Tag Archives: U.S. Bank

Banks Adapting Branch Networks to New Realities

For decades, bank branches have been focused on everyday banking transactions. However, with electronic self-service channels now handling a dominant share of these transactions, branches have come under intense scrutiny, with many industry commentators predicting the decline and even extinction of the branch channel.  This view has been strengthened by the fact that banks are focusing significant attention on cutting costs in an era where revenue growth remains elusive.  And branches represent a significant cost for banks.

Banks are belately beginning to react to this new environment by developing new branch strategies that recognize its changing role.  Banks are now putting less emphasis on the branch as a channel for day-to-day financial transactions.  Instead, branch investments are being directed to capture the potential of the branch as a key channel for sales, customer relationship development (through the provision of complex and/or sensitive financial advice), and branding (even customers who bank online tend to want the physical reassurance of the branch).  In addition, banks are increasingly aware of the research value of branches, both in terms of directly surveying branch visitors as well as testing new product or service innovations in selected branches before full roll-outs.

Some examples of new bank branch strategies:

  • In a presentation this week at the Morgan Stanley Financials Conference, PNC outlined a vision of its branch network that involves a more dynamic definition of branches, which includes multiple physical formats, as well as greater integration with both remote sales people and electronic channels.
  • Huntington recently reported branch plans driven by both the desire for cost savings (closing traditional branches and opening in-store branches) as well as to leverage the latest technology (such as branch image capture and processing) to drive efficiency.
  • U.S. Bank has three branch models, which enables the bank to tailor branch investments to market composition and opportunity.
  • Wells Fargo continues to have a strong commitment to the branch channel, as it claims that the vast majority of financial products are bought in a branch. It follows a specific model for branch productivity that is based on both in network density and retail execution, and which is seen in the following chart from its recent Investor Day:
  • At its 2012 Investor Day, Chase discussed a number of branch innovations designed to reduce costs and improve the customer experience. These include self-service tellers, paperless tellers, instant-issue cards and access to remote sales specialists through video. It is testing other innovations like next-generation ATMs, paperless sales, and mobile demonstration zones. Chase is also continuing to deploy additional sales personnel in branches; at the end of 1Q12, Chase had more than 6,000 sales specialists (y/y increase of 21%).

As electronic channels continue to change how consumers and businesses interact with their banks, many banks are reassessing the level and type of investments in their branch networks.  Though most are still committed to the branch model—noting its importance in sales and understanding that many customers still want to have the reassurance of a physical presence—the role of the branch is evolving and this has important implications for issues like branch sizing, design, staffing, technology deployment, and merchandising, as well as integration with other channels.

Credit Metrics for U.S. Card Issuers Continue to Improve

A study of recently-published financials for the leading U.S. credit card issuers reveals that their charge-off rates continue to decline, and that this trend looks set to continue in the coming quarters.

The following table summarizes 1Q12 managed credit card charge-off rates for 11 of the leading U.S. card issuers.  Ten of the eleven issuers reported year-on-year charge-off rate declines of more than 200 bps. The exception was American Express, which had the lowest rate.  The largest decline came from SunTrust, whose rate fell from 8.68% in 1Q11 to 4.83% in 1Q12. Seven of the eleven reported quarterly declines in their charge-off rates.

Of course, many industry observers are questioning when and at what level charge-off rate declines will bottom out.  Trends in 30+ day delinquency rates typically are a predictor of trends in charge-offs, and it is notable that of the seven issuers who published 30+ day delinquency rate data in the most recent quarter, all reported both year-on-year and quarterly declines.

Therefore, we should expect charge-off rates to continue to decline in the coming quarters. However, some issuers are now at or below historic averages (for example, Discover claimed that its charge-off and delinquency rates are at 25-year lows), so will have less scope for further declines.  In addition, these low charge-off rates may encourage some issuers to loosen underwriting criteria in order to grow loans, which can generate some upward pressure on charge-off rates.  Card portfolio acquisitions and disposals can also have an impact on charge-off rates; Capital One reported in its quarterly financials that it expects the acquisition of the HSBC card portfolio to raise charge-off rates by 75 bps.

Credit Card Issuers Continue to Pursue Spend-Centric Model

First quarter 2012 results of the leading U.S. credit card issuers reveal that they are continuing to drive spending growth by cardholders. Four of the seven leading issuers reported double-digit year-on-year growth rates, led by Chase and Capital One at 15%, followed by U.S. Bank at 14% and American Express at 12% (American Express also reported that small business card volume rose 16% y/y, its highest growth rate since before the financial crisis.  In contrast, Bank of America and Citi had anemic – albeit positive – growth rates.

The situation with regard to lending growth is more mixed. With the return to economic growth, and the significant improvement in credit quality, issuers have been looking to increase outstandings. However, consumers still bear the scars of the financial crisis and remain reluctant to increase their card borrowing. In addition, many issuers have not yet significantly relaxed the stricter underwriting standards that came into place in 2008 and 2009. The three largest issuers (in terms of outstandings) all reported y/y declines, with Bank of America’s average loans falling 11%. Bank of America’s average U.S. credit card outstandings have declined almost 22% over the past two years, and fell below $100 billion in the most recent quarter.  (It should be noted that this decline is partly attributable to card portfolio sales, with the bank selling portfolios over the past year to Regions, Sovereign and Barclaycard.)  Bank of America and Citi were the two issuers with declines in both volumes and outstandings. Chase also reported a y/y decline in average outstandings, but this was due to the sale of the Kohl’s private label portfolio in the first quarter of 2011.

So, at first viewing, we see some credit card portfolio retrenchment among those banks like Bank of America and Citi that were hardest hit by the financial crisis, while other leading issuers are now growing their portfolios. However, at closer inspection, Bank of America and Citi are also positioning themselves for future card growth. Citi had credit card account growth for the fourth consecutive quarter. And Bank of America reported that new accounts in 1Q12 were up 19% y/y.

In addition, it is notable that Bank of America is changing the composition of its card portfolio by selling off some private-label card portfolios and changing how cards are originated. (It reported that half of the 800,000 cards originated in the first quarter came through its branch channel.)