Beware of Penny-Pinching Bankers

If Morgan Stanley (NYSE: MS  ) is any indication, banking industry revenue isn't likely to improve anytime soon. The industry's revenue fell more than 3% year over year in the first quarter, only the second time in 27 years. Looking forward, the Morgan Stanley CFO's focus at a recent investor conference had shifted from revenue opportunities to ... new cost-cutting moves.

Uh-oh. That's not a good sign.

Down to the bone
Bailed-out banks cut expenses dramatically after being shamed in 2008. Now, Morgan Stanley is reportedly targeting BlackBerry usage and hard-copy brokerage statements. Quite the comedown in lifestyle, to say the least.

Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) also have new cost-cutting efforts under way. B of A is aiming big: It expects to reduce its branch count by 10%.

Bringing a knife to a gunfight
The trouble is, most of the easy cost-cutting has likely already taken place. It will be tough for further cuts to make much of a dent in two huge challenges banks are facing. Ongoing weakness in housing shortens the fuse on a ticking time bomb, i.e., loans that are on banks' books above fair value. In addition, a large portion of the recent improvement in bank earnings owes to reductions in loan-loss reserves, which is not a sustainable strategy. Absent such nonrecurring items, profits before taxes and "provisions" (loan losses and one-time items) slid a whopping 40% year over year for the six largest U.S. lenders in the first quarter. Here are some specifics:

Company

Q1 2011 Change in Pre-Tax, Pre-Provision Income

B of A (55%)
Citigroup (48%)
JPMorgan (31%)
Wells Fargo (32%)

Source: Bloomberg News.

Can't help, could hurt
It's hard to say if bank cost cutting will be a material drag on BlackBerry maker Research In Motion's (Nasdaq: RIMM  ) stock. Banks were early BlackBerry adopters and remain addicted because of RIM's strong security. Morgan Stanley's BlackBerry scrutiny could spread through the industry and put another nail in RIM's coffin. 

Foolish takeaway
Renewed cost-cutting efforts with a penny-pinching tone suggest that banks are scrambling to cope with earnings headwinds. If they're that worried, investors should be, too.

Will banks' new cost cuts be enough? To help you find out, the Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding companies to your Watchlist now:

Fool contributor Cindy Johnson has been underweight financials since 2008. She does not own shares in any security in this story. No way. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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