Tag Archives: Regions

Five Strategies to Adapt Bank Branches to The New Normal

There is a wealth of evidence that consumers are using online and mobile channels as the primary channels for their everyday banking needs:

  • Having reached critical mass in online banking penetration, the largest U.S. banks continue to report strong growth in active mobile banking customers (Chase +23% y/y to 17.2 million; Bank of America up 17% to 15.5 million; and Wells Fargo +22% to 13.1 million)
  • Regional bank customers are also growing their usage of non-branch channels.  45% of PNC customers use non-branch channels for a majority of banking transactions.  Fifth Third reports that ATM and mobile channels’ share of deposit volume rose from 12% to 31% over the past two years. KeyBank claims that online and mobile transactions are growing by 9% annually, while branch transactions are declining by 3%.

The rise of self-service channels for everyday banking transactions is leading banks to re-assess their investment in their branch networks.  For example, banks are changing traditional assumptions as to what constitutes optimal branch density within markets.  In a recent presentation, KeyBank claimed that branch density is now less relevant as long as a bank can pair branches with a good mobile offering. In addition, in a low-revenue-growth environment, banks are under pressure to cut costs in order to meet earnings expectations. As a result of these factors, banks are cutting branch numbers.

  • Bank of America is expected to cut branches to below 5,000 by the end of 2014, compared to more than 5,700 in the second quarter of 2011.  It recently announced the sale of branch clusters in North Carolina and Michigan.
  • Over the past six months Citibank sold all of its branches in Texas, as it focuses its energies on a select number of large metro markets.
  • KeyBank has closed or sold 8% of its branches over the past two years, and plans to cut its network further, by about 2-3% per year.

However, banks remain strongly committed to their branch networks.  This is largely due to the fact that consumers continue to value the branch channel, even if usage has declined.  A recent ABA survey found that 21% of consumers named the branch as their preferred banking channel, up from 18% in 2013. In addition, banks recognize the benefits in encouraging customers to use multiple channels.  Wells Fargo found that customers using its stores as well as online and mobile channels have a 70% higher purchase rate than customers who only use online and mobile. With in this mind, the following are five branch strategies that banks should follow, with examples of banks that have already implemented these approaches:

  1. Deploy new branch formats.  Given lower traffic and transaction volumes in branches, banks should launch branch prototypes with smaller footprints, so that they can maintain their physical presence, but at a lower cost.
    • PNC has converted 200 of its branches to a smaller format, with 100 more to follow by the end of 2014.
  2. Launch flagship branches in selected markets.  With changing ideas around branch density, bank can consolidate multiple branches into a large flagship store.  These flagship stores act as a brand beacon for the bank in specific markets, as well as providing space for the bank to showcase new innovations
  3. Reconfigure branch staff.  As branch activity is switching from transaction processing to sales and advice, and branches switch to smaller format, bank can reduce the average number of staff per branch, but should also change the functional balance, with fewer tellers and more sales specialists.
    • In the 18 months to June 2014, Fifth Third cut 22% of its branch service staff, but increased sales staff by 6%.
    • Over the past year, PNC has grown its number of investment professionals in branches by 4%.
  4. Incorporate technology into branches. As consumers become more accustomed with using technology for their everyday financial needs, banks should showcase customer-facing technology in branches.  This can enhance the user experience and capture sales opportunities
    • Regions is installing two-way video to enable customers communicate directly with bankers via an ATM.
  5. Open branches outside of footprint.  As having a critical mass of branches in a market is no longer a prerequisite for success, banks can open branches beyond their traditional retail footprint, to target specific consumer or business clusters.
    • City National has established branches in New York City, Atlanta and Nashville, dedicated to targeting entertainment firms that are clustered within these markets.

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

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

 

Banks Cut Marketing Spending in Absence of Revenue Growth

EMI analyzed bank marketing data of 25 leading U.S. banks and found a 4% y/y decline in marketing expenditure for the first nine months of 2013.  During this period, marketing spending accounted for 2.6% of net revenues.

Our analysis finds that marketing expenditure levels and changes vary significantly by bank type .

  • Monolines: These banks are characterized as having a strong dependence on their credit card operations.  The three banks in this segment—American Express, Discover Financial and Capital One—allocated 7.8% of their revenues to marketing in the first 9 months of 2013.  Capital One’s spend levels are relatively lower, as it has transitioned over the past decade to be more like a full-service bank, with a network of 900+ branches.  The ‘monoline’ segment is also bucking the overall trend, with a 4% y/y rise in marketing spend.

  • National banks: These megabanks invest about 2% of revenues in marketing to promote their brands, support their extensive physical and virtual channels, and advertise their wide array of financial products and services.  As these banks (which include JPMorgan Chase, Wells Fargo, Citigroup and Bank of America) are under pressure to maintain profitability in a low/no growth environment, they reduced marketing spend 8% y/y.  Wells Fargo stands out, insofar as its marketing spend as a percentage of revenues is much lower than its peers, as it has traditionally focused its revenue-generating activities on its branch network.  However, Wells Fargo was the only one of these four national banks to report y/y marketing growth for the first three quarters of 2013.

  • Regional banks: The 18 regional banks analyzed by EMI allocated 1.6% of their revenues to marketing over the first 9 months of 2013.  Under pressure to cut costs and maintain profitability in the absence of revenue growth, these regional banks cut marketing budgets by 13%, led by large regionals like KeyBank (-31%) and SunTrust (-29%).

The extent to which banks ramp their marketing spend will be based on whether they see significant revenue growth opportunities, which in turn is dependent on economic growth.  And there are some positive signs in this regard, with the OECD projecting that U.S. GDP growth will rise from 1.7% in 2013 to 2.9% in 2014 and 3.4% in 2015.