Elevated cost structures, new technology and changing customer preferences are all contributing to a fundamental re-assessment of branch banking operations and investment by U.S. financial institutions, according to the latest FDIC statistics and a new Fitch Ratings special report. And that means less retail space
Bank branch closings have outpaced openings by an average of 48% in every quarter since the first quarter of 2011, including the quarter to date. Banks have closed 3,839 branches in that time while opening 2,595 for a net loss of 1,244 branches. At an average range of 2,000 to 4,000 square feet of space per bank branch, that represents a loss of 2.5 million to 5 million square feet of retail absorption.
Share this story with your followers
If Cleveland-based KeyCorp is any example, the trend could continue at least for several more quarters.
In the company's second quarter earnings conference call, Chairman and CEO Beth Mooney listed "branch rationalization" and "optimizing our occupancy spend" as two areas of focus for the bank.
"Not only (to) improve efficiency, but also increase our flexibility so we can adapt more readily to economic, regulatory and competitive changes," Mooney said. "On the expense side, we are targeting reductions of $150 million to $200 million by December 2013."
William R. Koehler, president of both Key Community Bank and KeyBank added: "In the face of the present environment, we recognize the need to rationalize our branches while also repositioning them in a way that allows us to provide the right convenience for our customers where they are."
"As we think about rationalization, it takes two avenues," Koehler said. "The first is looking for stranded branches, branches in markets where they are not contributing to density or the client experience we're trying to create, and in doing so; we see a number of opportunities throughout our entire footprint. We've already made or notified the OCC [Office of the comptroller of the Currency] and some of our customers of 17 cases."
"The other is continuing to invest in a very selective basis in our priority markets to a much lower focus on de novos and much higher focus than we've done in the past on relocations and consolidations, again to position our branches more closely to our customers," he said.
KeyCorp is expecting to take out as many as 5% of its branches during the next 18 months. As of June 30, 2012, KeyCorp operated 1,077 branches - a 5% reduction would amount to about 54 branches.
Mobile is the New Drive-Up Window
As society's demographics change, younger individuals are interacting with their bank through various channels other than the traditional bank branch. The growth of internet banking, mobile banking, and ATMs, to name a few, allow banks to use technology to create additional touch points with their customers outside of brick and mortar buildings.
The elevated cost structure of most banks is prompting them to re-think and rationalize expenses, particularly branch networks, which is one of the most significant expenses for the sector. Fitch said it expects both fewer numbers of branches and different types of branches to inhabit the banking landscape going forward.
For many larger institutions with greater flexibility to ramp up technology spending to overhaul distribution networks, the transition should occur more quickly, delivering benefits sooner. In the case of smaller banks with limited technology budgets, market share and profitability could be eroded by delays in implementing new branch banking strategies.
Banks have traditionally viewed branch networks, which expanded rapidly as industry consolidation proceeded during the last 30 years, as their best form of distribution and customer contact. In addition to the collection of deposits, branches have allowed banks to build relationships, facilitating new lending to individuals, small local businesses, and larger, middle-market companies.
However, as a result of mergers and acquisitions, the density of bank branches has increased sharply, in some cases well beyond the capacity of banks to operate them profitably.
In Cook County, IL, for example, Fitch estimates that there is one bank branch for every 3,000 residents, what it calls "a sure sign of too many branches in a particular market."
In light of the cost burden associated with widespread branch networks, and particularly because many customers are becoming increasingly comfortable with Internet and mobile phone banking, Fitch said it expects many U.S. banks to continue a focus on downsizing branch networks, often quietly, to avoid potential political firestorms or negative customer reactions.
"We expect banks to continue reducing their branch network footprint, moving away from a focus on traditional branches toward new touch points with customers," Fitch reported. "This new branch model is likely to reward banks that deploy technology innovatively to optimize customer interaction, while cutting personnel and facilities expenses in the process."
"Over the near and medium term, we expect banks to invest heavily in technology to facilitate the smooth downsizing of branch networks," the rating agency said. "Increased technology spend will offset many of the benefits of reduced branch operating costs during the transition period, but longer term savings will likely be driven by the development of a more flexible, technology-driven distribution system."
Keep up weekly on national news, trends and property leads with the Watch List Newsletter,
a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert
. A new issue is published late each Wednesday.