Job cuts: banks on a mission to rein in costs

During the big bank’s profit reporting season, in November, investors expressed concern about the fact that for some of the banks costs were rising faster than revenues. Investors and analysts made the point that banks were faced with a low-growth outlook and would need to be a lot more efficient.

Job cuts at ANZ last week, and suggestions from a number of quarters that there is plenty more to come, are evidence that the banks took that message on board. Efficiency is going to be the big theme in banking in 2012 and productivity is going to be a big driver of earnings growth.

ANZ’s cost to income ratio rose from 46.5 per cent to 47.4 per cent during the 2010/11 financial year, making it the worst performer among its peers on expense management.

ANZ’s operating income increased eight per cent in the year to September, while operating expenses rose 10 per cent. In the second half of the financial year, from March to September, operating income fell three per cent, while operating expenses fell one per cent.

Westpac reported a one per cent increase in operating income for the year to September and a two per cent increase in expenses.

Westpac launched a productivity program in October 2010, which delivered $289 million of efficiency gains in 2010/11. The bank stepped up the program in August, targeting bigger gains in the current financial year. Staff numbers were reduced by 767.

National Australia Bank’s expense management figures looked better but deteriorated in the September half. For the full year net operating income rose 5.7 per cent and operating expenses fell 1.4 per cent. However, in the second half of the year income was flat, while expenses rose 0.2 per cent.

In November, Commonwealth Bank issued a September quarter earnings update, in which it reported that costs grew at a greater rate than its revenue during the quarter.

Analysts highlighted disappointing second half results in their wrap-ups of the banks’ 2010/11 financial reports and questioned where the growth would come from in the year ahead.

They noted that outlook statements have gone from being confident that demand for lending would rebound to being hopeful, at best.

“The banks delivered zero growth in pre-provision profit during the September half,” said UBS analyst Jonathon Mott in a note issued on Thursday.

“We believe that the banks are structurally challenged, with consumer and business preference for deleveraging likely to prevent a material recovery in credit growth.”

A lot of profit growth was driven by reductions in bad debt charges but analysts questioned whether there would be much more to be gained from that source in the year ahead.

If there are gains to be made they will come from cost reductions and business efficiency programs.