Bank staff cuts may be counterproductive, says consultancy group

Cost-efficiency is a necessary short-term goal for European banks as they strive to return to profitability but this will be better achieved by reducing infrastructure rather than cutting staff, according to a new report from BearingPoint, an international consulting group.

Published yesterday, the report states that the days of guaranteed returns for banks are over. “Market dynamics and regulations have created a new landscape in which banks have to work harder to generate revenues,” the 18-page report states.

BearingPoint’s research found that banks are not necessarily able to decrease their costs by increasing scale and said mid-scale banks appear to be very cost-efficient.

A key reason for this is the “inflexibility of large IT architectures and the resulting costs when anything has to be changed”.

BearingPoint’s research found the costs involved in paying severance and other restructuring expenses related to redundancies often reduced the benefits of such a policy and could “potentially affect income”.

“As a result, we do not consider lay-offs to be a significant cost-efficiency lever,” the report states.

However, branch consolidation could be a “powerful” means to reduce a bank’s cost-income ratio.

“While this may be true, banks would be wise to consider branches in terms of their broader strategies, for example to act as sales channels for new products or offer direct contact points,” it added.

In Ireland, Bank of Ireland has largely retained its branch network intact, while AIB and Permanent TSB have closed branches.

BearingPoint’s research found that €7 billion worth of lawsuits have been pursued in relation to the collapse of the banking sector in Europe since 2009.

In spite of capital injections of some €850 billion, a further €350 billion of capital appears to be required to assure market liquidity.

BearingPoint said that in spite of current low levels of profitability, people should not expect the banking market to “clear up rapidly” as monetary policy is impeding competition and delaying any such shakeout.

The database used for BearingPoint’s research covers the past seven years and involved 92 banks, including AIB, Bank of Ireland and Permanent TSB.

Martin McKenna, a partner in BearingPoint’s Dublin operation, said the Irish banks are probably only at step one of the five actions (these range from cutting costs to developing new income streams) that it has laid out as being necessary to return to growth.