A future bank supervisor in a team meeting with the accounts department. Photo: Morris MacMatzen/Getty Images- Reducing staff costs will be a central feature of Australian banks’ profit maintenance strategies over the coming years, according to analysts at Macquarie Private Wealth.
- They estimate digitisation and automation could help each of the four major banks cut up to 10,000 staff over the next five to 10 years.
- That’s nearly one in four jobs at the major banks.
- It’s another sign that the future for Australia’s major banks will be dramatically different to how it looks today.
Analysts at Macquarie believe automation and digitisation has the potential to allow each of Australia’s four major banks to cut up to 10,000 jobs over the next decade.
With automation already helping banks cut their workforces, further reductions in headcount will be a central feature of improvements to the banks’ operating models, the analysts say.
The assessment of potential headcount reduction is the first seen by Business Insider to give a clear indication of the scale of potential job losses to robots in the major banks, and is one of many signs pointing to a radically different future for Australian banking.
While the Macquarie analysts point out much of the process may involve headcount reduction through natural attrition rather than mass layoffs, the possibility that up to 40,000 jobs could go over a decade — nearly a quarter of the banks’ current workforce — is an indication of how dramatically automation is poised to transform entire industries.
Australia’s banking industry is already in upheaval following a string of scandals and the instigation of the Hayne royal commission which has exposed more shocking practices, including the widespread charging for work that was not conducted or in some cases, where the client was dead.
Against this backdrop, the banking sector is already re-thinking its holdings of wealth management divisions which will lead to some downsizing, compounding any impact of headcount reductions achieved through automation.
The scale of what’s possible is contained in a major review of the banking sector by analysts at Macquarie Private Wealth shared with clients last month. It assesses a range of strategic options for cost management at the banks to maintain profitability after the boom in consumer credit over recent years.
Reductions in branch numbers — which are relatively high in Australia compared to other countries — as well as reductions in interest rates on term deposits are among the options canvassed in the analysis, which concludes that the major banks are likely a solid investment over the medium-to-long term, although it notes some of the cost-saving measures may be difficult to execute in the current political environment.
More than 4000 full-time roles were cut by the four major banks — the Commonwealth, Westpac, NAB and ANZ — over the past year. A total reduction in headcount over the coming decade of 40,000 jobs would be in line with this.
The Australian banks are, of course, not alone in looking at automation to cut costs: Citi’s president this week said robots could help halve the number of employees at its 20,000-strong institutional banking business.
This chart from EY shows how the Australian major banks have been reducing headcount over the past five years.
EYStaff costs account for 50-60% of banks’ expense bases. “We don’t expect banks to reduce their technology and regulatory related expenditures even in a deteriorating revenue environment,” the Macquarie team writes, “and while there is scope to reduce other non-investment expenses, we note that they only represent ~25% of costs. As banks continue to invest in technology and reduce reliance on manual processes, we expect to see a significant reduction in staff numbers over time.”
They then put a number on it, but note it may be the case that not all the jobs affected will be in Australia; some will likely be in offshore operations that are currently do some of the processing and administration functions. On top of that, pay levels for staff that remain is likely to increase, on average, and the job losses could largely come from natural attrition rather than mass layoffs.
Here’s Macquarie:
Over the next five to ten years we expect bank workforces to change. We expect to see a significant reduction in administration, processing and low value-add activities and growth in IT functions. We expect the average cost per FTE to continue to increase; however, the number of FTEs is likely to decline materially over the next five to ten years. If banks are successful in digitalising and automating, we see scope to reduce FTEs by ~10k for each of the majors. While the number is considerable, we expect a significant share of this reduction to be achieved through natural attrition. Furthermore, some of the FTE reductions are likely to come from cuts in the outsourced employees. We expect the benefits of automation to have a significant impact on offshored and outsourced functions.
Tim Dring, EY Oceania Banking and Capital Markets Leader, also expects continued reductions in headcount over the coming years. “Increasingly, banks are seeing investment in technology to drive efficiency, growth and manage evolving risks as critical for sustainable success,” Dring said.
Managing the change would be critical for banks as staff see an ongoing period of layoff, he added. “A heightened focus on cost reduction and automation will continue to be a threat to bank staff and this cultural shift will need to be proactively managed with existing personnel. To support this talent shift, banks must establish and communicate an innovation process. It should be driven from the top, encouraging innovation and building in lessons learned along the way,” he said.
While the share prices in the major banks have been under pressure of late, Macquarie analysts say they see long-term value the stocks at their current levels. One major part of this will be the continuing decline in cash usage as digital banking continues to grow, reducing the demand for bank branches and ATMs. As this chart shows, Australia has a relatively high density of bank branches:
Macquarie Private WealthThey say the current political environment may delay measures like branch cuts:
Our analysis highlights that Australian banks appear to have ~40% more branches relative to urban density vis-à-vis their global counterparts. From a top-down perspective, this should translate into a ~15% cost-out opportunity (i.e. $1.1-1.7bn per bank). While we recognise that the current political landscape is not conducive for an aggressive approach on expenses, we believe that banks should be able to target flat to declining costs for the foreseeable future. We estimate that CBA and WBC have the most substantial cost-out opportunity, followed by ANZ and NAB.
The pressures on banks to transform their operating models would make the companies’ workforces look “very different in the future,” EY’s Dring said, underlining the likely reductions in branch numbers and consequences for process-heavy roles in the banking sector.
“With the low growth environment placing additional pressure on the banks’ performance targets, pulling cost reduction and productivity levers will be a key priority,” Dring said. “Product and process simplification, combined with emerging technologies automating many of the repetitive, high volume, rules-based processes that exist in banks today, may reduce the need for certain types of roles. With customers increasingly choosing to transact through digital channels, banks will also be under pressure to revaluate the relevance of their physical branch networks.”
Dring added: “In this environment, we expect the banks’ head count to continue to decline, primarily driven by increased automation and process simplification. However, there will also be pockets of the banks’ businesses where head count increases may occur, particularly in relation to technology, data and analytics related roles.”
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