Are banks cutting or expanding their expense spending?

This is an important question because, invariably, innovation spending comes from an expansion of expenses. In other words, fewer expenses might mean less innovation.

The answer is  not good for the banking innovation sector. According to an interesting analysis from Sterne Agee, a boutique investment firm, operating expenses at super regional banks — an excellent benchmark for middle-of-the-road banks — fell 2.5% last year compared with the same quarter in 2013. Now, that year-over-year decline was less than in the previous two quarters, but the message is clear:

[M]any banks have instituted formal cost-cutting programs in hopes of improving operating efficiency. From something as obvious as closing branches to reducing the number of envelope styles to save money, it appears that banks haven’t left a stone unturned.

Just to put the expense reduction in perspective, 2014 compensation at super regional banks increased 7.7%. In other words, banks are spending on people, not on “stuff,” and that presumably includes innovation and technology.

According to Sterne Agee, expense levels might go higher in 2015.

Most banks project full-year 2015 expenses to be stable to up, with some normal seasonality in the first quarter largely due to employee compensation. Additionally, some management teams have commented that should rates rise meaningfully during 2015, expenses may track higher.

These expense trends at the super regionals deserve attention considering the comments late last week from Richard Fairbanks, the chairman, president and chief executive of Capital One Financial Corp., who declared that the bank’s spending on innovation and technology was decidedly a long-term bet. With overall spending at super regional banks expected to do no more than modestly increase in 2015, we think it is safe to say that the Capital One approach is likely in the minority, and that is unfortunate.