You're too big to fail. Regulators are looking at your business through a microscope. The economy is plodding forward. Profit margins are slimmer. Legal headaches continue. What's the leader of a major U.S. bank to do?
Nearly six years after the worst of the financial crisis, the chief executives of the country's largest financial institutions are confronting a transformed landscape. Their current assignment couldn't be more different from years past, when they built empires through acquisitions and then turned their attention to surviving the meltdown. Now their task is to cut costs, jettison less-profitable activities and even consider becoming smaller.
The shift was on prime display in the most recent round of earnings announced earlier this month. All of the four biggest U.S. banks – JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. – highlighted their efforts to wring unnecessary costs out of their businesses.
Michael Corbat, chief executive of Citigroup, said he expected the conditions for banks to remain challenging. But he added that he was "very pleased with the progress" the banks had made in reducing expenses, lowering head count and exiting segments that "didn't fit our strategy."
The major banks have cut staff, closed branches and exited proprietary-trading businesses. They've also retreated from areas that were less profitable or had attracted the attention of regulators.
For example, JPMorgan spun off its private-equity arm and is selling its physical commodities business. Together, JPMorgan, Citigroup and Bank of America have laid off 150,000 people since the financial crisis, according to employment consultancy Challenger, Gray & Christmas.
The push to squeeze profits out of meagre growth is a sea change, said Gerard Cassidy, a banking analyst at RBC Capital Markets in Connecticut – one that he believes will define the next 25 years, much as the drive to grow ever larger defined the era before the crisis.
The historic route toward expansion – via acquisitions of other firms – is shut for the largest banks, which are already too big for the comfort of many regulators. "It's not 'Can I buy this bank in Canada' or 'can I buy this company in the U.K.?' That's done," said Mr. Cassidy. "Now there is modest growth and very heavy regulation. It's going to test these teams to see if they can effectively manage their companies similar to a financial utility."
In Mr. Cassidy's view, it's an open question whether the current leaders have the skills necessary to manage that transition. "You're going to need CEOs who can turn nickels into manhole covers," he said.
John Colon of Greenwich Associates, a financial-services consulting firm, likened the task for major banks to driving a car in the woods at night. "Sometimes you have to back up and change direction to get going forward again," he said. Banks are "backing up, reorienting, and trying to aim in a little bit different directions – in a place that's still a little dark and unclear."
For large banks, the situation calls for tough decisions about where it makes sense to compete. That's a reversal from the years in which it was fashionable to talk about being a global financial supermarket, with aisles of products for every taste and customer. Now the language among banking consultants emphasizes concepts like focus and clarity.
"When revenues are galloping year-on-year, it doesn't matter if I'm getting complex and complicated," said Monish Kumar, a senior partner at Boston Consulting Group in New York. Now banks need to identify who their customers are, what to sell them, and how to do that more efficiently than before. Such clarity sometimes requires the "intestinal fortitude to say, 'These are the people I'm not going after,'" said Mr. Kumar.
Sometimes that means reversing course in certain markets. A year ago, Citigroup announced it would shed consumer banking units in countries such as Turkey, Romania, Pakistan and Paraguay. Beyond exiting certain geographies and paring back branches, banks are less attracted to other areas due to regulatory scrutiny: JPMorgan, for instance, is selling its business that handles warehousing and storage of commodities. That segment drew the attention of U.S. lawmakers, who expressed concern about the potential for price manipulation.
Other challenges seem set to continue. Low interest rates, which put pressure on a bank's ability to profit from loans, appear likely to linger. Uncertainty persists surrounding the timing of the U.S. Federal Reserve's exit from bond markets, which dampens customer appetite for the trading services offered by banks.
Regulators have forced banks to hold more equity capital in reserve compared to their assets to make them less vulnerable to shocks. And they've required financial institutions to abandon their "proprietary" trading activities – which deployed the bank's own capital in search of profits.
It's unclear who will win the race to adapt to the new environment. Mr. Cassidy believes that Wells Fargo is ahead of the game, with the other three U.S. mega-banks jockeying for position. "As the litigation issues fade away, it will emerge over the next two years who really is doing the best job of managing their operations," he said.
And then there's the looming threat posed by new competitors. "The challenge is they're being attacked facing from a number of directions," said Wayne Busch, managing director for North American banking at Accenture. He notes that banks are starting to see incursions onto their traditional turf by technology and telecommunications companies. (Google has introduced a prepaid debit card, as has cellular provider T-Mobile.)
"We can debate who wants Apple or Google to be your bank," said Mr. Busch. But "if it meets your needs more readily than the big box bank on the corner, you might pick it."