Continuing its retail expansion, Comerica Inc. is extending a three-year branch-building program.
To grab the personal business of its corporate customers, the $58 billion-asset Detroit company has built 60 branches since late 2003, or 10 more than it originally envisioned. This year 30 more will open — 14 in California, nine in Texas, five in the Phoenix area, and two in Michigan.
"It just seemed like the perfect time for us to expand our footprint and really build on the successes we are having in Texas and California," Connie Beck, the executive vice president of retail banking, said in an interview last week. "Our banking center expansion is a corporate strategy. It is not a retail bank strategy."
Comerica's original three-year plan called for building 50 branches, but another 10 branches were added in 2006, the last year of the plan.
Nearly all the new offices are outside its home state of Michigan, a trend that corresponds to a pattern that has emerged among other companies in that state. (See story on page 1.)
Ralph W. Babb Jr., the chairman and chief executive of Comerica, said it expects to have 512 branches by the end of 2010, 46% of them in Michigan. At yearend it had 393 branches, 62% of them in Michigan.
At an analyst conference Jan. 30, Mr. Babb said he expects to spend $60 million on new branches this year — double what Comerica spent last year and four times what it spent in 2005.
The strategy has pumped up revenue, as well as expenses.
In 2005, Comerica's retail banking revenue rose 3.4% from 2004, to $816 million. Last year it rose 2.3%, to $844 million. The retail bank is now delivering about 30% of its parent's total revenue.
But while revenue has climbed over the last three years, the retail bank's earnings contribution has steadily declined. In 2004 retail banking made up 21.7% of the company's earnings, but by last year that figure had dropped to 15%. Comerica attributes the drop to its ongoing investment in opening branches.
The initial cost to open a "banking center" is between $2 million and $3 million. The branch then costs from $750,000 to $900,000 in its first year of operation. Comerica aims to make each of its new branches profitable within 18 months.
Anthony R. Davis, an analyst at BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc. said in an interview last week that "unquestionably it makes sense from a financial front" for Comerica to build branches.
"There have been gusts blowing in the face of this bank, and one of them is the Midwest and auto industry, and the other has been the housing market, particularly in California," Mr. Davis said.
However, Kevin St. Pierre, an analyst at AllianceBernstein LLP's Sanford C. Bernstein & Co. LLC, said the banking industry faces "an increasingly difficult deposit environment" this year.
"We believe Comerica's future branch expansion will be less successful than that of recent years, and rates of return close to management's goal of 20%-plus will depend on the bank's ability to take share and drive deposits through branches concentrated in the higher growth markets of California and Texas," Mr. St. Pierre wrote in a research note issued last week.
However, Mr. Davis and Mr. St. Pierre praised Comerica's diversification away from its heavy reliance on Michigan's economy.
The company also is upgrading existing branches. Last year it moved seven either to street-level locations or to higher-visibility spots, and this year it expects to move five more.
"That's just the origin of Comerica, which is a business bank, so no apologies for that, but it was a different time with a different strategy," Ms. Beck said.
Comerica has not ruled out expansion through acquisition, but "right now the prices are pretty rich," she said.
"Our focus is the internal growth," Ms. Beck said. "We have been focusing on a build-out or de novo strategy because we could build in the neighborhoods we chose. We could create the sales culture that works well for us and put the processes and systems in that work for us."
