Capital One keeps closing branches, even as rivals open them

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Even as some of its rivals have concluded that they need to add branches to attract more deposits, Capital One has stuck to its strategy of aggressively closing branches and gathering the bulk of new deposits online.

The McLean, Va., company, with roughly $373 billion of assets, has shuttered more than half of its branches over the past decade, including nearly 50 in the second quarter alone, according to a recent analysis by Sandler O’Neill & Partners. It now has fewer than 500 branches in eight states and the District of Columbia.

The only bank that has reduced its branch count anywhere near the same rate is HSBC USA, and even it seems to have concluded that the cuts may have been too drastic. The U.S. arm of the British banking giant HSBC said in June that it plans to add dozens of new branches over the next four years, largely in an effort to accelerate deposit growth.

But unlike HSBC, which has seen its total deposits decline slightly in recent years, Capital One appears to have suffered few ill effects from the branch closures.

Over the last four years, its total deposits have increased by an average of 5% per year, according to financial filings. By contrast, the average deposits among 31 big banks in its peer group has grown at a 3.8% clip over that same time, according to an analysis of Federal Deposit Insurance Corp. data. The bulk of its deposit growth has come via Capital One 360, its digital-only arm that it acquired from ING Direct in 2012.

Paul Schaus, the CEO of the consulting firm CCG Catalyst in Phoenix, said that Capital One has been able to sharply reduce its branch count because its “digital strategy is successful.”

Its challenge is keeping the momentum going in the face of stiff competition from other digital only banks, such as Ally Financial, and traditional banks that are employing all sorts of strategies to attract more customers.

After spending several years pruning branches, JPMorgan Chase, Bank of America and Fifth Third Bancorp are all adding scores of new branches in markets where they have little to no presence now, while Citizens Financial Group and PNC Financial Services Group have recently built online-only banks aimed at gathering deposits well outside of their branch footprints. Like Ally and Capital One 360, these digital-only versions of Citizens and PNC are trying to win depositors by paying higher-than-average rates.

Another challenge will be keeping deposit costs in line.

Over the last decade, its cost of deposits has actually shrunk from 55 basis points over the industry average at the beginning of 2010 to 43 basis points at the end of May, according to Sandler O’Neill analysts. Capital One itself warned in its most recently quarterly report that competitive pressures could force it to raise rates, and Sandler O'Neill has told investors to brace for higher deposit costs.

To date, Capital One’s “shift from branches toward direct banking has not adversely affected its deposit pricing,” Sandler O’Neill analysts said. “However, we do believe that [Capital One’s] higher mix of online deposits will put upward pressure on its deposit costs.”

To be sure, Capital One Chairman and CEO Richard Fairbank is still a believer in brick-and-mortar. At a recent industry conference, he said that customers can often get to the “one-yard line on their financial decisions” using digital channels, but that they still want to visit branches for advice or solutions to problems.

Capital One is also committed to opening more if its Capital One cafes, gathering spots where people can work or socialize over coffee and, if they are interested becoming Capital One customers, learn how to open accounts digitally. The bank has opened about three-dozen of these cafes in recent years, mostly in markets where it has no branches, such as Boston and San Francisco. Fairbank and other Capital One executives have indicated that the bank is planning to add more cafes, including some in markets where it does have traditional branches.

Some industry experts have questioned whether the cafes are worth the investment.

Ron Shevlin, director of research at the consulting firm Conerstone Advisors, said that Capital One’s digital offerings are every bit as sophisticated JPMorgan Chase’s, Bank of America’s and Citigroup’s and suggested that the bank may not need the cafes to drive deposit growth.

“The question is are the cafes picking up the slack or are the digital offerings picking up the slack?” Shevlin said. “I’d argue the digital offerings are picking up the slack.”

But others observers said that they expect Capital One to stick to its strategy.

“They are progressive,” Schaus said. “They’re trying to bring banking to where the consumer hangs out.”

Bain Rumohr, senior director of banks at Fitch Ratings, added: "We expect Capital One to continue to keenly focus on its unique, hybrid banking model, utilizing cafe-type branches throughout its retail footprint while continuing to invest heavily in its already-strong national digital platform.”

A Capital One spokesman did not comment on the performance of the cafes, but said in a statement that the bank “continually works to evolve and adapt to meet changing customer needs, preferences, and behaviors."

“We’re optimizing our branch network to ensure that we’re operating as efficiently and effectively as possible, while continuing to provide high quality products and services to our customers across a variety of channels, including retail and online.”

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