The banking industry has a lot of room to close more branches, even after shuttering thousands of offices in recent years.
Banks closed nearly 5,000 branches between mid-2009 and the middle of last year, based on the most recent data from the Federal Deposit Insurance Corp. More closures are expected as an increasing number of institutions, including some large regionals, decide that further cuts are necessary.
Many of the biggest cuts might not take place until executives improve other ways of serving clients and selling products, including online and mobile banking, industry observers said.
"Fundamentally, the industry is at an overcapacity," said Kevin Travis, a managing director at Novantas, a consulting firm. "There's too much infrastructure, with too many players and too many expenses chasing too little revenue."
Banks still have more than 90,000 branches, but that number could fall by 15% in coming years, said Mike Mayo, an analyst at CLSA.
The biggest wave of branch cuts so far has come from large national banks, such as Bank of America, that had more room to trim, said Chip MacDonald, a lawyer at Jones Day in Atlanta. Such institutions "needed to rationalize their structure" after years of acquisitions, he said.
"You've got to save costs wherever you can," MacDonald said. "It's hard to make money in a low interest rate environment, so everyone is looking at their delivery systems."
More regional banks are contributing to the trend, though they may have a harder time making cuts, industry observers said.
Regionals fall into an unenviable position of being too small to benefit from the brand awareness and technology advantages of bigger banks, Travis said. At the same time, they are too big to feel like a community bank, he added. Regionals also tend to rely more on branches to serve clients.
So management teams are likely fearful that they could do more harm than good by pursuing large scale closures, industry experts said. Instead, executives may look to cut jobs and the size of branches before shutting an office down, Mayo said.
"Getting the balance right is tricky," Mayo said. "It's an evolving process. Banks that do it right are constantly monitoring customer engagement. There's no one size fits all for the industry."
Regionals are being mindful to acknowledge that reducing branches is about more than just cutting costs, industry observers said. For many of those banks, such efforts are also a way to free up more funds to reinvest elsewhere.
KeyCorp in Cleveland began cutting branches several years ago as part of an effort to cut costs and improve revenue. Executives at the $92 billion-asset Key recently said they could continue to reduce its branch network by up to 3% annually, noting that some of those savings are being put to work in areas such as payments.
Zions Bancorp. in Salt Lake City recently announced plans to close roughly two dozen branches and eliminate up to 7% of its staff. The $58 billion-asset company's management, which has been struggling with elevated expenses, is also in the midst of upgrading its core systems and front-end commercial and commercial real estate loan origination platforms.
Banks "are trying to find investments in other areas," as they reduce branch count, Travis said.
Executives are concerned about making sure other channels, such as mobile and online, can serve clients before shuttering a large number of branches, said Bob Meara, a senior analyst with Celent's banking practice.
"Closing branches is a very expedited way to cut costs but it doesn't help revenue," Meara said. "Branch densities aren't going to change drastically until banks become good at selling and servicing digitally. Most stuff gets sold in the branch."
Customers want to do more digitally, but the banking industry's technology hasn't fully caught up, said Chad Borton, head of Fifth Third Bancorp's consumer bank.
Fifth Third recently said that it would close or sell about 100 branches, or roughly 7% of its network, and shed another 30 sites that were intended to eventually have offices. The move was necessary as customer preferences continued to shift to digital channels, Borton said. From January 2014 to last March, the $138 billion-asset company has seen a 75% increase in clients using mobile deposits.
The Cincinnati company's branches are also being built and retrofitted to have nearly half the size of branches built five years ago, while operating at about two-thirds of an older branch's cost, Borton said. The new design uses a universal banker model and relies more on technology, such as Smart ATMs, where clients can complete 70% of the transactions that could be handled by a teller.
"As banks build the capabilities to handle a broader set of activities, customers will continue to adopt new ways of banking," Borton said. "That will lead to further consolidation until we reach a steady state."