Banks look to cut the fat
Banks are eager to slash expenses to prove they aren't recklessly spending. That probably means more layoffs and asset sales. But will banks cut too far?
NEW YORK (CNNMoney.com) -- Complain about their bloated corporate structures all you want, but at least banks are trying to get in shape.
In recent months, lenders have moved aggressively to cut costs, taking an axe to everything from entire business lines to staffing levels.
American Express (AXP, Fortune 500), now a bank holding company, became the latest financial firm to act, announcing plans after Monday's closing bell to cut 4,000 jobs, or 6% of its global workforce. That follows layoffs of 7,000 people that AmEx announced in October.
Last week, JPMorgan Chase (JPM, Fortune 500) unveiled a more novel approach. As part of a broader effort to rein in expenses, the company has ordered employees in its investment banking division to fly coach on short business trips and to refrain from tipping more than 15% on meals and taxis.
"It is essential that we stay in front of our clients and the markets to maintain the leadership positions we've worked hard to build," the company wrote in a memo to staffers. "At the same time, we need to keep the cost of doing business in mind, particularly in the current environment."
Chase is not alone. Some troubled institutions like Citigroup (C, Fortune 500) banned off-site meetings late last year. Citi also told employees to scale back on their use of color copies.
It is no secret that business has not been easy for bankers lately. Even as lenders enjoy attractive margins on new loans, revenues across many of their businesses are down substantially from where they were just a year ago.
Financial firms also find themselves mired by ongoing loan losses in their credit card and mortgage portfolios, and many experts are concerned that commercial real estate loans may soon sour as well.
Banks, as a result, are acting much in the same way as they have in other recessions, notes Jennifer Thompson, senior analyst at the New York-based financial services research firm Portales Partners.
"Whenever revenue growth slows for this industry, the first thing banks start to do is step on the brakes in terms of expenses," she said.
What makes this current period of belt-tightening different, however, is that lenders are coping with intense scrutiny from government regulators who have been trying to keep banks afloat. The Treasury Department has invested roughly $200 billion in 579 financial institutions across the country through the Troubled Asset Relief Program.
That means that regulators will be intent on proving to taxpayers that they can pressure banks to slim down so lenders can return to health and pay back TARP money to the government as quickly as possible.
As a result, more cost-cutting measures are inevitable, according to experts.
Banks' two largest sources of expenses - employees and real estate - are ripe for reduction. Seamus McMahon, president of independent consulting firm McMahon Advisory LLC, says that could mean more layoffs as well as consolidation of offices and branches.
Many lenders have overextended their branch network in recent years, he notes, particularly those that recently underwent the government's stress test program.
Given the healthy returns that such banks are currently earning thanks to low interest rates, McMahon believes that some large lenders could easily close 15% of their existing retail branches without sacrificing any of their deposit base.
Banks may also look to technology improvements to save a buck or two. For example, experts note that many lenders currently depend on a mix of different software programs for taking in deposits that were never merged following the wave of bank consolidation earlier this decade.
And of course, there is always the option of purchasing a rival with the hopes that this will lead to savings down the road. Executives at PNC (PNC, Fortune 500) and Wells Fargo (WFC, Fortune 500), which last year acquired struggling regional banks National City and Wachovia respectively, have maintained they expect to save billions of dollars as a result of these deals.
Such savings, however, usually more take time to materialize, experts said. So banks have little choice but to look to short-term remedies.
But requiring employees to fly coach and only make photocopies in black-and-white can only go so far. Roger Lister, the New York- based chief credit officer for financial institutions at credit rating agency DBRS, said what banks are really trying to do with such initiatives is warn employees about excessive spending in general.
"Those kinds of economizing are much more important in terms of the message they send than the expenses they save," Lister said.
Still, as banks slash budgets and look to sell key businesses, they may cut too far into the corporate fat and end up severing profit muscle instead.
Banks that go too far with layoffs, for example, could very well find themselves ill-prepared to take advantage of a rebound in business once the economy turns around.
"There is always the risk of that," said Portales' Thompson. "It is a slippery slope." 
