By Steve Reider
The rise of online channels and the corresponding decline of in-branch transaction activity has led many financial institutions to reduce the scope of their branch networks in recent years. In concert with the raft of mergers precipitated by the 2008-2009 financial crisis, those reductions have left the U.S. with 105,000 bank and credit union branches, 8 percent below the peak levels of 2010. Further, U.S. branch counts have declined in eight of the last nine years—and banks and credit unions combined to shed a net 1,700 branches over the past year, and 6,200 over the past four years.
Yet amidst those trends, some of the largest banks in the U.S., many of which led the closure wave of the last decade, have announced sizable branch expansion initiatives:
- In a 2018 press release, JPMorgan Chase announced plans to add as many as 400 branches and enter 15-20 new markets over the next five years.
- Bank of America plans to add 500 branches and 2,700 ATMs, while entering numerous new markets in the Midwest.
- U.S. Bank plans to add branches in Texas and the Southeast in markets where it serves customers but offers no physical locations—and plans to add 60-80 branches overall by the end of 2020.
- PNC has recently entered or announced plans to enter markets well removed from its current footprint, including Dallas, Denver, Kansas City, Houston and Nashville.
- In 2018, Fifth Third announced plans to open 100-125 branches across the Southeast, in metro areas such as Nashville, Charlotte, Raleigh-Durham and Atlanta.
- HSBC plans to open 50 new retail branches in the U.S. in markets where it does not currently offer a physical presence.
What is prompting these ambitious expansion efforts at a time of apparent branch contraction overall? Foremost, the economic recovery of the past ten years has revived loan growth, creating a corresponding demand for deposit growth, and traditional branches remain the most effective means of raising low-cost funds.
But beyond the absolute deposit growth imperative, in some cases the expansion efforts reflect a reallocation of resources rather than overall network growth. For example, even as Bank of America, U.S. Bank and Fifth Third have announced branch-expansion plans in certain markets, each has also pared significant numbers of branches in other markets.
Across the industry, such rebalancing efforts impound one of two strategies:
- A reallocation of assets from low-growth to high-growth markets (e.g., for Fifth Third, from the Midwest to the Southeast)
- An exit from markets where the bank maintains limited presence to concentrate resources in selected strongholds.
That latter focus reflects the network effect—the phenomenon under which large branch networks capture a disproportionate share of market deposits. Explained in detail in an earlier post, The Network Effect: Strong as Ever, the concept implies a “get-big or get-out” strategy for large banks—that they should pursue market-leading franchises in a few markets rather than toehold presences in multiple markets. Many large-bank expansion efforts are focused on building dominance in core markets and are funded by an exit from less-successful markets.
That noted, some large-bank expansion efforts are targeting the loan potential in middle-market commercial hubs versus traditional retail/deposit-driven expansion—especially since those deployments require fewer branches and can be less costly to implement.
Finally, some of the largest banks foresee an end game with a handful of nationwide franchises that can leverage national advertising and branding campaigns. For these banks, offering some level of presence in markets that house 80-90 percent of American consumers will maximize the efficiency of national marketing efforts.
In sum, the branch landscape in the U.S. continues to evolve. And even as overall branch counts may have peaked, competition in the largest and most economically robust metros will increase as traditional regional banking boundaries erode.
As such, smaller institutions may find greater growth potential in second-tier metros, those beyond the top 50 or so in population size. They may also face an imperative of increased marketing costs to maintain current share positions in the largest metros.
Steve Reider is president of Bancography, based in Birmingham, Ala. Bancography provides consulting services, software tools, and marketing research to financial institutions. Email: [email protected]
