With commercial loan demand still weak and deposit costs edging upward, bank investors have become skeptical about revenue growth in the year ahead, putting pressure on shares.
Those concerns have surfaced in recent days during quarterly earnings calls held by large regional banks, a group that has aggressively ramped up spending on new technology over the past year.
Asked by analysts what options they have at their disposal to trim expenses if necessary, bank executives described their tech investments as all but immune to cost-cutting given their fight to stay competitive in the digital age.
For instance, U.S. Bancorp — where technology and related expenses jumped 9% in the third quarter from a year earlier — plans to launch a more sophisticated mobile banking app within the next three to six months. The Minneapolis company also recently
Still, executives at the Minneapolis company made it clear that while tech investments are a top priority, it has some flexibility to tighten its belt in other areas if the need arises.
“If it’s a lower-revenue environment, we will continue to make the investments in terms of those digital initiatives and capabilities, and we’ll figure out other discretionary types of spending that we can be managing,” Terry Dolan, chief financial officer at the $465 billion-asset company, said in an interview after its earnings call Wednesday.
Dolan used U.S. Bancorp’s mortgage business as an example. As refinancing activity declines and more loan applications come through digital channels, there are opportunities to “continue to optimize” the business, he said.
Compliance is another area. Over the past few years, U.S. Bancorp has added staff and invested in new systems, following a mandate by regulators to improve its anti-money-laundering controls. However, the company could begin “moderating” its staff increases in the future, according to Dolan.
“The thing I would say is that we are very focused on managing the things we can, while continuing to make the investments that we committed we were going to do,” Dolan said.
The pace of expense hikes has varied among the industry's large regional banks.
At the $116.8 billion-asset M&T Bancorp, noninterest expenses rose 6% during the first nine months of the year, compared to the same period a year earlier. At PNC Financial Services Group, meanwhile, expenses rose by about 5% in the same period as the Pittsburgh company begins the rollout of its national digital bank.
Such spending has added to investor jitters about the industry.
The KBW Nasdaq Bank Index has declined 6% since the beginning of the year. Broader market indices, such as the Dow Jones Industrial Average and S&P 500, meanwhile, are positive year to date.
'In the near term that would make our expense look great, and in the long term it would kill us,' PNC's Bill Demchak said of skimping on tech spending.
During PNC's quarterly call with analysts on Friday, Chairman and CEO Bill Demchak defended his company's tech investments, describing them as necessary to keep pace with changes in customer preferences and threats to cybersecurity.
“We're fighting every day to drop expenses, but having said that, again, we could choose to simply curtail investment in digital; we could choose to curtail investment in cyber; we could choose to not have active data centers in terms of resiliency of our client-facing applications,” Demchak said. “In the near term that would make our expense look great, and in the long term it would kill us. “
At M&T, meanwhile, technology spending has increased by between 8% and 10% for each of the past four years, CFO Darren King said on its earnings call Wednesday.
King said the Buffalo, N.Y., company is focusing primarily on how its digital investments can improve efficiency at the company over time. “We’re always thinking about how investments that we made yesterday can be monetized today to help offset the investments we’re making today for the future,” he said.
During the call, RBC Capital markets analyst Gerard Cassidy asked executives about the industry's focus on technology spending, and whether it makes a difference if a regional bank is an early adopter of new products.
Cassidy noted that M&T only recently began offering Zelle to its customers; other large banks, meanwhile, began offering the peer-to-peer payments app over a year ago.
“Do you find that if you’re not the first one to have the latest bell and whistle that it’s still OK if you’re not losing customers, because you’re not the first to get in line to get the latest and greatest?” Cassidy asked.
King said in response that, in terms of the Zelle rollout, being in the “middle of the pack” has been a fine strategy so far for M&T.
“We are not the first, and it hasn’t made a material impact on our customer acquisition rates or rates of retention,” King said.
Andy Peters contributed to this article.
