Is bank profit growth over? Cost-cutting back in vogue

The Commonwealth Bank of Australia (ASX: CBA) has frozen the pay of senior staff, including the Chief Executive, Ian Narev and the bank’s executive committee. General managers who earn more than $150,000 a year also won’t receive pay rises. The pay freeze is expected to affect about 400 to 500 staff, according to the Australian Financial Review. The bank wants to avoid wide-spread job cuts, and sending cuts offshore — and possibly avoid a lashing from Financial Services Minister, Bill Shorten, after he earlier slammed Australia and New Zealand Banking Group (ASX: ANZ) for retrenching staff, and sending some jobs to India.

CBA has also told thousands of its employees to expect smaller pay increases this year. The move comes despite expectations that the bank will report an annual profit of more than $7 billion next month.

ANZ has a similar wage freeze in place, with 900 of its top paid earners having their salaries frozen for the past two years. Despite the freeze, the bank will still slash around 1000 jobs this year. Westpac Banking Group (ASX: WBC) cut more than 750 jobs earlier this year, but has not announced any wage freezes so far.

The ‘big four’, including National Australia Bank (ASX: NAB), are under increasing pressure to cut costs as they face lower profit margins from weak credit growth and higher funding costs. Consumers are increasingly tightening their belts and reducing the amount of credit they have racked up. Credit cards are being repaid, extra money is being directed into our mortgages, and savings rates are on the increase. Corporates have also got in on the act, with many companies going cap in hand to shareholders recently, to raise equity to pay down debts.

Businesses and households have realised that not all debt is good, and should the economy take a turn for the worse, the less debt you have, the more wriggle room you have to juggle things around.

The Foolish bottom line

Unless banks can find new sources of growth, they face  having to cut costs to retain their profit margins, and one of the biggest expenses banks face is employee costs. Should the weak conditions continue, more bank staff could having their pay frozen, reduced salaries or at worst, losing their jobs.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.  The Motley Fool ‘s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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