Banks facing what could be years of ultra-low interest rates and constrained revenues have been outlining aggressive cost-cutting plans, perhaps setting the stage for an industrywide break in a long trend of mounting payroll and other expenses.

"The focus around cost reduction for the business is enormous," said Mark Shilling, who leads the banking and capital markets practice at Deloitte Consulting LLP. With employee compensation representing nearly half of noninterest expenses at banks, broad declines in bank employment could be on the way, Shilling said. "As we move into much more of a digital age now, have we reached the highest water mark in U.S. employment in financial services?"

Banks are under pressure to maintain enormous budgets for technology, compliance and risk controls — and many are reluctant to sacrifice growth initiatives — making it unclear how much room there is to tighten belts. Workforce reductions involve pain, dislocation and challenging adaptations as banks seek to wring greater efficiencies from new processes. Still, some analysts are optimistic that digital adoption accelerated by the pandemic will speed the path to lower costs.

"Branch footprints are being reduced, internal operations are being reconsidered at lower operating costs, and new business is still underway," Janney Montgomery Scott analysts wrote in a Sept. 22 note. "Expense changes in the next year may well surprise in comparison to spread revenue contraction."

Wells Fargo & Co. is seeking perhaps the most ambitious transformation, targeting a roughly $10 billion, or 18.5%, reduction in annual expenses of about $54 billion. The company, which has more employees than any other U.S. bank at about 266,000 as of June 30, has said the cuts would come mostly from its payroll over several years, which could translate into the elimination of large numbers of jobs.

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There is a precedent for such an approach. Emerging from the financial crisis about a decade ago, Bank of America Corp. sought to cut about 18.5% of annual expenses in its consumer operations in the first of two phases of its "Project New BAC." Between 2010 and 2018, the number of BofA employees fell almost 85,000, or nearly 30%, to about 202,000. The number of employees at Wells Fargo has been relatively steady over the past decade, and the bank has had the largest headcount among the Big Four since 2014.

Quarterly expenses at BofA have hovered between roughly $13 billion and $13.5 billion since the middle of 2018, despite substantial growth in its balance sheet. During a presentation on Sept. 15, Chairman, CEO and President Brian Moynihan said BofA's expenses were temporarily being lifted by programs to provide child care and other support to employees during the pandemic, and that the bank is "not doing a lot of hiring." But BofA continues to see a payoff from opening branches in new markets, he said, including "good operating statistics" from offices that opened during the crisis.

The industry as a whole has shown little ability to cut expenses outright, although banks did hold payroll costs to annual increases of less than 2% from 2013 to 2015, and other noninterest expenses declined in two of those years. Those years of relative cost control did help set the stage for a sharp improvement in the aggregate efficiency ratio after 2014, with the measure bottoming out at 56.3% in 2018.

Most of the improvement in the industry's efficiency ratio, which measures costs as a percentage of revenue, in the second half of the last decade were driven by surging net interest income as the Federal Reserve executed a series of interest rate hikes through the end of 2018. The Fed reversed course starting in mid-2019, and aggregate net interest income has dropped more than 6% in the six quarters through June 30, according to data from the Federal Deposit Insurance Corp., even as payroll and other expenses have continued to climb. In the first half of 2020, the industry's efficiency ratio was 61.2%. Efficiency ratios do not include credit costs, so they do not reflect massive additions to loss allowances banks made in the first half of 2020.

A move toward payroll cost reductions would represent a sharp turn for the industry. Annual spending on salary and benefits has grown consistently, even when total employees declined in 2013 and 2014.

Employment in the industry does not seem to have been heavily impacted by the pandemic. Jobs in the "credit intermediation" sector were down by about 30,000, or 1.1%, from March to about 2.7 million in August, according to the Bureau of Labor Statistics. Across non-farm payrolls, jobs were down by about 11.5 million, or 7.6%, during the same time, despite the recovery of about 10.6 million jobs since April.

A number of banks, including Wells Fargo, said they were initially holding off on layoffs during the pandemic. Moreover, many bank employees have been busy handling mortgage refinancings, requests for payment deferrals from borrowers, and Paycheck Protection Program small business loans.

Accelerated branch closures as the pandemic has further boosted digital volumes have been a major component of recently announced cost initiatives, with several banks planning to shutter 20% of their branch footprints.

But while banks see opportunities to cut expenses in personnel, real estate, back office operations and revamping management structures, some budgets are more sacrosanct. Technology spending is essential for the efficiency gains banks are seeking, and for competing with increasingly sophisticated rivals. According to a tally by Keefe Bruyette & Woods, technology spending accounted for about 20% of expenses at each of the Big Four in 2019, and ranged from 13% to 28% among a group of nine other large banks. Spending on risk and controls also continues to be a major draw on banks' resources.

Further, the record of success for past efficiency projects is mixed, said Deloitte's Shilling, who underscored the strains digital transformation poses for existing staff. He advised a "radical and aggressive rethink" including "partnerships to break up parts of the bank" and quickly provide access to talent and expertise.

KBW reviewed six major expense initiatives at large regional banks over the last five years, and found that while the banks cut expenses by about 1% to 12%, their shares lagged peers 12 months after the efforts were announced in four cases.

For JPMorgan Chase & Co., the outlook remains insufficiently morbid to make it reconsider preexisting spending plans, and the bank is taking its time to digest lessons from the pandemic about customer behavior and branch traffic, according to CFO Jennifer Piepszak.

During a conference presentation Sept. 15, she raised the bank's guidance for 2020 expenses a notch, to $66 billion from $65 billion, because of variable costs associated with businesses that are experiencing strong volumes. She noted the bank could dial back on long-term business investments, but said "that's not something, given our current baseline outlook, that we think is smart or even necessary."

Like some peers, JPMorgan Chase has been adding branches in new markets even as it thins out locations in existing markets, and Piepszak said the bank remains committed to the expansion strategy. Still, executives have said the bank is highly attuned to changing customer preferences, and have noted to investors that it would be able to exit 75% of its branches within five years if it needs to.