Academic journal article ABA Banking Journal

What Banks Say and Do about Operating Costs

Academic journal article ABA Banking Journal

What Banks Say and Do about Operating Costs

Article excerpt

What banks say and do about operating costs

In U.S. banks, operating costs consume about 66 cents of every dollar of total revenue. Despite efforts to control and reduce costs, studies undertaken by Price Waterhouse show this figure has not changed much over the last five years.

An important point: Improved cost management does not necessarily require an absolute reduction in costs. It does mean an improvement in costs incurred relative to some measure of business volume, such as total revenue. A bank may increase its costs, but if volume is growing at a faster rate, it has improved cost management.

Five facets. To gauge bankers' attitudes towards and strategies for managing operating costs, ABA Banking Journal and Price Waterhouse jointly sponsored a nationwide banker survey. The survey was designed to answer five questions:

(1) Given the many challenges facing banks, how much priority do they place on cost management?

(2) What steps have been undertaken in the past to control costs?

(3) What cost-cutting measures are planned?

(4) What factors are and will be important to operating cost management?

(5) What long-term cost position is desired by banks?

What comes first? Managing costs is only one of bankers' many objectives. The survey asked respondents to rank cost management relative to five other important objectives: increasing the bank's spread; increasing noninterest income; expanding market share; improving asset quality; and building capital.

Increasing spreads was the top priority. It was ranked an average 4.5 on a scale of 1 to 6, where 6 was the most important objective. In fact, 39.2% of respondents ranked increased spreads as the most important goal.

Better cost management ranked a close second, with an average rating of 4.1. Relatively few respondents (13.1%) put it first, but nearly 50% said it was their second or third priority.

The other objectives, in descending order of importance, were:

* Increased noninterest income: 3.7 rating; 7.8% of respondents gave it top priority.

* Expanded market share: 3.4 rating; 15.2% gave it top priority.

* Improved asset quality: 3.2 rating; 11.7% gave it top priority.

* Higher capital: 2.8 rating; 12.7% gave it top priority.

Priorities varied by bank size. Increasing noninterest income was the top priority for banks over $5 billion in assets. Better cost management was the top priority for banks in the $500 million to $1 billion and $1 billion to $5 billion asset groups. For banks under $100 million and $100 million to $500 million, increasing the spread was the most important priority. "Building capital" was at the bottom of each group's list.

Finding cost management to be the top priority primarily in mid-size banks is not surprising. In recent years such banks have made some of the most significant investments (relative to their size) in technology, product development, and delivery systems. They have done so to adapt to a more competitive environment. The costs of such investments have heightened their awareness of cost management.

There were also priority differences among banks in different regions of the country. Banks in the Great Lakes and Southeast regions were more focused on sources of income (both interest and noninterest). Banks in the Midwest and the Northeast were very concerned with increasing the interest income base, with cost management a second concern. Banks in the Southwest and West were more concerned with improving asset quality and spread, while those in the West also had improved asset quality as a very high priority, with better cost management a close second.

Past cost control. Overall, the most common past actions taken by respondents towards better cost management were improving procedures and improving productivity. As shown in Exhibit 1, about half of all respondents said they had taken steps toward these goals recently. …

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