US banks' efficiency ratio hits 10-year low as noninterest income spikes

The banking industry's aggregate efficiency ratio improved for the fifth consecutive quarter, dropping to the lowest level in the last decade.

The latest decline in US banks' efficiency ratio was thanks to a spike in noninterest income that helped to offset a rise in noninterest expenses.

Banks continue efficiency streak

US banks posted an aggregate efficiency ratio of 52.83% in the first quarter, down from 54.87% in the fourth quarter of 2022 and 61.62% in the year-ago period, according to S&P Global Market Intelligence data.

Among the top 20 US banks by headcount, 15 reported a quarter-over-quarter decline in their efficiency ratio, which is a measure of noninterest expenses divided by net interest income and noninterest revenue.

BMO Financial Corp. reported the greatest improvement at 49.7 percentage points quarter over quarter, though the company's recent acquisition of Bank of the West in February impacted the company's results.

Wells Fargo & Co. posted the second-best sequential efficiency ratio improvement among that group of banks with a decline of 16.1 percentage points. The company is working through an aggressive plan to cut expenses and bring its efficiency ratio in line with peers.

Conversely, five of the top 20 US banks by headcount reported a quarter-over-quarter increase in their efficiency ratios.

Noninterest income jumps

US banks posted $138.75 billion in noninterest expenses in the quarter, excluding goodwill impairment and intangible assets, up from $131.99 billion in the linked quarter and $132.76 billion in the year-ago quarter. Of the top 20 US banks by headcount, nine reported a quarter-over-quarter decline in noninterest expenses.

However, a spike in noninterest income helped to offset those increased costs and improve banks' efficiency ratios. The industry posted $85.96 billion in total noninterest income in the first quarter, up more than $20 billion from $61.86 billion in the fourth quarter of 2022 and $76.62 billion in the year-ago period.

Meanwhile, total net interest income fell to $176.69 billion from $178.67 billion in the fourth quarter of 2022, but still up from $138.82 billion in the year-ago period.

Bank headcount increases slow

The first quarter marked the sixth consecutive quarter of headcount increases for the industry, but that climb has slowed since the third quarter of 2022. The industry reported a 0.2% increase in full-time employees quarter over quarter and a 2.0% increase year over year.

Two of the Big Four US banks reported a higher headcount, with JPMorgan Chase & Co.'s headcount rising 1.3% and Bank of America Corp.'s headcount up slightly. Meanwhile, Citigroup Inc. and Wells Fargo reported a decline in headcount with a drop of 0.06% and 0.2%, respectively.

Eleven of the top 20 US banks by headcount posted a quarter-over-quarter increase in full-time employees, while nine reported a decline.

Goldman Sachs Group Inc. reported the largest decline in full-time employees, cutting staff by 6.4% in the first quarter, and BMO Financial reported the largest increase at 72.9%, also due to the Bank of the West merger.