The major Australian banks are likely to target staffing costs to defend their profit margins over the near term, according to analysis by Macquarie Research.
A low interest rate and low economic growth environment is limiting the ability of the banks to grow revenue. Moody’s last month changed the outlook for the banking system to negative from stable.
The worry is declining profits from low interest rates, household debt from a booming housing market, increasing bad loans and the challenges of Australia’s ongoing economic transition.
However, Macquarie Research sees scope for banks to manage expenses more assertively if revenue conditions continue to disappoint.
“We believe banks have capacity to deliver cost savings of $600 million to $1 billion each, which represents 6% to 10% of their cost base,” the Macquarie analysts write in a note to clients.
“While we do not expect banks to significantly reduce their headcount via large scale redundancies, we see scope to manage headcount through attrition, selective redundancies and reductions in the variable expense base.”
The research uses Westpac as a benchmark and finds that the ANZ could cut headcount by a massive 24%, the Commonwealth by 11% and the NAB 4%.
Staff costs represent between 50% and 60% of costs, as this chart shows:
The banks expanded headcount between 2006 and 2010 following job cuts in the early 2000s.
When outsourcing numbers are included, the overall level of headcount is even higher.
“While both balance sheet and revenue growth far outstrips the increase in headcount, we recognise that over the last six years banks spent over $6 billion each in the form of investment that was expected to provide efficiency benefits,” Macquarie analysts write.
“While these benefits appear to be somewhat realised within the branch network (reduced number of branches and less employees per branch), the overall headcount continued to increase.”
Macquarie Research says it appears that efficiency benefits have been largely re-invested back in the form of growing headcount and increased cost per head.
This chart shows average employee expenses across the big four banks:
Over the last five years, the average cost per full time staff has increased by 15% for ANZ, 25% for the Commonwealth, 27% for Westpac and 15% for the NAB.
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