Trust banks under extra pressure to cut expenses

Reversing pledges not to eliminate jobs during the pandemic, Northern Trust and Bank of New York Mellon have quietly initiated layoffs in recent weeks.

The Chicago-based Northern Trust cut 500 jobs across its global workforce in January, reducing its overall staff by about 2.5%. BNY Mellon, meanwhile, did not disclose the number of staff it laid off, instead referring to a statement that the layoffs last month were necessary because the pandemic “has redefined ‘business as usual.’” In both cases, the news was first reported by the financial news website Wolf Street.

Confronted with low interest rates and tough revenue growth prospects, trust banks may have to cut more expenses, executives said. Their decisions will rest heavily on how well their core fee-based businesses perform this year.

“When we see that the environment is making it more challenging on the organic fee growth side, we absolutely need to focus more on the expense side,” Northern Trust President and CEO Michael O’Grady said during the company’s fourth-quarter earnings call two weeks ago. “If we have the opportunity to grow faster organically and profitably, then we’ll look to do that. But not knowing that, we don’t want to go in with higher expense expectations and then have another year where it’s very unpredictable as to your ability to onboard that new business.”

Noninterest expenses at BNY Mellon, Northern Trust and State Street declined in the first three quarters of 2020 before shooting up in the fourth quarter because of spending on technology upgrades and efficiency moves.

State Street’s expenses rose 8% from the third quarter to $2.3 billion, driven partly by a $50 million charge it took to reduce its office space by 1 million square feet. Expenses climbed 9% to $2.9 billion at BNY Mellon because of higher litigation and severance expenses. Expenses at Northern Trust increased 5% to $1.2 billion in large part because of $52.5 million in severance charges and a $11.9 million charge for exiting a lease early.

Meanwhile, core fee-income businesses are likely to be a mixed bag for trust banks this year, analysts say.

If those financial institutions can continue to add to assets under custody and administration, then they should be able to generate some growth in servicing fees. On the other hand, fees generated by transaction-based businesses, like foreign exchange or investment management fees, could decline in 2021 after being driven up by market volatility last year.

State Street, Northern Trust and BNY Mellon anticipate low-single-digit growth in overall fee income for the full year. But State Street, for example, predicted fee income would decline 2% to 4% in the first quarter simply because foreign exchange income is unlikely to match or exceed activity a year ago.

“As the pandemic unfolded we had heightened levels of volatility, which was good for those transaction-oriented businesses,” said Brian Kleinhanzl, managing director at Keefe, Bruyette and Woods. “As volatility comes down, those activity-based revenues come down with it as a result.”

Trust banks are a bit more limited in their ability to cut expenses, at least compared with retail banks which may be able to find cost savings by trimming branches. Trust banks also need to keep updating their digital capabilities, especially since they are often dealing with a wide variety of geographic locations, tax laws and assets.

“There are some more levers that can be pulled expense-wise at the commercial banks, whereas the trust banks don’t necessarily have that lever to pull and drop expenses,” said Jeff Harte, managing director at Piper Sandler. “The way they could really drop expenses would be to invest less, but from a long-term business perspective, that’s not what you want them to do.”

Expenses related to information systems and communications rose 9% to $394 million from the year-earlier period for State Street, which said it needed to update some software and technology infrastructure. In recent years, BNY Mellon has invested in technologies such as artificial intelligence in part to automate some processes that were once handled by humans.

The low-interest-rate environment has made fee income and expense management more critical for the banking industry as a whole. But analysts say the good news is that trust banks’ net interest income is unlikely to drop much further than it already has.

Trust banks took an earnings hit from lower interest rates last year as they repriced short-term assets on their balance sheets. Net interest income for trust banks in the fourth quarter was “low, which is not good, but it’s probably not going a whole lot lower. That’s kind of the expectation,” Harte said.

“It’s not as huge of a lever as it is for commercial banks in terms of contribution to total revenues, but [trust banks] do tend to be asset-sensitive, so they’re seeing a lot of the repricing trends that other banks will see over time,” Kleinhanzl said. “This impacts them sooner.”


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