The past 10 years have seen an unprecedented wave of branching by financial institutions. With several thousand branches being opened each year at an average cost of more than $2 million, the industry is collectively wagering billions of dollars on the likelihood that consumers will continue to visit physical branches to fulfill their financial needs. But are the investments delivering the returns necessary to justify their capital investments?
Most institutions approve new branches based on a business case that forecasts a certain level of profitability over a given period-usually a five-year horizon. And, since branch balances are highly skewed toward deposits, deposit growth is often viewed as a proxy for profitability. Common benchmarks for deposit growth fall into the $40M -$50M range over the first five years of the branch's operation, especially at banks. There is evidence, however, that few branches actually meet even the lower end of this range of expectations.
Basis For The Data
Bancography has examined the historic performance of bank branches opened over the past five years, as documented by FDIC deposit statistics. The study addressed only traditional bank and thrift branches. Credit union branches were omitted because credit unions are not required to report deposits at the branch level; in-store and other alternate configuration branches were eliminated given their different objectives; and main offices of newly chartered institutions were excluded since their initial deposit bases can include large sums from early investors. The study also excluded new branches that represented one-for-one relocations of existing branches.
One important note: Because FDIC deposit statistics are reported only once per year on June 30, statistics cited herein that classify a branch as open for a given number of years actually reflect a range of open dates. For example, the statement "branches that were opened for two years" will actually refer to branches open for more than one year and for no more than two years.
If the standard five-year performance benchmark is to capture $40-million in deposits over five years, then few branches are succeeding as forecasted. The median deposit base after five years for bank branches opened between July 2001 and June 2002 was only $17 million; fully half of all branches remained under that level through their fifth year of operation.
To reach the top quartile of deposit growth, a branch needed to reach $28 million in five years; only 25% of branches exceeded $28 million in deposits through five years of operation. Only 14% of branches exceeded $40 million in deposits after five years, with the top decile cutoff at $47 million. So while 10%15% of branches solidly met performance expectations, 85% likely fell short.
The chart, above, illustrates that the difference between top, middle, and bottom performing branches emerges quickly and increases in each successive year.
The increased competition in the industry may account for the slow growth of new branches, as in many markets the rate of branch growth exceeds the rates of deposit and household growth. This indicates that smaller deposit bases reflect a fundamental shift in the industry's dynamics, and imply that banks must consider smaller footprints with lower non-interest expense.
Geography plays a role too: branches in metro areas outperformed those in smaller communities, with median five year deposits of $19M versus $13M, and top quartile performance of $33M versus $23M. Of the ten most active states in terms of branching, new branches in New Jersey and California showed the highest median five-year growth at $30M; while the median five-year deposit growth for new branches in Tennessee and Texas fell below $15M.
The sample shows hundreds of branches exceeding $40M through five years or on target to reach that level through their first two to four years of operation. But the fact that 75% of branches will likely fall short of this popular benchmark confirms that bankers must be more judicious than ever in site selection and branch design, and more willing than ever to support new branches with thorough staff recruiting.
The increased competition in the industry may account for the slow growth of new branches, as in many markets the rate of branch growth exceeds the rates of deposit and household growth. This indicates that smaller deposit bases reflect a fundamental shift in the industry's dynamics, and imply that banks must consider smaller footprints with lower non-interest expense.
The Role Geography Plays
Geography plays a role, too-branches in metro areas outperformed those in smaller communities, with median five-year deposits of $19 million versus $13 million, and top quartile performance of $33 million versus $23 million. Of the 10 most active states in terms of branching, new branches in New Jersey and California showed the highest median five-year growth at $30 million, while the median five-year deposit growth for new branches in Tennessee and Texas fell below $15 million.
The sample, above, shows hundreds of branches exceeding $40M through five years or on target to reach that level through their first two to four years of operation.
But the fact that 75% of branches will likely fall short of this popular benchmark confirms that bankers must be more judicious than ever in site selection and branch design, and more willing than ever to support new branches with thorough staff recruiting, sales training, and marketing initiatives.
Steven Reider is the founder of Bancography, Birmingham, Ala. Bancography offers software tools and consulting services to assist financial institutions with market analysis, branch planning and profitability. For info: www.bancography.com.
