The largest U.S. banks have been publishing their quarterly and full-year financials over the past two weeks. Within these reports, we can discern a number of channel-related trends. These trends have a direct impact on how banks interact with their customer base in terms of providing everyday banking and value-added services as well as cross-selling additional products and services.
We’ve listed these key channel trends below:
Banks are continuing to reduce their branch networks. According to SNL Financial, the total U.S. branch network fell by 1,614 branches and is now at 92,997, a decline of 1.7%. These declines are driven by banks’ desire to cut costs, as well as from a recognition that greater usage of self-service channels for everyday banking transactions may enable banks to reduce bank density. The following chart looks at net changes in branch numbers for leading banks with more than 500 branches:
Citibank reported that it plans to close an additional 50 branches in the first quarter of 2016 as it exits certain markets (including Boston) and will concentrate its branch presence in six key metro markets. It is worth noting that in other markets where Citibank has cut its branch presence, it claims to have retained over 50% of deposits through its online and mobile channels.
Banks are overhauling branch design and staffing. Not only are banks reducing their overall branch numbers, they are changing how branches are designed and staffed. In its 4Q15 earnings conference call, SunTrust mentioned that it is relocating to new, smaller branch locations in Richmond and Raleigh, which will reduce its square footage in these markets by half. Overall, it has reduced its branch footprint by 2.5 million square feet over the past four years. PNC reported that 375 of its 2,600 branches have been converted to its Universal Banker model, and it plans to convert an additional 100 branches in 2016.
Mobile banking is maintaining its strong growth trajectory. According to Javelin Strategy & Research, 30% of U.S. adults used a mobile banking service weekly in 2015. Reflecting this trend, leading banks continue to show double-digit y/y growth in mobile banking users (Chase +20% to 22.8 million; Bank of America +13% to 18.7 million; and Wells Fargo +15% to 16.2 million). These customers are also using mobile banking for a greater variety of transactions. For example, Bank of America reported that mobile banking’s share of total deposit transactions rose steadily from 4% in 4Q12 to 15% in 4Q15.
Online banking usage remains strong…and is growing. While mobile banking garners most of the headline in financial trade press, online banking remains a key customer service channel, and some leading banks continue to register strong growth rates in online banking users. This is likely due to a number of factors, including overall account growth, increased customer comfort with using online banking, new online banking functionality, as well as lingering concerns over mobile banking security. The following table compares 2015 online and mobile banking users and growth rates for Chase, Bank of America and Wells Fargo:
We expect that as banks continue their migration towards self-service channels for a growing number of everyday banking transactions, banks will continue to scale back their branch networks. This will involve reducing branch density in particular markets, as well as exiting markets where they lack a critical mass or where their branches are underperforming. However, banks in general want to maintain a physical presence in markets, so they can leverage the power of the branch as both a sales channel and a branding beacon.
In addition, banks need to provide a consistent user experience across their online and mobile channels. In the short term, banks will continue to provide more functionality in the online channel, as consumers build trust in using their mobile devices for more complex financial transactions. But the distinctions between online and mobile channels are blurring, and banks are already starting to refer to “digital channels” to encompass desktop, tablet and mobile channels. Even the traditional delineations between “online” and “offline” channels are breaking down, as banks showcase their digital services in branches, and as digital channels include functions to enable customers make in-branch appointments.
The major U.S. credit card issuers have now published their quarterly financials. A review of these reports by EMI revealed the following 10 trends:
Outstandings are growing. Credit card loan growth is once again being led by regional bank card issuers (such as SunTrust and Wells Fargo who tend to cross-sell cards to existing bank customers), as well as card “monolines” (such as Capital One and American Express). Banks with national credit card operations report lower growth (or even declines) as a result of the lingering effects from the financial crisis, runoff of promotional rate balances, as well as high payment rates. But even here we are seeing signs of growth: although Bank of America reported a 1% y/y decline in average outstandings, it also reported its largest quarter for new account origination since the fourth quarter of 2008.
Volume continues to grow, but with some slowdown. Some leading issuers continue to grow volume at double-digit rates (Wells Fargo grew loans and volume by 15%, boosted in part by the bank’s acquisition of the Dillard’s portfolio). Other issuers had lower volume growth, and many pointed to the impact of lower gas prices. For example, Discover reported volume growth of just 2%, but absent gas prices, this growth was 5%.
Net charge-off rates continue to decline to historic lows. For many leading issuers, net charge-off rates are well below historic norms. In addition, the rates continue to decline; of the 13 issuers studied, 12 reported year-on-year charge-off rate declines.
30+ day delinquency rates are also declining. Delinquency rates tend to be a leading indicator of future charge-offs, so it is notable that 30+ day delinquency rates continue to decline.
The profit picture is mixed for issuers. Six leading issuers provide credit card profitability data, as they operate standalone payment units. Four of the six issuers reported y/y declines in profitability as growing expenses exceeded revenues. However, Chase increased net income for its Card Services unit by 33%, driven by lower costs (9% decline in noninterest expense, and 10% fall in provision for loan losses). American Express grew its U.S. Cards net income by 15%, as revenue growth of 6% and a 4% decline in provisions exceeded a 4% increase in noninterest expense.
Growth in lending and volume are driving revenue growth. In the wake of the 2008 Financial Crisis and subsequent industry retrenchment, credit card industry revenues fell significantly. As the economy stabilized and then grew, leading issuers continued to struggle to attain revenue growth. Now the return to outstandings growth, as well as continued loan growth, is finally enabling issuers to increase revenues.
To support this revenue growth, card issuers’ noninterest expenses are increasing. The rise in revenues is driving growth in expense areas like marketing and rewards costs. Of the five issuers providing noninterest expense data, four reported y/y increases, led by Discover (+18%) and U.S. Bank (+13%).
Provisions for loan losses are (mainly) decreasing. As net charge-off and delinquency rates continue to decline, three issuers reported y/y declines in their provisions for loan losses. However, Capital One and U.S. Bank increased provisions, with Capital One growing provisions by 69%.
Issuers are increasing credit card yield. Of the seven leading issuers who reported card yield in their financials, six reported y/y growth. The exception was Wells Fargo, which had the highest yield in 2Q15. However, five of the seven reported q/q declines; the exceptions were Fifth Third and SunTrust, which had the lowest yield among reporting issuers.
Issuers are using a range of channels for new account acquisition. In general, cards issuers are continuing to reduce their dependence on direct mail for new card acquisition, and are focusing more investment on digital and branch channels. Chase reported that its online channel accounted for 62% of new card accounts in 2Q15. Even though Citi is continuing to cut its U.S. branch network, it reported that credit card acquisition via branches was up 10% on a same-store basis.
The quarterly reports of the leading U.S. banks revealed a number of important channel trends:
Mobile banking is continuing its strong growth. Three of the leading U.S. banks provided quarterly updates on active mobile banking users, and each reported double-digit y/y growth in 1Q15: Chase +22% to 20.0 million; Bank of America +13% to 16.9 million; and Wells Fargo +19% to 14.9 million. According to eMarketer, more than half of adult mobile phone users are expected to use mobile banking in 2015.
Consumers are transitioning to self-service channels for a growing range of transactions. PNC reported that 50% of its consumer customers used non-branch channels for a majority of their banking transactions in the first quarter of 2015, up 7 percentage points y/y. PNC also reported that the non-branch (ATM and mobile) channel share of deposit transactions doubled from 20% in 1Q13 to 40% in 1Q15.
Many banks are slowly shrinking their branch networks. Leading banks who reported significant branch reductions in the most recent quarter include: Citibank (down 61 during the quarter, as its pursued its strategy of consolidating its presence in 7 U.S. markets), PNC (-37 branches), Regions (-33) and Chase (-31 ). Although Bank of America has closed more than 800 branches over the past three years, the net branch decline fell to 20 in the first quarter of 2015.
Some banks are growing branch numbers…and in-branch sales staff. In spite of the general perception that the branch channel is in the process of terminal decline, some banks are in fact acquiring or opening branches in order to capture growth opportunities. Huntington Bank reported the addition of 43 new in-store branches in Michigan. And even though Bank of America reduced branch numbers by 260 over the past year, it grew sales specialists by 5%.
Banks remain committed to the branch network as consumers use multiple banking channels. While electronic self-service channels have a dominant share of everyday banking transactions, branches still play a key role in areas like new account generation, customer relationship management (including cross-sell), and branding. Wells Fargo claims that its most loyal customers are not those who have the most products, but rather those who use the most channels most often. It reported that mobile banking sessions rose 38% in 2014, while branch visits remained steady.