Even after eliminating staff, cutting bonuses and tapping an army of robots to replace legions of workers, Wall Street is still bracing for higher costs in coming months — especially those tied to pay.
The country’s six biggest banks are expected to spend a combined $183 billion on compensation and personnel expenses this year, driving up overall costs to a record $320 billion. That will crimp profits at a time many investors have grown increasingly worried about higher credit losses and a drop in deposits.
“It’s one of the biggest decisions that a bank CEO has to make: How much to streamline their firms today to maintain current profitability versus preserving and enhancing the franchise for future revenue growth,” Mike Mayo, an analyst at Wells Fargo & Co., said in an interview. “Bank CEOs talk recession but are acting for growth.”
Rising personnel costs mean shareholders will be expecting bank executives to find other ways to cut expenses. Still, Wall Street is a trillion-dollar industry where stars expect to make millions of dollars and top bosses can become billionaires. But when a downturn looms, the tension between trimming costs and wooing talent is thick.
At JPMorgan Chase & Co., costs will probably rise to $81 billion this year, the company warned investors. That’s partly because the country’s largest bank added more than 20,000 people to its payrolls last year, and has plans to add more staffers in the months ahead.
Hiring freeze
Bank of America Corp. is putting a pause on hiring except for the most critical roles in units including wealth management, business banking and technology, Bloomberg reported Wednesday. In the near-term, the firm expects expenses will go higher, to $16 billion in the first quarter of this year, only to “trend back down again over the course of 2023,” CFO Alastair Borthwick told analysts.
Firms that spend faster than their revenue growth get punished by investors, while those that show discipline win praise. Persistent inflation and a slowdown in dealmaking mean the job is particularly fraught right now.
At Citigroup Inc., expenses for the year are likely to climb 6.7% to about $54 billion. That doesn’t even include costs tied to the firm’s efforts to dispose of more than a dozen retail banking units around the world, moves that added nearly $2 billion in expenses in recent years, the firm said.
New York-based Citigroup has spent years investing in its underlying technology and risk-management systems to satisfy a pair of consent orders regulators slapped on the firm in 2020. That work will continue this year, contributing to the increase in expenses.
Meanwhile Wells Fargo & Co. is planning to hand out a whopping $1 billion in raises for staffers, which reflects merit-based awards and impacts from inflation, CEO Charlie Scharf told analysts. That will push total expenses for the scandal-plagued bank to $50.3 billion this year, excluding any losses tied to resolving litigation and regulatory matters, he said.
“Expenses are always looked at critically,” Chris Kotowski, an analyst at Oppenheimer & Co., said in an interview. “But for the most part these banks are able to manage their compensation ratio really well as long as revenues, loans and deposits go up.”
Right-sizing
Morgan Stanley has been “overdue” for right-sizing the workforce because it hasn’t done much to pull back in recent years, according to Chief Executive Officer James Gorman. That’s no different from peers that are also re-setting compensation packages and streamlining the staff to bring down costs, he said.
“As the environment evolved over the course of 2022, we actively managed our expense base,” Morgan Stanley Chief Financial Officer Sharon Yeshaya said on a conference call this week. Given how uncertain prospects for the economy are, the firm is continuing to look for “efficiency opportunities,” she said.
Goldman Sachs Group Inc. executives acknowledged the bank is walking a fine line between keeping expenses under control while also keeping money-makers happy.
“We always strive to maintain a pay-for-performance culture,” David Solomon, who runs Goldman Sachs Group Inc., said Tuesday. “That said, we also recognise that we operate in a talent-driven business.”
