CFOs’ North Star is building a fortress balance sheet generating resilient and growing earnings. It’s a tall order. The path to achieving and sustaining it is ever changing, since capital markets and balance sheet valuations are highly dependent on unpredictable external factors, most notably interest rates, the economy at large and regulatory expectations. The last couple of years have complicated many a CFO’s life even more. They must find ways to modernize their institutions’ infrastructure and decision making without permanently lifting the fixed cost base. Nearly any financial result can be achieved short-term, but success is ultimately defined as quality growth yielding operating leverage. This quandary has taken a back seat in recent quarters to major macro developments, such as the gyrations of expectations regarding interest rate direction and the Fed’s posture (most of us switched from expecting a couple of rate cuts to 0-2 rate rises), the implications of the Iran war etc. During that time, the North Star hasn’t changed, and pressures for modernization continued to intensify. Industry observers focus on the short-term agenda and earnings resilience, but their tolerance for expense growth hasn’t changed.
Bank earnings have generally been resilient, buoyed by an unexpectedly strong economy and therefore lower credit losses. That tailwind, while welcome, hasn’t impacted the continued analysts’ focus on cost reduction concurrent with infrastructure automation, with special focus on AI. The challenged of modernization without expenses reset is a tough one. It is especially poignant and the last wave of technology investments hasn’t necessarily yielded improved revenues, customer retention or even earnings resilience in too many cases). Investors and boards want to see how past investments in Salesforce, Ncino/Abrigo and core upgrades for both retail and commercial systems have generated stronger earnings and customer engagement. They expect management to fund modernization through improved productivity as well as through more revenue.
That new scrutiny on “table stakes” technological investments involves look backs and disciplined assessments that are often new to us. As a result, CFOs must fund the next round of investment from the existing cost base to avoid negatively impacting current earnings. Technology, data, cyber, risk, and AI are increasingly billed as “table stakes” spending, but recent past experiences didn’t always demonstrate that projections of improved productivity, franchise value and revenue growth justified the investment. New questions are now being asked about long-duration investments, and expectations for greater discipline in investment self-funding through measurable revenue and efficiency gains are growing. Another question to be asked is, does it pay to be an early investor, thereby reaping the benefits of their investment by permanently lowering their cost curve and generating more dollars available for reinvestment? Or is it better to wait out the first wave of new investments, most notably AI, until the cost and revenue conversation can be had with greater certainty regarding permanent outcomes?
It is interesting to note that 2Q26 earnings call questions focused more on tech-related items as part of discussions of how computing infrastructure is improving operational performance and cost discipline and somewhat less on AI. Banks are having a hard time responding to analysts’ questions on the overall impact of transformation on the organization since they have traditionally are tackled the topic and measured its impact on a project-by-project basis. Interrelationships among the various projects remain undetected in many instances, which gets in the way of achieving the ultimate goal of a meaningful upgrade to enterprise-wide internal data handling, cloud computing, core systems, ledgers, and all external customer touch-points.
The opportunity most CFOs face today is affecting a fundamental shift in capital planning and ROI look backs from infrequent capital strategy development and reforcasts to faster capital intelligence. A faster approach is needed to reflect the frequent and wide gyrations of major market forces such as rate moves and direction, credit considerations, market volatility and balance sheet tradeoff implications. For example, the Federal Reserve’s May Financial Stability Report illustrated how quickly things change. Percent respondents cited private credit as a salient risk jumped to 50% from 22% in the prior report, while oil shock risk went from unmentioned to 70%. Nimbleness and speed are becoming non-negotiable for effective capital planning.
One word of caution, though: The prevailing wisdom is the desire to link all major elements into one gigantic data pool that provides a coordinated view of the client, product and portfolio decisions directly to pricing, origination, RWA forecasting and stress planning. I’m not sure we are ready to achieve such a lofty (and expensive) goal. It might be our next universal client access model, which proved equally elusive. Instead, identify your main drivers and monitor those, even independently of each other, to get better and quicker information on the impact of your capital allocation decisions for a meaningfully faster mid-course corrections.