Finance

BANKERS' HOURS DON'T LOOK SO GOOD

You've seen it in Detroit, around Boston's Route 128, and in every defense-industry outpost in the country: Over the past 10 years, industries from autos to aerospace have shed thousands of employees and cut millions of dollars in expenses in the face of mounting competition. Indeed, it has been a mark of pride for some CEOs to show how many people they can remove from their payrolls.

Bankers, though, have generally ignored the cost-cutting mania. To be sure, the industry has seen plenty of consolidation. The number of banks declined 13% between the end of 1990 and the middle of 1994, according to the Federal Deposit Insurance Corp. But bankers have been too busy chalking up record profits from the huge gap between their lending rates and their funding costs to worry much about costs. The number of bank employees dropped less than 2% over the same period.

But now reality is biting. Revenue growth has been stalled by rising rates, costs are increasing, and nonbank rivals are stepping up their incursions into the banks' turf. So these institutions are finally starting to follow the lead of their industrial counterparts and take sharp pencils to their costs. On Dec. 1, for example, Chemical Banking Corp. announced that it would eliminate 3,700 positions, which, along with other moves, will allow it to cut $440 million from annual expenses.

The new cost-cutting fervor stands to permanently transform the banking industry. As small, independent institutions are swallowed up by big rivals benefiting from economies of scale, bank employees will have to contend with the same job-loss worries as their industrial counterparts. William E.B. Siart, president and CEO-elect of Los Angeles' First Interstate Bancorp, estimates that employment in banking, which has actually risen slightly since 1991 to 1.5 million in June, 1994, could drop 10%--nearly 150,000 people--over the next five years. Siart is helping to lead a cost-cutting drive at his bank.

What's behind all the cuts? Revenues are suddenly hard to come by. Rising rates have made buying bonds a high-risk venture, and now those rates are even squelching demand for financial products such as home mortgages. Some financial institutions are simply walking away from unprofitable businesses. In October, Fidelity Federal Bank, a Glendale (Calif.) thrift, laid off 65 employees in its wholesale mortgage business because President and CEO Richard M. Greenwood did not want to compete against the below-market teaser rates on mortgages that many thrifts now offer. "Last time I checked my arithmetic, putting assets on the books at a negative [interest-rate] spread didn't make sense," he says.

RAZOR-THIN PROFITS. The picture is similar in commercial lending. Because playing the yield curve is no longer very profitable, banks are eagerly seeking borrowers. But the competition is so fierce that profits are razor thin, so companies are looking to pare expenses to boost earnings. Even Chemical Bank, the leading syndicator of big commercial loans, expects to cut $80 million in commercial lending costs. "Lending is a very important product for us," says Chemical Chairman and CEO Walter V. Shipley. But he adds, "you bet we can make it more efficient."

Cost-cutting is also being propelled by new interstate banking laws. Banks will soon be able to consolidate interstate branch operations and eliminate many state-level back-office operations. "The interstate banking legislation is intended to create efficiencies, and those efficiencies are going to be accomplished by cutting staff," says Ashby G. Hilsman, a partner and banking law specialist at Marks & Murase.

First Interstate is taking full advantage of the new law. Siart says the bank may merge 14 separate banking operations into one and consolidate seven consumer loan centers into two, among other moves. "We either had to react or we weren't going to be here," he says. "We knew we had to improve our profitability, and it's either costs, revenues, or loan losses." Similarly, Banc One Corp., the Columbus (Ohio) superregional, plans to consolidate 77 bank subsidiaries into a mere 13 and close up to 100 branches--and meanwhile slash 4,300 jobs.

FIERCE MARKETPLACE. Easing interstate banking restrictions also means more competition. Some of the country's most aggressive banks may expand into markets all over the country. That would spell big trouble for those with inefficient cost structures. Most banks don't yet face as much direct global competition as auto makers do, but they will be facing more and more from rival banks that used to be only in other regions of the country.

Some are already preparing themselves. Philadelphia's Corestates Financial Corp., itself an active acquirer in its region, has announced plans to freeze hiring and develop a range of cost-cutting ideas to be implemented over the next fifteen months. "The consolidation in the industry raises the issue of economies of scale," says Chairman and CEO Terrence A. Larsen. "We're looking toward the company we think we need to be in the next five years or so."

Bankers concede that slashing costs alone will not be a panacea. Chemical, for one, plans to invest $180 million in businesses it sees growing rapidly. "All cost-cutting does is put you on the platform to compete," says First Interstate's Siart. "The way you're going to win or lose isn't cost-cutting. It's marketing." That's true. But in today's increasingly treacherous environment, banks that aren't sharpening their axes may not even be around five years from now.THE BIG SHRINK

Banks are slashing costs and paring staff to maintain profitability

BANC ONE Eliminating 4,300 jobs, 9% of its workforce, consolidating back-office

processing, closing up to 100 branches

CHASE MANHATTAN Offering voluntary retirement to 2,600 employees, holding

annual expense growth to 2%, selling some businesses

CHEMICAL BANK Cutting 3,700 jobs, closing branches, improving purchasing,

reducing expenses by $440 million

CORESTATES FINANCIAL Freezing hiring and implementing wide-ranging cost cuts by

the end of first-quarter 1996

FIRST INTERSTATE Reducing staff by more than 3,000, consolidating operations

and systems to save $167 million annually

FLEET FINANCIAL Eliminating 5,500 staff positions, paring annual costs by $300

million by Spring 1995

DATA: BUSINESS WEEK

Kelley Holland in New York