Many analysts figured banks were due for a belt-tightening this year after America’s biggest lenders splurged to keep their operations running during the pandemic. The spending spree, however, has persisted.
Costs at the top five U.S. banks — JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup — jumped 10% in the latest quarter to more than $6.6 billion. Driving the wild expenditures, executives say, are rising compensation and technology costs needed to fend off enterprising fintechs that are tearing up the old ways of doing business.
Fighting Off Fintech
After 2008’s financial crisis, banks cut costs to salvage profit margins. But during the pandemic, stimulus programs sheltered them against loan losses. Now flush with cash, banks are spending up to protect their territory from fintechs, which raised a record $22.8 billion in 614 deals in the first quarter alone:
- Cost increases at America’s top lenders are now outpacing revenue growth. Second-quarter expenses were 21% higher than in pre-pandemic 2019, while revenues were just 10% higher.
- Compensation, the banking industry’s costliest line item by far, is up 7% at the big five banks compared to last year.
Big Mis-Tech: To make matters worse, tech investment has so far failed to cut costs for banks. Their efficiency ratios, which measure costs as a proportion of income, have been locked above 50% for several years.
“There’s a nervousness among investors that this is the cost of doing business to keep clients from bleeding to fintechs,” Brian Foran, a bank analyst at Autonomous Research, told the Financial Times.
Merger Purge? Since the threshold for “systemically important” financial institutions — which face stricter regulation — was raised to $250 billion in assets, U.S. banks have gone on a merger bender. As a result of all the consolidation, 52 U.S. banks had over $50 billion in assets at the end of Q1 this year, compared to 39 at the end of 2017. In response to the M&A party, President Biden recently issued an executive order tightening merger scrutiny, and Democrats in Congress are considering legislative action as well.