Five Ways to Reinvent Bank Branches

June 18, 2014

Recent banking industry news continues to highlight growth in self-service channel usage, and an ongoing shift away from branch channels.

The latest data from the FDIC shows that there were 96,684 domestic branches at the end of March 2014, a net decline of 672 branches from the end of March 2013. While the y/y decline is less than 1%, the number of branches has been steadily declining in recent years.
In a recent presentation, Regions reported that branch transactions fell 8% in 2013, while mobile banking interactions rose 59%.
A report by Bernstein Research found that Fifth Third could close nearly 600 branches, based on their deposit levels and proximity to other branches.
Bank of America has continued selling off portions of its branch network, with recent sales of 13 Tennessee branches to First Horizon, as well as 13 branches in Michigan to Huntington Bank.

These trends point to a need for a significant reinvention of the branch channel if it is to remain relevant for consumers, and strategically important for banks. Here are five areas that banks can focus on in order to achieve this:

Avoid both inertia and “following the crowd.” There is a danger that banks avoid making necessary changes to their branch networks because of internal resistance and a cultural predilection to carry on as before. Equally, banks may be inclined to close a significant portion of their branches because they perceive that it the prevailing industry trend. Both of these tendencies should be avoided. Decisions on branch numbers, density, design, staffing and support should be based on strategic analysis of market trends, competitive threats and overall company objectives.
Don’t make branch decisions based solely on cost. Branches represent a significant cost for banks, and with declining branch usage as consumers gravitate to other channels for everyday banking transactions, the tendency will be to cut branches. However, this is a narrow view that does not take into account the sales, service and branding roles that branches play. Although Regions reported an 8% decline in branch transactions in 2013, it also claimed that 80% of sales came through the branch. And while Bernstein Research claimed that Fifth Third could close 47% of its branches, a Fifth Third spokesperson said that the branch remains the most visible brand identifier in their communities.
Test different branch formats. Some of the leading U.S. banks have been piloting different branch formats in their markets. In February 2014, Capital One opened a new Capital One 360 Cafe in Boston (these cafes raise awareness of Capital One’s online bank unit). In May, PNC opened a pop-up branch in Chicago, and SunTrust opened an innovation branch in Atlanta. And banks like Bank of America and Citibank have opened flagship (or “destination”) branches. Banks are looking at these new branch formats not only to assess how they resonate with different customer segments, but also to determine optimal staffing levels and the impact of these branches on overall branch density within markets.
Overhaul branch staffing. Changes in average branch size and format, as well as in the role of the branch, have important implications for branch staffing. Smaller branches require fewer staff, and staff activities will shift from handling everyday transactions to selling and providing specialized service and advice. This has important implications for recruiting, training, compensation, support and internal communications, and banks need an integrated branch personnel strategy with input from multiple functions within the bank, including HR, sales, service, marketing and product.
Leverage branches to build beachheads in new markets. Traditionally, branches have marked a bank’s footprint within defined geographies. Now, some banks are moving beyond these geographic constraints to open branches in out-of-footprint markets to focus on specific segments (such as commercial, private banking and wealth management clients). BBVA Compass has been opening loan-production offices along the East Coast. BMO Harris opened a corporate banking office in Atlanta, well away from its traditional Midwest footprint. As these branches do not target the mass market, product expertise and service quality are more important factors that having strong branch density in a market.

Commercial Loan Growth Slows in 1Q14…But Remains Key Lending Category for Leading U.S. Banks

April 22, 2014

EMI analysis of 14 leading U.S. banks found 7.4% y/y growth in commercial and industrial (C&I) loans in the first quarter of 2014, down from a 7.9% y/y growth rate in 4Q13. Though three banks (Capital One, Fifth Third and Regions) reported double-digit loan growth, only Capital One exceeded the 4Q13 y/y growth rate. Six of the 14 banks—including two of the top three commercial lenders: Wells Fargo and Chase—had lower y/y growth in 1Q14 vs. 4Q13.

In addition, as banks compete aggressively for commercial loans in the current low interest rate environment, yields continue to decline. Of the 13 banks providing C&I loan yield data, all reported double-digit y/y basis point declines. Banks with the largest y/y declines included Fifth Third (-55 bps to 3.35%) and KeyBank (down 49 bps to 3.29%). For nine of the 13 banks, yields are now below 3.5%.

In spite of the slight decline in C&I loan growth rates, this loan category continues to propel overall bank loan growth. While the 14 banks generated total y/y loan growth of 2% in 1Q14, their non-commercial loan growth was just 0.4%.

The following are four quick tips for banks to maintain—and even accelerate—commercial loan growth:

Target specific geographic markets or vertical industry segments, where the bank already has—or can quickly develop—dedicated capabilities
Re-commit to the small business segment by providing services and support tailored to their unique characteristics and needs
Develop initiatives to increase commercial loan utilization rates (which continue to trail historic averages for many banks, although many banks did highlight recent growth in utilization rates)
Identify and dedicate resources to capture growth in particular loan categories (such as CRE), which have been ignored in recent years in the aftermath of the financial crisis

Top Credit Card Issuers’ 4Q13 Financials: Takeaways and Implications

January 24, 2014

A scan of 4Q13 and full-year 2013 financials for 13 leading U.S. credit card issuers revealed the following trends in outstandings, volume and credit quality:

Outstandings

Average outstandings continued to decline y/y for the top 4 issuers, but rose in other issuer categories:

Although outstandings for the largest issuers continue to decline, there is evidence that these issuers are now at a inflection point, where growth in new vintages is starting to exceed declines in run-off portfolios. Chase claimed that it reached this inflection point in the second quarter of 2013, and expects to generate moderate outstandings growth this year. Bank of America is pointing to strong growth in account production, with 1 million new accounts opened in each of the past two quarters.
Discover and American Express both increased outstandings by 4% y/y; this led to net interest income growth, of 10% and 8%, respectively.
Wells Fargo grew average outstandings 8%, as it grew new accounts by 29% y/y . Credit card penetration of Wells Fargo retail banking households rose from 27% in 1Q11 to 37% in 4Q13.

As there is growing consensus that the economy will grow robustly in 2014, improved consumer confidence should translate into increased credit appetite, which issuers will look to meet with targeted campaigns and pricing (on introductory rates rather than go-to APRs). In addition, in recent years, issuers have focused on higher FICOs (which we discussed in a recent blog), but now may look to develop campaigns, product and pricing for other segments.

Volume

The 7 issuers reporting annual volume data generated an increase of 8% between 2012 and 2013. Growth in volume continues to outstrip outstandings, as debt-wary consumers continue to see the credit card as more of a payment than a borrowing tool.

In general, issuers grew volume from a combination of new account production and increased existing cardholder spending.
American Express’ 9% growth was boosted by a 12% increase in small business spending, marking the fourth consecutive quarter of double-digit growth.

In 2014, issuers will be looking to benefit from growth in consumer spending as the economic recovery takes shape, so we should expect a continuation of tiered earnings in rewards programs, as well as communications and offers targeted at key stages of the cardholder life cycle (card acquisition, activation, retention and ongoing card usage).

Credit Quality

Charge-off rates for many issuers are at or below historic lows, with all issuers reporting 4Q13 rates below 4%.

In the aftermath of the financial crisis, some of the leading issuers experienced huge spikes in their charge-off rates. The charge-off rate for Bank of America’s U.S. Card unit rose to more than 14% in the third quarter of 2009, while the rate for Citigroup’s Citi-Branded Cards-North America unit peaked at 10.78% in 2Q10. The chart above shows that charge-off rates for these issuers have returned to normal levels.
Low charge-off rates—and the expectation that these rates will remain low—enable issuers to maintain reduced loan loss provisions. This in turn boosts profitability even as issuers struggle to grow revenues. Some of the leading issuers reported strong y/y declines in provisions in 4Q13, including Chase (-46%) and American Express (-27%).

As issuers push for outstandings growth in 2014, the expectation is that charge-off rates will rise. However, there are indications that rises in charge-off rates will be moderate. 30+ day delinquency rates (leading indicator for charge-off rates) continue to fall. In addition, the credit card sector has changed fundamentally in recent years; neither consumers nor issuers see credit cards want to return to the borrowing/lending culture that pertained prior to the financial crisis.