BANKS WARN OF COST CUTS AHEAD / THE WALL STREET JOURNAL

Banks Warn of Cost Cuts Ahead

Fed’s move to keep interest rates near zero could continue to crimp revenue

By Rachel Louise Ensign

Bank of America says it may have to cut costs further if interest rates remain low. Photo: emmanuel dunand/Agence France-Presse/Getty Images


No news was bad news for the country’s banks on Thursday.

After years of having their profits pinched by low interest rates, banks—and their investors—had been itching for the Federal Reserve to make a move. Now that the Fed decided to stand pat, some lenders are warning they could have to cut expenses further to compensate for the revenue that would have come in if rates had ticked upward.

Rising interest rates are generally good for banks, because they typically accompany strong economic growth and because they tend to widen the spread between the interest banks charge on loans and what they pay for deposits. That bolsters earnings.

Bank of America Corp. BAC -1.95 % Chief Executive Officer Brian Moynihan said at an investor conference in New York on Thursday that his firm, which has been reducing expenses for years, would double down on those efforts if rates didn’t rise.

“Let me assure you, if the revenue environment weakens or interest-rate structures don’t move up and the economy slows down, we’ll have to take out more costs,” Mr. Moynihan said.
At the same event, U.S. Bancorp USB -1.67 % CEO Richard Davis announced plans to trim the firm’s expenses. He said focusing on costs allows him to “care less” about whether or not interest rates rise. The bank already is known for its lean operations. Its efficiency ratio, a measure of expenses versus revenue, was 53.2% in the second quarter, better than those of many competitors.

Mr. Davis has compared the bank’s situation waiting for interest rates to rise with the last few grueling moments of a gym-class test, hanging on a bar for 90 seconds.

“It’s going to take a bit longer for banks to see some relief,” said John Pancari, a bank analyst at Evercore ISI.

The Fed’s benchmark rate has been near zero since 2008.

Investors sold off bank shares after the Fed announcement. The KBW Nasdaq Bank Index fell 2.3%, a much deeper drop than the 0.4% decline in the Dow Jones Industrial Average. Some bank stocks fell even more, with Citizens Financial Group Inc. CFG -3.04 % dropping 3.4%, Fifth Third Bancorp FITB -2.37 % falling 3.5% and Zions Bancorp ZION -2.82 % pulling back 3.4%.

Many bankers had been rooting for a rate increase. J.P. Morgan Chase JPM -2.55 % & Co. CEO James Dimon said Thursday afternoon that he didn’t expect a move, even though he wanted one.

“It would be a good thing to raise rates,” he said. “It would be a good sign.”

When asked about rate increases recently, BB&T Corp. BBT -2.49 % CEO Kelly King said: “I dream about it every night.”

The price of shares in big banks, including J.P. Morgan and Wells Fargo WFC -2.72 % & Co., have fallen sharply over the past month, as investors bet a rate increase was less likely. J.P. Morgan dropped 2.3% on Thursday, while Wells Fargo fell 2.8%.

The effect of the Fed decision was possibly compounded by a gloomy outlook on third-quarter trading by some banks. Mr. Moynihan said he expected revenue from the unit that trades bonds, currencies and commodities would be down, but revenue from the smaller equities-trading unit would increase.

His statements echoed a similar prediction Wednesday by Citigroup Inc. C -2.79 % Chief Financial Officer John Gerspach, who said his bank’s trading revenue could fall 5% in the third quarter.

The pain of persistent rock-bottom rates might not be confined to bank investors. Some analysts have said bank struggles could impede a broader economic recovery.

The Fed’s decision was broadly treated with disappointment throughout the banking industry.

At Citizens Financial’s Boston trading floor, where more than 30 staffers clustered around televisions for the afternoon announcement, the decision was a letdown for some.

“We were out on the trading floor waiting with bated breath,” said Tony Bedikian, head of global markets at the firm. He said the outcome “wasn’t as exciting as we were hoping it would be.”

At J.P. Morgan’s seventh-floor trading desk in midtown Manhattan, Troy Rohrbaugh’s eyes darted back and forth from three computer screens to his television, where Fed Chairwoman Janet Yellen explained the central bank’s decision. He said the explanation surprised some, as it indicates the Fed is open to keeping rates low for a longer period.

“This is more dovish than the market expected,” said Mr. Rohrbaugh, who runs J.P. Morgan’s interest-rate, commodities and currency trading businesses. “There’s a segment of the client base that remains in limbo.”

Huntington Bancshares Inc. HBAN -2.70 % Chief Financial Officer Mac McCullough said the Fed’s decision raised questions about what conditions would have to be in place for the central bank to be comfortable increasing rates.

“It just creates more uncertainty,” he said. “If not now, then when and what?”

But others saw a silver lining for banks. Tom Digenan, head of U.S. equities at UBS Global Asset Management, said he believes the sector is oversold.

“We’re seeing some stuff that’s really cheap,” he said. “The toughest thing on financials is everyone wants a catalyst or a story, but sometimes the answer is just they’re really cheap.”

—Emily Glazer, Christina Rexrode and Jeff Bennett contributed to this article.