Are Bank Branches Heading Towards Obsolescence? Banks See Big Savings In Restacking and Reducing Occupancy, "Taking Out a Million Square Feet Across the Country"
In the midst of a slow and fragile recovery and ahead of a host of pending regulatory changes, the nation's banks this past week said they are not done cutting staff and paring down their occupied square footage.
Charlotte-based Bank of America Corp. this week announced a fresh round of job cuts, on top of the 12,000 U.S. positions the second-largest US bank eliminated last year.
With the goal of cutting $3 billion in costs per year by mid-2015, Bank of America said its job cuts would focus on capital markets businesses, investment banking, commercial lending and wealth management. Bank executives have said they will likely need fewer job cuts in this round because people in those business lines tend to be better paid.
In a related development, Moody's Investors Service said the bank's job cuts are credit negative for the city of Charlotte.
Charlotte is among the five largest financial centers in the country and has experienced significant pressure since 2008 owing to job losses in the banking sector. Further job losses would reduce sales tax receipts and would indirectly pressure property values over time.
The city's finance and insurance sector lost 9% of its jobs between 2008 and 2010, dropping to 77,000. Unemployment in the city was 8.4% in May (the latest data available), versus the national rate that month of 8.2%, and double the 4.2% rate recorded in 2007.
Morgan Stanley's chairman and CEO James P. Gorman also said his company would be reducing headcount later this year.
We "expect to end 2012 approximately 7% lower across the firm than the end of 2011, driven by a combination of previously announced reductions in force as well as applying a very high (bar) for replacing natural attrition," Gorman said.
John C. Gerspach, CFO of Citigroup, told analyst this week that the bank holding company has cut about $1.3 billion in expenses so far this year.
"There certainly is a good element of headcount reduction that is contributing to the overall expense reduction," Gerspach said. "You've seen expenses coming down in the business year-on-year. They have now had two consecutive quarters of lowering expenses and we're going to continue to look at that business and make sure that we've got it sized appropriately."
Karen L. Parkhill, vice chairman and CFO of Comerica Inc., told analysts: "We had $8 million in restructuring costs in the second quarter related to the acquisition of Sterling [Bancshares], which closed last July. We now expect to incur about $25 million to $30 million in merger and restructuring expenses for the remainder of 2012, primarily related to real estate optimization, which will occur in the third quarter."
At KeyCorp, Jeffrey B. Weeden, CFO and senior executive vice president, said in its earnings call, "There is still more work that's being done on some of the consolidation efforts. And then we get into some of the occupancy costs. So as we go through and we have vacancy around the company, what we're doing is really restacking and eliminating some of our occupancy overall. If you think about every foot, on average, it is $28 to $30 a foot. If you can take out a million square feet across the company, that's a big run rate savings overall. Those are the things that we're really focusing on."
Wells Fargo said this week that it has reduced occupancy expenses by 7%, including real estate reductions of 3 million square feet.
Bye Bye Bank Branches?
Efficiencies in U.S. retail bank branching have been well entrenched since 2009. The total number of bank branches has fallen 2% in the last three years, according to statistics from the Federal Deposit Insurance Corp. As of March 31, 2012, there were 98,458 U.S. bank branch offices -- levels not seen since 2007 when banks were expanding at a rate of about 2% per year.
Banks have been downsizing their branch network as a way to cut real estate costs as online banking activity has been picking up.
In the past 18 months, Webster Bank in Waterbury, CT, has closed 17 branches, while opening three new locations.
"These actions are part of our strategy to optimize the configuration of the branch network as our customers' channel preferences changed and that's evidenced by the steady increase in the percentage of active online users," Gerald P. Plush, president and COO, of Webster Bank, said in an earnings conference call this past week.
Peter S. Ho, chairman, president and CEO of the Bank of Hawaii, which had 71 offices in Hawaii as of March 31, told investors this past week: "The other opportunity that we have out there is as the leases come up on a number of these [branches] so we see opportunity to reposition either into a more optimal space from a real estate standpoint or into potentially smaller spaces than what we have had historically. That actually has been a pretty good source of value for us over the past year or so."
Despite the perfect storm of on-going regulatory and legal challenges, the opportunity for retail banking real estate change remains, according to Jones Lang LaSalle Retail 2020 research, but just not in the U.S. or other developed countries.
The report out of Jones Lang LaSalle's London office emphasizes that changes across the global retail banking environment continue to be driven by political, economic and technological trends. However, these trends will lead to continued bank expansion in frontier markets, but be offset by greater efficiency in developed markets.
The Jones Lang LaSalle report, said the key trends in retail banking will be fuelled by increasing customer demand for innovation, flexible service capability and banks actively managing their brand's presence in a retail environment.
These drivers will result in retail banks making substantial changes to their established branch networks in developed markets. As a result, Jones Lang LaSalle predict that as much as 50% of existing retail bank branches in the developed world will be obsolete by 2020, as banks assess their space requirements.
"The perfect storm facing the global banking industry continues unabated. However, within the kaleidoscope of increasing regulatory, legislative and legal scrutiny, retail banks face the greatest opportunity of all retail sectors to unlock the power of their real estate networks," the report stated. "New retail formats and new technology offer diverse options for those looking to drive efficiency of legacy branch portfolios, enter new markets or increase their competitive advantage. The challenge is to ensure that accelerating retail bank real estate change remains a priority and gets the attention it deserves."
"Whilst we are still seeing new entrants opening physical branches, our research highlights that most developed markets across America and Europe are 'over-banked'", the report continued. "We predict that as a result of 'right-sizing' and embracing technology, 50% of retail branches in these developed markets will be obsolete in their current format by 2020."
Excess branch networks won't disappear overnight, but the trend will be one of a steady run-off as property leases expires.
The challenge in this truly multi-channel world will be for global retail banks to actively manage their existing property portfolio and then to identify the right locations to maintain a presence or take new space. We will see far more emphasis on right place, right space and right price."
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