In its simplest form, the efficiency ratio shows how much a company spends on overhead to produce a dollar of revenue. The lower the number, the better the management, with anything in the mid-50s typically considered a good score. Most banks disclose the figures in their quarterly earnings.

The ratio deteriorated to almost 80 percent in the fourth quarter from 75 percent at Bank of America, the second-biggest U.S. lender by assets, and to 69 percent from 65 percent at Citigroup, the third-largest.

Wells Fargo & Co., the leader in home mortgages, trimmed the ratio to 58.5 percent, just below its own maximum target of 59 percent, which the San Francisco-based company exceeded in the third quarter at 59.1 percent. At least three analysts said the spending on overhead still was more than they estimated.

JPMorgan Chase & Co. posted a mixed record, improving to 67 percent from 102 percent as it rebounded from legal expenses that caused a third-quarter loss. The biggest U.S. lender still fell short of the second quarter's 63 percent. Minneapolis-based U.S. Bancorp, the largest regional lender, increased to 55 percent from 52 percent sequentially.

While bankers often highlight return on equity as a gauge of their profit-generating prowess, accounting scholars such as Charles Mulford, a professor at Georgia Institute of Technology in Atlanta, said efficiency ratios "focus more on the actual running of the business." Assuming no big changes in financing, "improvements in efficiency ratios will show up as improvements in ROE" and eventually in the share price, said Mulford, who wrote a book on cash-flow reporting.

Group Progress

As a group, banks have made progress on expenses from last year. The ratio for firms with more than $10 billion in assets fell to 58 percent in the fourth quarter from 61 percent in the year-earlier period, according to the Federal Deposit Insurance Corp. (FDIC). In terms of dollars, the five biggest U.S. lenders spent $4.1 billion less to run operations than a year earlier, a 6 percent drop, according to data compiled by Bloomberg.

Full-year ratios improved at Citigroup and Bank of America, and quarterly results at some key divisions. Bank of America's retail unit posted 54 percent for the last three months of 2013 and Citigroup's global consumer bank in North America reached 50 percent.

Doing better in the future depends in part on improving scarce revenue growth, with the industry's quarterly total falling 1.7 percent, according to FDIC data. This year began slow, with New York-based Citigroup and JPMorgan warning that trading revenue is down about 15 percent and Federal Reserve figures showing little change in total loans and leases by the end of February at the 25 biggest U.S. commercial banks. Firms may get help as the Fed shifts away from a policy that held down interest rates and curbed growth in lending income.

Some of the biggest expense cuts came at Bank of America, where CEO Brian T. Moynihan, 54, said in December that the Charlotte, North Carolina-based firm is about 70 percent through a plan to reduce spending by $8 billion a year. More than 25,000 jobs and 300 branches were eliminated in 2013. Moynihan said efficiency will improve as litigation costs fade and benefits emerge from spending on smartphone technology and back-office operations.

Citigroup CEO Mike Corbat, 53, set a 2015 target of the mid-50's, and the bank listed efficiency as the top priority for 2014 in a Dec. 10 slide show. Beth Mooney, CEO at Cleveland-based KeyCorp, used the word eight times in the opening remarks of her most recent quarterly presentation on earnings at Ohio's second-largest bank.

Careful Cutting

Managing for efficiency has limits, with Moynihan telling investors in January he must avoid cutting money for the core franchise or investments that will boost future revenue. For now, that means more upfront costs and pressure on bankers.

"Shaving a few percentage points off the cost base won't work," said Steven Lewis, an Ernst & Young LLP director for banking and capital markets in London. "Banks will need to adopt a spend-to-save approach. Reshaping operating models and redesigning the supporting infrastructure will require multi-year investment."

That's the plan at PNC Financial Services Group Inc., where the fourth-quarter efficiency ratio rose to 63 percent from 62 percent. The second-biggest U.S. regional bank told analysts on Feb. 11 it will spend more to modernize applications, upgrade data centers and enhance cyber security.

"While there are short-term costs associated with this, these investments in our infrastructure will create long-term efficiencies," said finance chief Robert Reilly, adding that the Pittsburgh-based company doesn't have a target ratio. "We think managing in that light could lead to a bad outcome."

Permanent Increases

The idea of paying now and profiting later didn't appeal to shareholders of First Niagara Financial Group Inc. The bank plunged 12 percent Jan. 24 after the Buffalo, New York-based lender disclosed spending plans for new systems and staff and said that the full benefits won't come until 2016 and 2017. The stock still hasn't recovered.

Some costs are proving hard to avoid. Legal matters including regulation and lawsuits have already cost U.S. lenders more than $114 billion since 2007, according to data compiled by Bloomberg. Bank of America's Moynihan, whose company has laid out more than $50 billion, has told investors to expect billions more.

"Even in good times we have probably $2 billion a year in litigation expenses," he said at a November forum. JPMorgan CEO Jamie Dimon, 58, said in December that his bank was spending an extra $1 billion annually on matters such as controls and compliance, and "that's going to be $2 billion more by the end of 2014. Some of that's permanent."

Spending has been driven by the Dodd-Frank Act's overhaul of financial regulation and the Volcker Rule's requirement that banks track positions and transactions to avoid running afoul of its ban on proprietary trading. Demand for new mobile banking and self-service systems is adding to the tally, pushing up technology spending at North American banks 4.5 percent this year and 4.6 percent in 2015 to $62.2 billion, according to Celent, the financial-industry consulting firm.

Regional banks are feeling pressure as more of them start facing the Fed's annual stress tests in 2014. Ohio's Huntington Bancshares Inc. has spent $10 million to prepare. Salt Lake City-based Zions Bancorporation, Utah's biggest lender, has more consultants than employees working on its submission, said Executive Vice President W. David Hemingway.

"We're spending money right and left to buy help and systems," he told analysts on Nov. 7.

More technology costs come from customer demand as banks cope with a flood of new mobile devices and defending against hackers. Mobile banking has increased 50 percent since 2012, and online banking is the top category where consumers say their banks should be investing, according to a 2013 Accenture report.

Moynihan said Bank of America devotes more than $3 billion a year to develop technology. Each new smartphone application or online service means more money for data security to prevent a breach that could damage earnings and customer trust, according to the bank.

Branches Remain

While mobile banking creates an opportunity to save money by shrinking Bank of America's 5,100 branches, Moynihan told analysts Jan. 15 that most are still needed because customers visit 8 million times a week, presenting opportunities to sell services. The result: "We're investing heavily in both platforms," he said.

Branches will be smaller, employ fewer tellers and become more sales-oriented, according to U.S. Bancorp finance chief Andrew Cecere, who said in December the reason for keeping them open will become evident as interest rates rise and deposits become more valuable.

"A more balanced approach between revenue growth and expense reductions will be required to achieve our sub-64 percent 2014 goal," said SunTrust Banks Inc. CFO Aleem Gillani during a Feb. 12 presentation. The bonus of his boss, CEO William Rogers, is partly tied to efficiency targets, according to the Atlanta-based company. The long-term objective is to get below 60 percent, Gillani said.

That's not good enough for Mayo, the CLSA banking analyst who has pressed executives for improvements during investor conferences and in note after Gillani's appearance.

"The aspiration to achieve a long-term efficiency ratio of 60 percent is analogous to a student striving for a C-minus grade," he wrote.

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