U.S. banks' efficiency ratios crept up again during the second quarter after a slight improvement in the first quarter.
The aggregate efficiency ratio for U.S. banks increased to 61.0%, up from 60.0% in the linked quarter and 58.8% in the year-ago period, as expenses increased modestly and the revenue environment remained stressed. Of the top 20 U.S. banks by headcount, 13 reported a quarter-over-quarter increase in their efficiency ratio, a measure of noninterest expenses divided by net interest income and noninterest revenue.
For some U.S. banks, digital and technology costs drove up expenses in the near-term with hopes that the investments will pay off in the future.
"Our tech transformation is the engine of long-term efficiency gains," Capital One Financial Corp. Chairman, President and CEO Richard Fairbank said on the company's earnings call. "Delivering positive operating leverage over time continues to be one of the important payoffs of our technology journey and a key element of how we deliver long-term shareholder value."
The McLean, Va.-based company reported an efficiency ratio of 54.1% for the quarter, up 1.9 percentage points from the previous quarter, driven by a 6.0% increase in total noninterest expenses.
As the company adapts to the increasingly digital environment by hiring more technology talent, its salary and benefit expenses will likely rise, Fairbank said.
"Winning in technology really kind of begins and ends with one thing, hiring world-class tech talent," Fairbank said. "We are leaning into that. I think we're in a very good position, but we're going to need to pay appropriately for that talent."
Noninterest expenses, excluding goodwill impairment and intangible assets, jumped to $125.1 billion across all U.S. banks at June 30, up from $123.8 billion in the linked quarter. Of the top 20 U.S. banks by headcount, 11 reported a quarter-over-quarter increase in noninterest expenses.
Muted loan demand and low interest rates continued to weigh on revenue during the second quarter. Net interest income for U.S. banks totaled $129.2 billion in the quarter, down from $129.7 billion in the linked quarter and $131.5 billion in the year-ago period.
Many banks have pursued fee-generating business lines recently to diversify their income streams while also offsetting the weak rate environment. Total noninterest income for all U.S. banks was $75.7 billion for the quarter, a slight decline from the prior quarter but up more than 7% from the second quarter of 2020.
The number of full-time employees at U.S. banks declined 0.4% quarter over quarter and 0.9% year over year during the second quarter. Many U.S. banks are turning to job cuts as they trim branch footprints and look to improve efficiency.
Wells Fargo & Co. made headway on its aggressive plan to cut expenses to bring its efficiency ratio in line with that of peers. The company reported the largest decline in full-time employees quarter-over-quarter among the "big four" U.S. banks, with 9,091 fewer employees as of June 30 from March 31, a 3.5% decline. Wells Fargo's efficiency ratio improved to 65.3% from 77.7% in the linked quarter and 88.1% in the year-ago period.
"We're still in the stage of peeling the onion back. And every time you peel a layer of the onion back, you see the next layer even more clearly, and I think we're still in that stage," President and CEO Charles Scharf said on the company's second-quarter earnings call. "But it does give us a pretty good feeling about our ability to continue to drive this forward."
Bank of America Corp. reported a decline in its number of full-time employees for the first time since the fourth quarter of 2019. On the company's second-quarter earnings conference call, Chairman, President and CEO Brian Moynihan attributed the multi-quarter increase in employees to the COVID-19 pandemic.
"In the second half of the year, as we normalize our operations, we'll continue to return our business as usual, working on process improvements that allow us to reduce our headcount," Moynihan said.
