Regional Bank Execs Show Strain from Endless Cost Cuts

If and when bank executives strike gold in terms of revenue growth, questions about cost control will finally stop getting under their skin.

Until then, expect more testy exchanges like the one Tuesday between Kelly King, chief executive of the $176 billion-asset BB&T (BBT), and Craig Siegenthaler, a Credit Suisse analyst.

BB&T has aggressively cut costs and has a goal of improving its efficiency ratio to the mid-50% range by the end of the year. But Siegenthaler asked King if BB&T could terminate more employees in its mortgage business, as a result of the big drop in refinancings.

"We will take on more expense in the short term and we're unapologetic about that," said King, who was clearly peeved. "We're going to take a little bit of time to do that."

King argued that BB&T still had a considerable amount of work to perform in its mortgage division, as a result of the new "qualified mortgage" rule.

"We had to move all of those loans, except [home equity lines of credit] into a mortgage division," King said. "We wanted to be very careful, very slow."

Other bankers at the conference on Tuesday tried hard to buy time, citing areas where they are finding revenue growth, especially fee-generating businesses. They argued that they are doing their best to cut costs, while reminding that sometimes it costs money to make money.

Curt Farmer, vice chairman at $65 billion-asset Comerica (CMA), touted the fees that the Dallas bank gets from asset management and from a branch network that focuses on business customers and wealth management, Farmer said.

"We employ over half the bank's employees," Farmer said, referring to retail banking and wealth management. "We are a net funding provider for the bank. We've been able to increase customer-driven fee income, more than offsetting" declines in other revenue areas.

Farmer also bragged about Comerica's deposit base, saying it has the one of lowest-cost funding sources in the industry.

PNC Financial Services Group (PNC) executives reiterated the cautious outlook for loan growth they had shared last month during a quarterly earnings call. They sought to assure investors Tuesday they are doing all they can to eke more returns from their existing clients and their newer markets, such as the Southeast, while continuing to cut costs.

The Pittsburgh bank's corporate goals — which include expanding its wealth management and mortgage origination businesses, and investing in technology — "are designed in part to help us grow our fee income which allows us to be less reliant on loans only both from a price and risk standpoint," PNC Chief Financial Officer Robert Reilly said.

PNC increased fee income 22% last year. Even if the unusual boost from mortgage refinancings is removed, it still increased fees 9%.

Clearly PNC and other regional banks feel pressure to find new sources of income in the current murky economic recovery and tough interest rate environment. It noted how it typically sells 6.44 products per corporate banking client that it has had for more than two years, compared with 5.17 per first-year client. There are more of these new clients in the Southeast that it can still mine more deeply, the executives said.

There are signs of progress. Its corporate banking segment added "more than 150 new primary clients" and grew average loans by $500 million in the Southeast, Reilly said. He noted "double-digit" growth in noninterest income from increases in brokerage, credit card and debit card revenue on the consumer side in the Southeast, where it bought RBC Bank (USA) nearly two years ago.

BB&T's King reminded investors that the company's insurance subsidiary generates about 17% of BB&T's total revenue. When King was asked if BB&T could expand its insurance offerings, he responded, "I wouldn't want [insurance] to grow to become 25% to 30%" of BB&T's revenue.

"We want to stay diversified," King said, especially if the insurance business takes a downturn.

"[Insurance] looks good when it looks good, but it doesn't look good when you have a calamity," King said.

Cost-cutting repeatedly popped up as a line of questioning in Tuesday's sessions.

Although Comerica's noninterest expenses in the fourth quarter rose 0.5% from the previous year, Comerica's chief financial officer, Karen Parkhill, stressed the company is dedicated to lowering costs. She reiterated that Comerica's long-term goal is to improve its efficiency ratio to below 60%, from 68.8% at the end of 2013; and to raise its return on assets to above 1.3%, from 0.85% at year-end.

"Carefully controlling our expenses is assisting us in managing this slow-growth, low-rate environment," Parkhill said.

Siegenthaler asked Comerica's Farmer if the company saw "additional opportunities to realign your branches and drive further spend-savings?"

"We don't anticipate major closures" of branches in 2014, though the company is taking other steps, Farmer responded.

When Comerica builds new branches, it's trimmed the size down from about 3,500 square feet per new building, to about 2,500 square feet. It's also reduced the average number of full-time employees per branch from 6.5 workers to 4.5 workers.

Comerica is "cross-training" branch employees to work both as a "personal banker" to handle loan applications, and also to work a teller line, Farmer says.

Meanwhile, PNC took at least half a dozen questions tied to expense control.

It cut $781 million in expenses, or 7%, last year, and it is aiming to trim another $500 this year. Executives argued that the cuts will have more than short-term benefits, providing savings to invest in new consumer and back-office technology and other areas.

"We want to do it in a way that also gives us further opportunities to grow revenue," Reilly said.