During a recent conversation about banks, one of my editors reminded me of the old saying that goes, “you can’t cut your way to prosperity.” How true — and how appropriate — to be reminded of the phrase in light of current events. In recent months, a host of major banks, including First Union Corp. and PNC Bank Corp. among others, have announced a variety of expense-reduction strategies, with significant employment and cost whacks. Specifically, PNC plans to cut expenses by $200 million or 5% of annual costs and First Union said this spring it would trim 5,850 employees or 7% of its workforce. Even the innovative Citigroup is into headcount reduction these days.
On the surface, many Mississippians may ask, “So what — why should we care?” Indeed, these companies aren’t based here. But because of their sheer size and scope, they’re among those institutions that are shaping the future destiny of the industry. They’re the ones that pundits turn to in attempting to define what modern “financial services companies” versus “banks” should be.
What’s so revealing about these actions, however, is how unrevealing they truly are. Despite fiery speeches in recent years by some of the industry’s top honchos about technological wizardry, database marketing, “new” sales cultures, innovative nonbank “partnerships” and mega-mergers that create “truly national” banking franchises, much remains the same. And one thing that hasn’t changed is banks’ historic leaning on cost cutting as a strategic crutch.
Over the years, bankers have argued that “if economic conditions were better” or “if powers were broader” they could boost revenue growth. But the economy has been good and bankers have achieved greater competitive capabilities, and they’re still challenged by the so-called “revenue wall.”
But instead of addressing the revenue issue in a meaningful way, a lot of bankers have reverted to old habits, namely cost cutting. Consider the way Wall Street works, and it’s no wonder banks do. The stock market — moving quickly and decisively — can be quite punitive at the sound of bad news. In First Union’s case, its stock suffered some knocks earlier this year after announcing a lowering of 1999 earnings estimates. Cost cutting — and its quick fix mentality — can be good news to analysts’ ears, at least in the short term. Bank CEOs — ever conscious of their stock price — obligingly take the easy way out. From there, they’ll continue a well-worn cycle: They’ll cut costs, make a few pricey acquisitions to capture new revenues, then whack more expenses from the combined entity.
While downsizing, rightsizing — whatever you choose to call it — certainly has its place, it’s an engine with limited steam. After a while, you can only go so far. Like one prominent, but controversial CEO told me, “In the long run, you can’t grow and be prosperous unless your customers are giving you more business.” But even more importantly — as my editor succinctly states, “The days of meeting performance targets through expense cuts are numbered.”
Tupelo-based journalist Karen Kahler Holliday writes a monthly banking column for the Mississippi Business Journal. She is senior contributing editor for U.S. Banker magazine.