U.S. banks' efficiency ratios improved slightly in the third quarter in an improved revenue environment.
The aggregate efficiency ratio for U.S. banks improved to 60.4% in the third quarter, down from 61.0% in the linked quarter and 60.6% in the year-ago period, according to S&P Global Market Intelligence data. Of the top 20 U.S. banks by headcount, 13 reported a quarter-over-quarter decline in their efficiency ratio, a measure of noninterest expenses divided by net interest income and noninterest revenue.
The slight improvement in U.S. banks' efficiency ratios was partly the result of a boost in net interest income for only the second time since the onset of the COVID-19 pandemic in the U.S. in March 2020.
Challenges from slow loan growth eased in recent months, with U.S. banks posting gross loan growth of 2.0% quarter over quarter, excluding Small Business Administration Paycheck Protection Program loans. Those green shoots helped to boost U.S. banks total net interest income to $134.4 billion in the quarter, up from $129.2 billion in the linked quarter and $128.8 billion in the year-ago period.
Christopher Marinac, director of research at Janney Montgomery Scott, described a "modest improvement" in loan growth in the third quarter, excluding Paycheck Protection Program loans. But while net interest income received a boost from loan growth during the quarter, normalized net interest income levels "are a long ways off" as excess cash remains on banks' balance sheets and interest rates remain low, he said.
Total noninterest income was also up during the third quarter, with U.S. banks reporting $76.0 billion in total, compared to $75.8 billion in the second quarter and $72.6 billion in the third quarter of 2020. Multiple banks have added new fee-income generating lines of business, or bolstered their existing business lines, to make up for the challenging income environment since the onset of the pandemic.
While revenue pressures eased during the third quarter, U.S. banks' noninterest expenses remained stressed.
U.S. banks posted $127.1 billion in other noninterest expenses, excluding goodwill impairment and intangible assets, up 1.6% from the linked quarter and 4.3% from the year-ago quarter. Of the top 20 U.S. banks by headcount, 13 reported a quarter-over-quarter increase in noninterest expenses.
Many U.S. banks reported an increase in expenses due to ongoing wage inflation pressure.
"There's no secret in terms of what's going on out there in the quest to maintain a workforce. Wage inflation is significant in the Chicago marketplace," Old Second Bancorp Inc. CFO Bradley Adams said on the company's third-quarter earnings call. "I don't know that we'll be as successful [at] holding the cost down as we were in 2021."
Old Second Bancorp's noninterest expenses increased 1.4% quarter over quarter, excluding merger-related costs.
While inflation and wage pressures will make it challenging for many U.S. banks to manage expenses through the next few quarters, investments in technology and headcount reductions will help to offset the uptick in expenses, Marinac said.
U.S. banks' headcount continued to decline during the quarter, with the industry reporting a 0.1% decline in total full-time employees quarter over quarter and a 0.7% decline year over year.
Among the "big four" U.S. banks, Wells Fargo & Co. posted the largest decline in total headcount as it continues to work through its aggressive plan to cut expenses and bring its efficiency ratio in line with peers. The company reported 244,746 full-time employees as of Sept. 30, down 1.9% from the prior quarter and 7.6% from the year-ago period.
"We still have just tremendous excess expenses across the company. You can see it in headcount. You can see it in efficiency ratios across the businesses," President and CEO Charles Scharf said in the company's third-quarter earnings call. "It's like peeling an onion back. You think you see what's incredibly clear. Once you actually get rid of those inefficiencies, you then start to see the next level. ... so we still think that they're extremely meaningful efficiencies that we can pursue for quite some time here."
Wells Fargo's efficiency ratio stood at 71.9% for the third quarter, up 6.6 percentage points from the prior quarter.
Citigroup Inc.'s total headcount, meanwhile, has been on the rise since the fourth quarter of 2019. The company reported a 2.1% increase in full-time employees quarter over quarter.
