By David Henry and Dan Wilchins
NEW YORK (Reuters) - Banks are dieting now, but surgery is next.
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A raft of banks have announced cost-cutting measures in the last week as loan growth proves tepid and trading slow. Wells Fargo said it plans to cut costs by $6 billion a year by the end of 2012, while Goldman Sachs Group Inc
But the announcements are likely a prelude to banks rethinking their businesses much more seriously as they wrestle with weak loan demand as well as new capital requirements and tougher regulations.
Once banks are done reducing administrative staff and cutting salaries for their best-paid bankers, they will have to think about more radical steps, like shedding units and exiting markets that are not sufficiently profitable.
"The banks will all cut costs, and then there will be the question of is that enough," said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.
Banks so far are favoring standard cost-cutting moves to rein in expenses. A big chunk of Wells Fargo Corp's
State Street Corp
Cost-cutting for now is being triggered mainly by weak loan demand and low interest rates. Higher-yielding loans like mortgages are maturing, only to be replaced by lower-yielding new loans or government securities -- if they are replaced at all.
Bank of America Corp's
"You've got to run pretty hard just to cover the runoff," Wells Fargo Chief Executive John Stumpf told analysts on Tuesday.
Banks, he said, are in "one of the toughest environments I have ever seen."
Wells Fargo is so short of customers who want to borrow that Stumpf said the bank "is sitting on almost $90 billion of liquidity ... We are not even earning our cost of deposits on that."
RUNNING OFF, SELLING OFF, SPINNING OFF
For an example of the difficulties facing banks, look at HSBC
HSBC is looking at serious measures to fix that, including selling its U.S. credit card portfolio and shedding branches in Upstate New York. Generally, it is trying to focus on its main businesses and get out of areas that are "noncore." Some investors believe that even these steps are not enough.
As goes HSBC, so other banks will go, analysts and bank executives said.
One former bank chief executive told Reuters, "The first step is to cut costs, but eventually you have to go through the process of figuring out how you justify being in businesses whose returns are not exceeding their cost of capital."
Wells Fargo hinted at just that on Tuesday, telling analysts it will be reviewing all lines of business to see if they are worth keeping.
Said David Hendler, analyst at CreditSights, "It's going to happen even to the stronger guys."
If bank businesses can't earn their cost of capital, "they're going to have to run them off, sell them off or spin them off," he said.
(Reporting by David Henry and Dan Wilchins; additional reporting by Lauren Tara LaCapra in New York, Ross Kerber and Svea Herbst-Bayliss in Boston, and Joe Rauch in Charlotte; editing by John Wallace)