Wage increases undercut banks’ push to cut costs

Loan growth may be top of mind when earnings season begins Wednesday, but another important theme is how banks are managing expenses amid wage growth.

Even as banks of all sizes face pressure to cut costs, they are hiking minimum wages and paying more to existing employees in an effort to attract and retain workers in an unusually competitive hiring market.

Bank of America this month will lift its minimum wage by $1 to $21, part of a plan to reach $25 an hour by 2025. BMO Harris Bank in Chicago will start paying $18 an hour to new and existing branch and call center workers. And among smaller banks, the $6.4 billion-asset Bangor Savings Bank in Maine will soon start paying $18 an hour, a move that will affect approximately 475 employees.

The rising cost of talent comes as net interest income continues to be squeezed by low interest rates and muted loan demand. To satisfy investors, banks will need to show that they can balance higher wages with curbing costs in a tough operating environment, said Chris McGratty, an analyst at Keefe, Bruyette & Woods.

“Naturally, when revenue growth gets tight, there are more discussions around branch closures and synergies there, but at the same time we’re seeing upward pressure on talent across the sector and I think that is a pressure point,” McGratty said. “How much of it is permanent versus temporary is to be determined, but I would say that good talent is becoming more expensive.”

Wage pressure has been building for months, especially in the market for lower-wage branch workers who have worked onsite through a grueling pandemic, but also in the ranks of commercial lenders, information technology workers and investment bankers.

To remain competitive, banks are boosting pay, doling out bonuses and offering remote work options. At JPMorgan Chase, the largest U.S. bank by assets, lower-level investment analysts are in line for a pay raise. And last month, the $3.7 trillion-asset company bumped its minimum wage for branch workers to at least $18 an hour, depending on geography. On average, branch workers received a $2 per hour increase, according to a company spokeswoman.

“The competitive environment for talent is like nothing I’ve seen," Jennifer Piepszak, JPMorgan’s co-head of consumer and community banking, said in a recent interview, "so we needed to respond to that.”

PNC Financial Services Group in Pittsburgh is set to pay a minimum of $18 per hour starting Nov. 22, up from the current $15 per hour. In a press release announcing the change, the company said the decision was meant to “enhance employee’s financial wellness, help PNC attract and retain the best talent, and ultimately strengthen the bank’s competitive position in the marketplace.”

Data from the U.S. Bureau of Labor Statistics over the past three years shows “an upward sloping line” in hourly wages in the “financial activities” sector, said Elise Gould, a senior economist at the Economic Policy Institute, a left-leaning think tank in Washington, D.C.

The gradual slope is similar to wages in other industries during the same time period, she said.

Wage increases are starting to show up in operating expenses. Among all banks chartered by the Federal Deposit Insurance Corp. in the second quarter, the median for compensation expenses as a percentage of total revenues was 43.9%, up slightly from 43.6% in the first quarter, according to a report from Janney Montgomery Scott.

That metric has been rising since the second quarter of 2020, when it fell because of higher revenue. As of June 30, the median for compensation expenses as a percentage of revenue matched its level in the fourth quarter of 2019.

“Wage inflation is a thing,” said Janney analyst Christopher Marinac.

Marinac’s team hosted a series of panel discussions with bank CEOs in mid-September. One popular topic of conversation was higher hourly wages and larger compensation expense trends.

Banks are “sort of figuring out what it takes” to hire and keep employees, Marinac said. “But I think basically it’s ‘bite the bullet and pay’ because you won’t get employees in any other way.”

That’s part of the strategy at Lakeland Bancorp in Oak Ridge, New Jersey. Due to increasing turnover in entry-level and customer-facing jobs, the $7.9 billion-asset parent company of Lakeland Bank is raising wages in November, said Jen Thoma, its chief human resources officer.

Lakeland’s minimum wage is currently $15 an hour. In exit interviews, employees have said they are leaving the company because they can get higher pay elsewhere, Thoma said.

The bank is trying to mitigate the rising cost of compensation by taking advantage of technology.

“We’re looking for efficiency and ways to do things differently in a digital environment, where essentially you may not need as many people and you can reallocate your resources,” Thoma said.

Other options that banks have for offsetting rising wages include further branch reductions, analysts say.

“I think for better or worse, COVID left some customers without a choice” when it comes to adopting digital banking, Janney analyst Feddie Strickland said. “And I think maybe they won’t need as many tellers on the teller line. That’s a little bit of a mitigant for the front office.”

Banks can cut costs if they increase their use of digital capabilities in branches and other customer-facing areas, and if they employ more technology in back-office operations such as finance and compliance, said Marty Mosby, an analyst at Vining Sparks.

If loan growth kicks in and interest rates start to rise, higher wages might be less of a concern, he said.

“Where the whole thing falls apart is if you’re putting loans on the books at reduced profitability,” Mosby said. “If the pricing is bad, it won’t create the end result you need to have to mitigate the cost of wages going up.”