All of this looms over the industry. To be sure, profits have rebounded from the depths of the financial crisis. All told, the nation’s banks earned $28.8 billion in the second quarter, nearly 38 percent more than a year ago and about what they earned in 2004, according to Trepp, a financial research firm. But more than one-third of those profits came as banks shifted capital to their bottom line that had been set aside to cover losses.
That helped obscure a 4.4 percent drop in revenue, which fell to $188 billion, the industry’s level in 2005. Trepp analysts project it could fall an additional 4 to 5 percent over the next year.
In response, bankers are turning to the one area that is easiest to control — costs. They have begun programs aimed at cutting operating expenses, which have risen almost 13 percent since 2008. Many involve moving middle- and back-office workers to cheaper locations, redeploying them to understaffed businesses like mortgage servicing or finding ways for computers to replace personnel.
At Wells Fargo, its Project Compass is aiming to simplify its businesses and cut expenses by $1.5 billion a quarter. Citigroup is in the middle of Project Rainbow, focused on at stitching together dozens of disparate computer systems to run on a single network. Bank of America has hired efficiency experts to help it reorganize. And JPMorgan Chase is more than halfway through a five-year plan to save up to $1.3 billion a year by streamlining its trading operations following its 2008 takeover of Bear Stearns and several prior acquisitions.
Banks are also expected to hold the line on bonuses this year. Compensation for traders could fall 15 to 30 percent, while 2011 pay for investment bankers and commercial bankers is expected to be about the same or slightly less than a year ago, according to new projections by Johnson Associates, a compensation advisory firm.
Industry critics do not find comfort in what they see as still excessive pay or that megabanks like Bank of America and JPMorgan were made even bigger through acquisitions of ailing firms during the crisis. Banks dodged any chance of the government’s breaking up the behemoths after the crisis, and now it is the aftershocks and darkening prospects for growth that are forcing them to slim down.
Even as they slim down, banks are applying some of the cost savings to hire new workers and invest in faster-growing parts of their businesses. The biggest source of cost savings, of course, is eliminating jobs, and nationally and in New York the pink slips seem to have picked up in the last few months.
Banks and brokerage firms first started layoffs in the fall of 2006. By the time the financial crisis receded three and a half years later, more than 428,000 financial workers had lost their jobs nationwide — an 11 percent drop in the industry’s work force, according to Moody’s Analytics.
Then, in March 2010, hiring resumed as banks added more than 10,000 workers to cope with new financial regulations and a surge in mortgage foreclosures as well as to prepare for what seemed to be a nascent recovery.
But over the summer, that optimism has faded. Moody’s Analytics now projects the industry will lose about 3,500 jobs by the end of the year, bringing employment back to 2000 levels.
“There may be a recognition that hiring levels are just too high,” said Marisa Di Natale, who follows financial industry employment trends for Moody’s Analytics. “The trajectory of revenue growth may be lower for quite some time.”