Can AI Really Deliver Savings and Efficiency? What Big Banks Have Learned
By Steve Cocheo, Senior Executive Editor at The Financial Brand
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Executive Summary
- In earnings briefings with Chase, Citi, BofA, Wells Fargo, U.S. Bank and PNC, analysts delved deep into AI adoption, exposure to non-bank financial institutions, the state of the consumer economy and glimmerings of bank regulatory reform.
- AI’s contributions to efficiency improvement and productivity are under scrutiny as analysts ask what the massive and rapid adoption has produced.
- Bankruptcies at Tricolor Holdings and First Brands also had analysts digging into banks’ exposure to nonbank financial services lending.
Securities analysts are no longer asking executives whether they are adopting AI, or when, but boring right into the heart of the matter:
Is the massive investment made so far really paying off?
Analysts specifically want to know: Is AI helping major institutions attack expense growth?
During JPMorgan Chase’s briefing, Ebrahim Poonawala, with Bank of America Securities, asked: “How should bank shareholders think about AI-led productivity gains in terms of making a dent on expense growth either next year or for the next few years?”
Jeremy Barnum, executive vice-president and CFO, noted that the AI theme is “incredibly overwhelming for the whole marketplace right now.” However, “for us, running a company of this type, we need to make sure we stay anchored in facts and reality and tangible outcomes,” said Barnum.
He said that substantial staff and spending have poured into the bank’s AI efforts.
“But in the end, the proof is going to be in the pudding, in terms of actually slowing the growth of expenses,” said Barnum. He said that pegging how much in savings AI is generating “turns out to be a very hard thing to do, hard to prove.”
In fact, Barnum continued, “It might, at the margin, result in people scrambling around to use AI in ways that are not efficient, and that distract you from doing underlying process reengineering that you need to do.”
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So, while Chase has been adopting AI throughout its global organization, Barnum said that the bank favors “old-fashioned expense discipline,” including constraining headcount growth.
“We have a very strong bias against having the reflexive response to any given need to be to hire more people,” said Barnum. He said the bank is “feeling a little bit more confident in our ability to put that pressure on the organization because we know that even if we can’t always measure it that precisely, there are definitely productivity tailwinds from AI.”
Barnum said the bank hopes that “that will show up in lower [expense] growth than we would have had otherwise.”
During Bank of America’s earnings session, several analysts probed management on the same issue.
Glen Schorr of Evercore asked: “Why aren’t you and others talking about AI as a huge efficiency driver of better margins in the years to come? Is it just a little too far off? Am I a little too optimistic?”
Chairman and CEO Brian Moynihan said that the bank’s extensive digitization, plus adoption of AI in various forms, “allows you to do things that you heretofore haven’t done.” He noted that the bank had reversed a surge in staff during the pandemic period, thanks to technology, while business volume has increased.
As an example, Moynihan pointed to the bank’s expansion of its Erica virtual assistant.
“We’ve gone from 210 questions that could be answered to 700,” said Moynihan. “To put that in context, over the last 24 hours there were 2 million interfaces where a consumer got an answer from Erica.”
Analyst Mike Mayo of Wells Fargo pressed further, and Moynihan responded with a philosophical point. He explained that BofA sees AI as enhancing its employees efforts — “it’s enhanced intelligence, not artificial intelligence.”
The nature of the technology is that it can be applied in different parts of the bank than earlier generations of tech, Moynihan said. As a result, he said, AI had already improved overall efficiency, but that it had to be remembered that “it comes with higher technology costs.” He added that the bank would have more to say about AI and other tech at its upcoming Investor Day in early November.
During her opening presentation, Citigroup CEO Jane Fraser did speak of productivity improvements that AI had brought. A notable case: AI-driven reviews of new code.
“This innovation alone saves considerable time and creates 100,000 hours of weekly capacity — that’s a very meaningful productivity uplift,” Fraser said. She added that the company launched a pilot of agentic AI for 5,000 employees in September and that an expansion was already planned.
The ROI of AI was just one of the continuing stories analysts have been probing during the first part of the latest earnings season. Also on the docket were issues of consumers’ economic resilience, the status of bank lending to nonbank financial institutions (NBFIs or NDFIs), and early thinking on regulatory proposals to throttle way back on the use of, and approach of, memorandums of understanding (MRAs), a long-running industry sore point.
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Banks Say Consumers Remain Resilient … So Far
Leaders told analysts that consumers still appeared strong and were a good source of deposits and lending business. However, some executives emphasized that their typical consumer borrowers generally had higher credit ratings. This jibes with a growing belief that the consumer credit economy is bifurcating, splitting between haves with better credit and have-nots with poorer credit.
Citi’s Fraser spoke of a global economy that “has proved more resilient than many anticipated. The U.S. continues to be a pacesetter, driven by consistent consumer spending as well as tech investments in AI and data centers. … while growth is cooling somewhat and we are keeping an eye on the labor market, America’s economic engine is indeed still humming.”
Discussing the company’s credit card portfolio, she noted that 85% of the cardholders had FICO scores of 660 or higher and that credit performance in cards was meeting expectations. (The maximum possible score is 850.)
“Consumers are being very discerning in terms of how they spend,” said Fraser.
At U.S. Bank, Gunjan Kedia, president and CEO, said the company’s view on consumer credit is favorable. She said the bank was seeing strong spending trends and credit trends, and pointed out that the majority of its consumer borrowers have ratings of 720 or more.
At Wells Fargo, Charles Scharf, president, CEO and chairman, was even more upbeat. During the bank’s briefing officials noted that expansion of its card programs was driving growth, especially generated through its branch system and its digital channels.
More generally, Scharf said that, “you see strong consumer spend and stable deposits and those things paint a picture of a consistently strong consumer, even though what you read would lead you to believe that they’re being more cautious. Our results just say that there’s a high degree of consistency there without any real pockets of slowing.” Scharf also noted that Wells wasn’t seeing appreciable changes in spending patterns across different consumer economic levels.
PNC’s William Demchak, chairman and CEO, had spoken of records levels of both credit and debit spending among consumer customers, but he qualified it.
A cautionary note: Demchak said that use of credit was stronger among lower-income consumers. “I don’t that that can continue,” said Demchak. “Eventually they are going to hit limitations.”
Demchak also believes that most of the spending activity is among wealthier customers.
At Chase, Barnum said that the bank was watching “the potentially softening labor market.” However, he added that credit measures, including early delinquencies, have been stable and a little better than anticipated.
Barnum admitted to some caution based on Chase economists’ read that the labor market is in a “low hiring, low firing” moment, thanks to high uncertainty among employers.
However, there are risks, including slowing growth that’s already being seen.
“So it’s pretty easy to imagine a world where the labor market deteriorates. And if that happens, obviously, we’re going to see worse consumer credit performance,” Barnum said.
Read more:
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NDFIs: Are There Other ‘Cockroaches’ Out There?
Analysts frequently asked about the level of large banks’ lending to non-bank financial institutions (NBFIs), also called non-depository financial institutions (NDFIs). This was prompted by the bankruptcy filing of subprime auto lender Tricolor Holdings, LLC, and the bankruptcy filing of First Brands Group, LLC, a major auto parts supplier that filed after investors discovered billions in off-balance-sheet private debt.
Chase had already disclosed major exposure to Tricolor, a $170 million write-off in the third quarter, but pointed out it had no exposure to First Brands. Disclosures by regional banks Zions Bancorporation and Western Alliance Bank of losses involving First Brands caused selloffs of regional bank shares in recent days.
“You should assume that whenever something happens, we scour all process, all procedures, all underwriting, all everything,” Jamie Dimon, chairman and CEO, told analysts in addressing Tricolor. “And we think we’re okay in other stuff. But my antenna goes up when things like that happen. And I probably shouldn’t say this but when you see one cockroach, there are probably more.”
Analysts peppered the major banks’ executives with questions about their NDFI exposure. The leaders took pains to portray their activities as very “plain vanilla” — a label specifically used by Michael Santomassimo, CFO at Wells Fargo — and they generally pointed to their lending being secured in one way or another.
Gerard Cassidy of RBC Capital Markets pointed out, in questions to Citi, that the industry’s exposures to NDFIs has doubled over the last five years and that the bank itself had $104 billion in exposure at the end of the second quarter.
CFO Mark Mason said that most of the bank’s exposure was to securitizations backed with diversified pools of collateral. “Overall, I would say the NBFI exposure is predominantly investment grade,” said Mason. He said the bank works with “top-tier asset managers that are sponsors of private credit or established consumer platforms.” He said the bank was observing limits of credit concentrations and monitoring the collateral loans and other assets beneath the top layer.
PNC’s Demchak said he felt the category itself was a misnomer. “There’s a whole bunch of things that are bucketed into ‘nonbank financials’,” he said, while stating that the bank had no exposure to Tricolor. (He referred to the situation, without naming the company.) He added that are aspects of NDFI lending that are very safe businesses and that most of what PNC is doing is in those areas.
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A Ray of Hope Out of Washington
Finally, analysts and executives kicked around pending revisions to regulatory capital rules, and how that could help the banks. Demchak touched on an advance notice of proposed rulemaking out of the Comptroller’s Office and the FDIC that would revise the supervisory framework for the issuance of matters requiring attention (MRAs) and raise the bar for examiners seeking enforcement actions.
Demchak said that the proposal is very new and must be analyzed, but thinks it could save the industry time and money, and, paradoxically, lead to quicker action on significant issues that examiners raise. [Editor’s note:See an analysis of the proposal: New Proposal from Trump Bank Regulators Would Mark Major Sea Change.]
“If it does nothing else, it will get rid of all the crazy ancillary work that we do on minor MRAs,” said Demchak.
Often MRAs generate a process that requires committees, consultation and time-consuming development, according to Demchak.
“You can spend 1,000 hours fixing something in the MRA process where you could actually fix the issue that they were concerned with in about 10 hours,” said Demchak. “If it actually comes out the way they wrote their proposal, it would be a massive work-set decline inside our company — not because we’re not going to fix issues, but rather that we’re going to just fix issues, as opposed to talking about them for months.”
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