Why Banks Like JPM Are Focusing Extensively on Expense Management
What Investors Can Expect from JP Morgan’s 3Q15 Earnings
Cost control is important for banks to remain profitable
Cost control has been a key focus for US banks (XLF) as they struggle to remain profitable while containing rising costs in an uncertain and volatile environment.
J.P. Morgan (JPM) has been better off in terms of its cost-cutting ability compared to its peers. In comparison, banks like Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) have not been praised for their ability to control overhead expenses. Wall Street analysts keep a close eye on efficiency ratios of banks. This ratio is especially important in the upcoming results, as low-interest rates and global events have eaten into banks’ revenues.
Understanding the efficiency ratio
The efficiency ratio is a measure of operating expenses as a percentage of net revenue. It shows how revenues fuel a bank’s operating expenses. A lower percentage is better, as it means lower expenses compared to revenues.
For J.P. Morgan, the efficiency ratio improved to 59% in 2Q15 from 60% in the previous quarter. This ratio was reported to be 61% during the third quarter of 2014.
If we look at the segmental breakup of overhead ratios, we notice that the Asset Management segment has the highest ratio of 70%. In comparison, the Commercial Banking segment reported an overhead ratio of 40%. Meanwhile, the two segments of Consumer and Community Banking and Investment Banking reported overhead ratios of 56% and 59%, respectively, during the second quarter.
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