Efficiency in Focus for Big Banks

The year 2023 has proven to be quite challenging for big banks. With higher funding costs, tepid loan demand, and minimal deal-making activity, the sector has been forced to prioritize cost-saving measures.

While cost savings can be beneficial in the long run, layoffs do come with upfront severance costs. This was highlighted by Wells Fargo CEO Charlie Scharf during a recent Goldman Sachs conference. He stated that the bank anticipates severance costs ranging from $750 million to $1 billion in the fourth quarter as it continues to prioritize efficiency. Despite Wells Fargo's ongoing efforts to become a leaner organization following the 2016 fake accounts scandal, Scharf mentioned that these costs were unexpected due to the decreased frequency of employee turnover.

"While turnover is dropping, unfortunately, we have to take more aggressive action internally. However, we believe this is necessary for long-term success," Scharf remarked at the conference.

This sentiment resonates with the wider banking industry as it grapples with rising costs and inflated headcounts resulting from pandemic-era hiring sprees. Wells Fargo, for instance, saw its headcount peak at 275,000 but has since reduced it to 230,000 by gradually streamlining areas that could benefit from increased efficiency.

Efficiency Improvements at Wells Fargo and Citigroup

In a recent statement, Wells Fargo CEO Charlie Scharf discussed the bank's ongoing efforts to improve its efficiency. Scharf compared the process to peeling an onion, in which each layer reveals new opportunities for improvement. He expressed the view that the bank still has a long way to go in terms of reaching its full potential.

Citigroup, a rival of Wells Fargo, has also initiated its own turnaround plans. These plans involve reorganizing the bank into five distinct business units and eliminating layers of management. Although the scale of Citigroup's layoffs has not been confirmed, it is speculated that up to 10% of employees may be let go.

Both Wells Fargo and Citigroup have faced challenges in recent years. Wells Fargo has been focused on restructuring following the fake accounts scandal and removing the $2 trillion asset cap imposed by the Federal Reserve. Citigroup, on the other hand, has struggled to meet financial targets and has faced regulatory concerns regarding internal controls.

The efficiency ratio, which measures a bank's expenses relative to revenue, has shown improvement at Wells Fargo. It declined to 63% in the third quarter, a significant improvement from its 80% level in 2020. In contrast, Citigroup's efficiency ratio has increased to 68% from 57% over the same period. This reflects the bank's investment in operational improvements.

Following these updates, both Wells Fargo and Citigroup experienced a decline in their stock values. Wells Fargo shares dropped by 1.4%, while Citigroup saw a 1.8% decline. The KBW Nasdaq Bank Index also fell by 1.1%, while the S&P 500 remained relatively stable.

Overall, these developments indicate the ongoing efforts by Wells Fargo and Citigroup to enhance their efficiency and address underlying challenges in their operations.