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Analysis: Jobs, travel, biscuits: cost squeeze at Europe's banks

Directions to the Bank district are seen on a sign in the City of London
Directions to the Bank district are seen on a sign in the City of London

By Sarah White and Steve Slater

LONDON (Reuters) - Closing branches during the summer lull and telling staff to cut back on biscuits and book cheap flights: banks have rarely been battling harder to cut costs -- and even the most minor expenses are coming under fire.

At a time of tepid revenue growth and tougher regulations, chopping back costs is one of the few levers banks have to boost profit. Lay-offs sweeping the industry are the most visible result, but those still in a job are also feeling the pinch.

"You will usually get a wave of petty restrictions, as much to get the message across to staff as to actually cut costs," said one consultant working with top international lenders.

Bans on travel for a week each month and restrictions on color photocopying and biscuits within offices were examples of banks stamping out more trivial expenses, he said.

An analysis by Reuters of revenue and cost trends show how the problem has deepened for banks. Aggregate revenue for 11 of Europe's biggest banks dropped 3 percent in the first half of this year from a year ago, while costs rose by 4 percent.

That accelerated a long-term trend. Revenue for the same 11 banks rose 32 percent from the first half of 2005, but costs leapt by 45 percent, according to the Reuters analysis.

Costs at all but one of the banks were up on a year ago and most have shown costs as a percentage of revenue higher than six years ago, often sharply.

At Credit Suisse , operating expenses as a share of net revenues soared to 80.8 percent in the first half from 72.9 percent a year ago and 42.7 percent in the first half of 2005.

That means for every 100 francs taken by the bank, over 80 francs went out the door on staff and other costs.

Comparing cost/income ratios at banks is difficult, because reporting is not standardized, but the trend is clear.

HSBC's cost/income jumped to 57.5 percent this year from 50.9 percent a year ago, and UBS's was up to 72.4 percent from 67.2 percent. Banks across Europe also showed big rises, such as Societe Generale , Barclays , Lloyds , BBVA and RBS .

The need to reverse the trend has prompted banks to consider deep cuts and inflict savings plans to appease investors. HSBC, Europe's biggest bank, plans to cut 30,000 jobs and $3.5 billion of annual costs.

In all, European banks in recent months have announced plans to shed over 50,000 jobs, with Lloyds, UBS, Credit Suisse and Barclays all wielding the axe.

Many observers reckon that may just be a foretaste of what is to come, as economic recovery wobbles badly.

Fixed wages have jumped over the past two years as a consequence of the regulatory clampdown on bonuses, which banks say has left them with less flexibility during downturns: in the past they could slash bonuses.

ALL COSTS SCRUTINISED

Lenders are seeking savings in all areas.

"Banks are looking at three areas when it comes to costs. First, direct headcount; second, capital efficiency -- their businesses that consume too much capital to earn a good return; and third, non-compensation expenses," said Gareth Hunt, a banking analyst at Investec.

As in previous downturns, budgets for marketing, advertising and training are coming under strain.

That will affect travel and Christmas party plans in Europe, even as a war for talent in hot markets like Hong Kong continues. So while HSBC reckons it can save $100 million on its office paper costs, it plans to continue hiring in Asia.

"The message is that top performing staff in Hong Kong don't need to worry about their bonus, but the person that sells them paper clips does," Hunt said.

Travel is always an early casualty. Junior bankers will be asked to travel in economy class rather than in business, or even shift to budget airlines such as easyJet.

Other moves include Spain's Banesto closing 228 of its 1,768 branches in Spain during August to cut costs.

AN AWFUL LOT OF SOCKS

Moving jobs to lower cost locations, streamlining IT processes and combining operations into regional centers are all being looked at -- as they have in the past -- while more emphasis on mobile and internet retail banking can cut branch overheads.

Barclays Chief Executive Bob Diamond plans to cut 1 billion pounds of costs in three years, and reckons double that total has already been identified.

Barclays, HSBC and others are also targeting entire businesses that do not measure up, such as a retreat from Russian retail banking.

These decisions are linked to stricter capital rules coming in under Basel III from 2013. That has shone a light on unprofitable areas, and given banks a reason to reverse strategy.

That is what is spurring many banks to say they need to go beyond what they've done in the past.

"We clearly have a cost problem," new HSBC CEO Stuart Gulliver said in May when he unveiled his strategic plan. He wants "a substantial re-engineering" that goes beyond typical cost-cutting such as cancelling newspapers, reducing travel and restricting laundry bills on business trips.

"It takes an awful lot of socks to get to $2.5 billion to $3.5 billion (of savings), so we really, really do need to look at a couple of things," he said.

(Additional reporting by Philipp Halstrick in Frankfurt, Judith Macinnes in Madrid, Sophie Sassard in London; Editing by Douwe Miedema and David Cowell)

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