Bank of America increases spending on talent and technology

Compared with the same period last year, the cost of top U.S. banks jumped by more than US$6.6 billion, or 10%, in the most recent quarter, as executives paid for talent and technology to strengthen their business to withstand the increase from almost every angle. Fierce competition.

The increased spending by JP Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup surprised analysts. Many people have predicted that as the additional costs associated with conducting business during the pandemic fade, bank spending will decline slightly this year.

However, in a series of conference calls this week discussing quarterly earnings, executives predicted that due to bankers’ salary increases and greater investment in technology and marketing, annual spending will increase.

Brian Foran, a banking analyst at Autonomous Research, said: “Investors are concerned that this is the business cost of preventing customers from flowing to fintech companies.”

Most U.S. banks’ cost growth has exceeded revenue growth, and banks are struggling to cope with historically low interest rates and a sharp slowdown in lending.

Based on earnings released this week, the five banks’ spending in the second quarter was 21% higher than in 2019 before the pandemic broke out. But compared with 2019, revenue in the second quarter only increased by 10%.

Although technology spending has been increasing over the years, accelerating digitization during the pandemic has forced executives to work harder.

“The urgency and importance of talking with bank executives seems to be increasing day by day,” Fran said.

Higher spending represents a shift in the way banks responded to the last financial crisis, when many banks relied on cutting costs to increase profits. But the stimulus plan helped banks avoid the wave of loan losses that executives had anticipated related to the pandemic, which meant they had extra cash to spend.

Citigroup Chief Financial Officer Mark Mason said after the bank reported a 7% increase in costs this week: “Especially considering the pace of recovery, we are identifying some real strategic opportunities to invest in franchise operations.” Will not miss this window of opportunity. “

Banks are facing increasing competition in almost every aspect of their business.Private equity firms now have the funds to execute large deals on their own Not dependent on the bank, Fintech companies are eroding the profit margins of wealth management businesses and have adopted Lower fees and allowances.

JPMorgan Chase’s chief executive, Jamie Dimon, warned in an annual letter to shareholders in April that the banking sector’s share of the US financial system is shrinking. The bank this week increased its annual fee guidance by 1% to $71 billion.

The bar chart of quarterly salary costs of $1 billion shows that banks are paying more to employees in the battle for talent

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

Salary is the industry’s largest expenditure so far. In the second quarter, the salaries of these five banks increased by 7% compared to last year because they paid for talent.

Investment banks such as Citigroup and JPMorgan Chase have raised salaries for complaining junior investment bankers Burned out During the pandemic, Bank of America promised to increase its minimum wage to $25 an hour.

Performance-related compensation businesses such as investment banking have also exceeded expectations this year, which may push up bonuses.

Jan Bellens, head of Ernst & Young’s global banking and capital markets department, said that as part of the technology push, banks are increasingly recruiting engineers and data scientists, which has increased their median salary.

The histogram of marketing expenses in millions of dollars shows that banks are spending much more on marketing than during the pandemic

As the lender promotes promotions, the group’s quarterly marketing expenses have also soared 46% year-on-year Credit Card Offer Trying to start loan growth, bankers are back Catering potential customers After the blockade last year.

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

Other bank-specific factors are also driving spending, such as Integration fees Morgan Stanley after completing two major transactions Supervision Citigroup’s cost.

The bank hopes that the latest round of technology spending will produce better results than before. Technology spending many years ago failed to significantly reduce the bank’s business costs, and the bank’s efficiency ratio (the ratio of cost to revenue) has been stubbornly maintained at more than 50% for many years.

For bank investors who pay close attention to profitability indicators, increasing spending in the face of income pressure may be a difficult choice.

Oliver Wyman’s consultant Vivian Merker said: “Investors really have a hard time understanding the long-term value of the technology investments that are being made now.” “Part of the reason is that historically, there have been too many promises and insufficient delivery, and part of the reason is that no one knows the future. “

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