US banks ramp up spending on talent and technology

Costs at major US banks jumped more than $6.6 billion, or 10 percent, in the fourth quarter from the same period last year, as executives pushed talent and technology to bolster their businesses against increased competition from almost all angles.

The increase in spending at JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup surprised analysts. Many expected banks’ expenses to fall slightly this year as the additional costs associated with doing business during the pandemic fade.

However, in a series of conference calls this week to discuss quarterly earnings, executives expected higher annual expenses due to increases in bankers’ salaries and larger investments in technology and marketing.

“There is concern among investors that this is the cost of doing business to prevent clients from bleeding into fintech companies,” said Brian Foran, an analyst at Independent Research Bank.

Cost increases in most US banks are outpacing revenue growth as banks struggle with historically low interest rates and a dramatic slowdown in lending.

Expenditures at the five banks rose 21 percent in the second quarter compared to 2019, before the pandemic, according to earnings released this week. But second-quarter revenue is up 10 percent compared to 2019.

Although technology spending has been on the rise for years, accelerated digitization during the pandemic has forced executives to stumble even more.

The vertical graph of quarterly expenditures in US dollars shows that US banks are spending more to fend off competition

“It seems that the urgency and importance when talking to bank executives is increasing day by day,” Foran said.

The higher spending represents a shift from how banks responded to the recent financial crisis, when many relied on cost cutting to boost profits. But the stimulus programs helped banks avoid the wave of pandemic-related loan losses that executives had expected, meaning they had extra money to spend.

“We are identifying, particularly given the pace of the recovery, some real strategic opportunities to invest in the franchise,” Mark Mason, Citigroup’s chief financial officer, said this week after the bank announced a 7 percent increase in costs. “We will not miss this opportunity.”

Banks face stiff competition in almost every aspect of their business. Private equity firms now have the capital to execute big deals on their own without relying on banks, and fintech companies are eroding profit margins in the wealth management business and luring some consumers away from traditional banks Lower fees and perks.

Jamie Dimon, CEO of JPMorgan, warned of a shrinking banking industry’s share of the US financial system in his annual letter to shareholders in April. The bank this week raised its annual expense guidance by 1 percent to $71 billion.

Vertical graph of $1 billion in quarterly compensation costs shows banks are paying more to their employees amid a war on talent

“If we can find more good money to spend, we’ll spend it,” Dimon said on the bank’s earnings call.

Compensation, the industry’s biggest expense to date, rose 7 percent at the five banks in the second quarter from a year ago as they paid for talent.

Investment banks such as Citigroup and JP Morgan raised the salaries of small investment bankers who complained about it Burnt During the pandemic, Bank of America has committed to increasing the minimum wage to $25 an hour.

Businesses such as investment banking with performance-related compensation also beat expectations this year, which is likely to increase rewards.

As part of the technology push, banks are increasingly hiring engineers and data scientists, which is increasing their average salaries, said Jan Bellins, head of global banking and capital markets at EY.

A column chart of marketing expenses in US dollars showing that banks are spending much more on marketing than during the pandemic

Quarterly marketing expenses were also up 46 percent year-over-year across the group as lenders paid off the promotion Credit Card Offers In an effort to stimulate loan growth, bankers have returned to it Winning potential customers and dining After closings last year.

“Banks are all in the ring and all ready to fight for revenue. Fighting for revenue means spending more for growth,” said Mike Mayo, banking analyst at Wells Fargo.

There are other bank-specific factors that fuel spending as well Integration expenses For Morgan Stanley after two big deals and organizational Costs at Citigroup.

Banks hope the latest round of tech spending will yield better results than previous efforts. Years of prior technology spending had failed to reduce the cost of doing business for banks appreciably, with banks’ efficiency ratios — a measure of costs as a proportion of income — remaining above 50 percent for years.

Higher spending in the face of revenue pressures could be a tough sell for bank investors who have closely monitored profitability metrics.

“It’s really hard for investors to understand the long-term value of the technology investments that are being made now,” said Vivian Merker, advisor at Oliver Wyman. “Partly because historically there has been an overdose of promises and underachievement and partly because no one knows the future.”

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