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Big U.S. banks grapple with costs as they face an ominous 2016

By Dan Freed

(Reuters) - Five large U.S. banks cut more than $5 billion from their expenses during the first three months of the year, but it was still not enough to stop the financial bleeding in what was by many measures the worst quarter for Wall Street since the financial crisis.

Volatile stock and bond markets, a rout in energy prices and stubbornly low interest rates left big banks' earnings in the dumps. As they reviewed results over the past week, some bank executives said conditions have improved in the early days of the second quarter, but there was little optimism that 2016 will be a year to celebrate.

Goldman Sachs Group Inc and Morgan Stanley, whose earnings are more reliant on markets than peers, both saw their profits drop by more than half. Their returns on equity of around 6 percent were well below what investors and analysts say is acceptable.

"They're not cutting costs fast enough to keep ahead of revenue declines," said Paul Miller, FBR Capital Markets.

He cited revenue pressures on businesses including asset management and equity and fixed-income trading, and noted, "All those things are coming down and the banks' infrastructure is unable to adjust those costs fast enough."

Almost all of the biggest U.S. banks are in the process of executing multibillion-dollar cost-cutting programs that were announced months or years ago, such as Morgan Stanley's Project Streamline or Bank of America Corp's New BAC plan.

Others already completed such initiatives and are trying to be more efficient around the edges by restricting unnecessary travel or freezing new hires in certain markets.

Yet JPMorgan Chase & Co was the only one that managed to reduce its expenses more than revenue declined versus a year ago.

Wells Fargo & Co was the only bank to report higher expenses, but it was also alone in revenue growth, with both rising 4 percent. Wells is the least reliant on Wall Street businesses out of the big six banks.

JPMorgan, Bank of America, Citigroup Inc, Goldman and Morgan Stanley reduced costs by $5.3 billion, or by 10 percent compared with the year-ago period. The latter four banks reduced headcount by 7,836 employees during the quarter, while JPMorgan and Wells increased staff levels.

Pressure may build on banks to cut staff and costs further if markets do not improve. Analysts peppered management teams with questions about their expense levels on conference calls, and some executives acknowledged further steps may need to be taken.

"If indeed the environment continued as is, we would be much more aggressive on the cost front," said Morgan Stanley Chief Executive James Gorman.

Citigroup's finance chief, John Gerspach, said the bank is actively cutting back staff and assets in areas where management believes business will not return.

At Goldman, which slashed compensation per employee by 44 percent, Chief Financial Officer Harvey Schwartz stopped short of promising the bank would embark on any kind of sweeping cost-cutting initiatives, but said it can always "operate more efficiently."

Goldman cut its overall expenses by 29 percent last quarter compared with the same period a year earlier, but its revenue declined an even sharper 40 percent.

Drastic cost cuts at Morgan Stanley and Citigroup Inc also fell short of big revenue declines posted by both companies. However, Citigroup said $491 million in charges it took to reposition its businesses, including severance payments, will help lower costs over the long term.

Although the cost cuts mostly fell short, several analysts who spoke to Reuters said they were satisfied with what banks had done, given the extreme circumstances they were dealing with.

Jeff Harte, a bank analyst with Sandler O'Neill, said he was encouraged by banks' ability to bring expenses lower. However, "that's partially a function of not as great a revenue outlook. So it's nice, but then again, it's maybe not so nice."

(Reporting by Dan Freed in New York; edited by Lauren Tara LaCapra and Alan Crosby)