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Efficiency appears to be the motto for big banks as they wrap up 2023.
It has been a challenging year for the sector as it has had to grapple with higher funding costs and tepid loan demand and deal-making activity. That’s caused some banks to focus more on the expense side of their business while growth is constrained.
But cost savings aren’t a shot in the arm for lenders. While layoffs mean lower costs in the longer run, banks still face upfront severance costs.
That was the takeaway from
Wells Fargo
Chief Executive Charlie Scharf while speaking at a
Goldman Sachs
conference Tuesday. Scharf said the bank expects to book $750 million to $1 billion in severance costs in the fourth quarter as it continues to focus on efficiency. While Wells Fargo has long been working to become a leaner organization following its fake accounts scandal from 2016, Scharf said the bank hadn’t anticipated these costs, as employees haven’t been quitting as frequently as they have in the past.
“With turnover dropping, unfortunately, we’re going to have to be more aggressive about our own internal actions. But again, we think that’s the right thing to do for the long term,” Scharf said at a Goldman Sachs conference.
His comments mirror a trend seen across the banking industry as it deals with rising costs and bloated head counts from the pandemic-era hiring spree. Scharf said Wells Fargo’s head count peaked at 275,000 and is now at 230,000 as the bank focused gradually on whittling down areas of the bank that could be more efficient.
“When we talk about our own efficiency, we say we aren’t even close to where we should be. I describe it as peeling an onion back. When you become more efficient, it gives you a chance to look at everything else and say, OK, what’s next?” Scharf said.
His remarks come on the heels of rival
Citigroup
embarking on its own turnaround plans, which will reorganize the bank into five distinct business units and strip away layers of management. Citigroup hasn’t confirmed the scale of its layoffs, but an earlier report from CNBC says as many as 10% of workers could be let go.
Both Wells Fargo and Citigroup have been somewhat of problem-child banks in recent years. At Wells Fargo, it has been about restructuring after the fake accounts scandal and getting out from under the $2 trillion asset cap the Federal Reserve imposed on the bank because of it. Citigroup, meanwhile, has struggled from years of missed financial targets and what regulators deemed weaknesses in its internal controls.
Wells Fargo’s efficiency ratio, a measure of a bank’s expenses relative to revenue, has gradually improved: It declined to 63% in the third quarter, after being as high as 80% in 2020, according to FactSet data. Citigroup’s efficiency ratio, meanwhile, has climbed to 68% from 57% over the same period, as the bank has had to spend considerably to get its operations in order.
Wells Fargo shares slid by 1.4% Tuesday while Citigroup dropped 1.8% Tuesday, and the KBW Nasdaq Bank Index fell 1.1%. The
S&P 500
was nearly flat.
Write to Carleton English at [email protected]
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