending also surged 46% year-on-year across the Group as lenders promoted promotional activities. Credit card offer Bankers trying to start growing loans in a hurry Acquire potential customers and eat After the blockade last year.
“All the banks are in the ring and ready to fight for revenue. Fighting for revenue means spending more on growth,” said Mike Mayo, a bank analyst at Wells Fargo. Said.
Banks expect this latest technology spending to yield better results than previous efforts. Years of past technology spending have not been able to significantly reduce the cost of doing business in a bank, and the bank’s efficiency ratio (a measure of cost as a percentage of income) has been stubbornly 50 for years. It remains above%.
Increased spending in the face of earnings pressure can be a difficult sale for bank investors who closely monitor profitability indicators.
Oliver Wyman consultant Vivian Marker said: “Historically, we’ve exceeded our promises, we’ve fallen short of results, and no one knows the future.”
U.S. banks are spending more on talent and technology
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