Big Banks' Branch Profits Waning

Includes: C, FITB, JPM, PNC, RF, STI, USB, WF
by: Martin Lowy

A few days ago I reported on how forward-looking regulatory capital requirements are likely to promote shrinkage of some large banks. But capital requirements are not the only regulatory force promoting shrinkage. Today I will focus on how regulatory and technological forces are affecting branch bank profitability. This will cause banks to close less-profitable branches and to take associated one-time charges. In many less populated areas, that may be good news for the local community banks.

Branch bank profitability is declining. For a long time, one might have expected the value of branches to shrink based on electronic banking alternatives -- and that is occurring. Now you even can take a picture of check with your iPad and deposit that check electronically. For many people, it was only the "nuisance check" that was keeping them branch-based. Now that the check is not so much of a nuisance, they will be free to engage in basically branchless banking. But regulatory forces are becoming a factor as well.

The branch has fewer profitable products to sell. For example, debit cards were a profitable product for many large banks. But under the Durbin amendment in the Dodd-Frank Act, the product is no longer profitable for large banks (smaller banks are exempted). Home equity loans (HELOC) appeared to be quite profitable-until the banks started incurring losses because they had taken on too much credit risk. Now few banks are offering HELOCs that very many customers can qualify for. The bloom therefore is off that rose.

The branch also is less profitable in a very-low-interest-rate environment because the difference between deposit rates of interest and other rates of interest at which a bank can borrow gets compressed. The way most banks measure deposit profitability, that spread compression makes the branch uneconomic, given its large fixed costs.

Even the credit card business is getting turned on its head. Whereas in the last decade or so banks thought their most profitable customer was the riskiest one, who kept high balances and occasionally paid a late fee, the bloom is off that business model's rose. Those people, like the HELOC borrowers, it turned out, defaulted too often in bad economic times. That should have been no surprise. But apparently it was.

In addition the securitization rules have changed, and it is not possible for banks to pretend they are not on the hook for credit losses. As a result of these factors, the new big bank credit card model is to favor the good credit risk who is a high-frequency card user. Thus the volume of outstandings is likely to continue to decline, and therefore the value of the branch as a source of card business also is likely to decline.

These factors affecting branch profitability are likely to fall most heavily on the banks that have lower deposit-per-branch ratios. The following table shows the deposits and numbers of branches of most of the large U.S. retail banks. The deposits-per-branch is somewhat skewed by the differences in wholesale banking that is done mostly at large home offices or regional centers.

This is true particularly of JPMorgan Chase (NYSE:JPM) and Citi (NYSE:C). Citi, the most extreme example, lists about $150 billion of its $800 billion of deposits in a single branch. Nevertheless, Citi's branch system does appear to be the most cost-effective in terms of deposits, with JPM, Bank of America (NYSE:BAC)and Wells Fargo (NYSE:WF) also looking effective.

The smaller retail banks seem to have significantly less deposit-taking efficiency, and that may harm them as reduced fees make each branch less profitable. The table shows the total deposits, number of branches, and average deposits per branch at most of the large retail banks in the United States. (Data is 2011 data from the FDIC. The precise numbers change fairly quickly, especially as the banks attempt to rationalize their branch systems after years of bloat through mergers and, in some cases, lax management. But in a gross way, the figures represent the state of the U.S. retail deposit-taking industry at this time.)

Large U.S. Retail Banks by Deposits per Branch


Deposits $$B


Per Branch $$M

















US Bank
















Fifth Third




It appears from this table that banks such as U.S. Bank (NYSE:USB), PNC (NYSE:PNC), SunTrust (NYSE:STI), Regions (NYSE:RF) and Fifth Third (NASDAQ:FITB) will have a hard time achieving the levels of branch profitability that the four big banks, JPM, BAC, Wells and Citi can achieve through their larger deposit bases, especially as they rationalize their businesses following the mega-mergers of the last ten years.

In many respects, Citi appears to be the best configured in the retail space in terms of having fewer small branches to shutter. In an ironic twist, this may be due in part to the fact that Citi's weakness shut it out of the acquisition market for the last few years.

Disclosure: I am long JPM.