Canadian banks face earnings pressures, will look for ways to cut costs: analyst

TORONTO – Canada’s biggest banks are taking a closer look at ways to reduce their expenses this summer as they prepare for slower earnings growth, according to a new report from Barclays.

Analyst John Aiken, who released a broad overview of the country’s banking industry on Thursday, said that cost controls are near the top of the list for the industry as it grapples with tighter revenues.

The banks will look at ways to make their technical operations more efficient to save time and money, but if that doesn’t create enough savings, jobs could be in jeopardy, he suggested.

“If this environment continues, you may need to see some more dramatic cost-cutting measures put in place,” Aiken said in an interview.

“That could ultimately lead to head count reduction, although at this stage in the game it does not look like that’s the first item on the list.”

However, Aiken said that some banks are looking at routes such as changing variable compensation structures to defer some payments, rather than simply the more immediate relief of cutting jobs.

“Process improvement to create more efficiencies … will take a longer time frame to reap the expected benefits,” he noted.

During the second-quarter earnings period, several banks noted that expense management was an area they were giving particular attention.

Bank of Montreal (TSX:BMO) chief executive Bill Downe highlighted the bank’s continuing plans to lower costs across its operations as part of a long-term review that examines all of its businesses.

Some of those savings will be recognized through the closure of 24 of its U.S. BMO Harris bank branches in the U.S. Midwest, which is expected to trim US$300 million — though integration and restructuring costs are expected to be C$600 million over the next few years.

National Bank (TSX:NA) and Royal Bank (TSX:RY) were also vocal about their cost management plans.

The report said that TD Bank (TSX:TD) is likely to spend more attention on compensation plans that discourage risk taking.

“For wholesale banks, (the) first reaction is to cut head count, followed by a cut in compensation,” Aiken wrote in the note.

Barclays’ analysis was based on an annual “walking tour” that the banks gave the investment firm, effectively providing a mid-year overview of their operations.

Aiken said that every bank participated except for Royal Bank (TSX:RY), due to a scheduling conflict.

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