Banks can struggle to find their footing in large metropolitan markets.
Webster Financial in Waterbury, Conn., is finding that out firsthand a year after announcing a major expansion in Boston. The $26 billion-asset company opened 17 new branches in the city early last year, largely by taking over leases from Citigroup.
Management used a quarterly conference call last week to update analysts on how the expansion is going. On the positive side, Webster met its expectations for deposit account openings.
Webster, however, did not hit its target for total deposits — though the new branches have brought in more than $200 million in deposits — and loan growth has been slower than expected. At the same time, the expansion cost the company about $22 million last year, and management said it will take longer than originally forecast for the effort to turn a profit.
“Instead of breaking even sometime in late 2017 … we figure that we’ll go to economic profitability by about [half a cent] a quarter,” Jim Smith, Webster’s chairman and CEO, said during the conference call. “So that means you’ll get there sometime in late 2018 at this point.”
Webster’s issues epitomize the hurdles that growth-minded banks face as they enter the nation’s biggest cities, industry experts said.
“It is really tough to compete in a metropolitan market,” said Joseph Cady, a managing partner at CS Consulting Group in San Diego. “How do you do a better job in a place like Boston? It comes down to your business model and having a value proposition to make people bank with you without getting into a price war.”
Webster’s management pointed to competition as a big reason for the bank's early struggles.
“When we entered the market a lot of our competitors were offering high interest rates on deposits, and a lot of the offers were very competitive,” said John Ciulla, Webster’s president. “So I think the economics out front were impacted by competition.”
The Boston area had nearly 140 banks competing for $311 billion in deposits on June 30, based on data from the Federal Deposit Insurance Corp. In comparison, Connecticut, where Webster has 13% deposit market share, has 62 banks with $129 billion in deposits.
Webster also took its time getting the right personnel in place. That was important since the company picked up only branches from Citi; the deal excluded loans and deposits.
“I think about business banking as being a key part of the strategy and … it takes some time to build momentum,” Ciulla said.
Webster seemingly had to choose between taking shortcuts to reach near-term targets or postponing certain goals to focus on building relationships, industry observers said. Staffing is even more important as customers shift their attention to other delivery channels.
“The front-line people have to be better than they’ve ever been in an environment where branches are less important,” said Trent Fleming, a consultant in Germantown, Tenn. ”They really have to be able to handle a wide range of customer needs with a solution mindset.”
“Are you going to try and outprice someone or go out there to try and add value?” Cady added. “It takes time to line up the right loan officers.”
But it can be difficult to identify and land customers that will stick around, especially in big cities where a high percentage of the population is transient.
“Only 30% of bank clients tend to want a relationship,” Cady said.
Smith made it clear during the quarterly call that his team is committed to keeping the branches open even as Webster plans to close eight locations in other markets during the second quarter.
“We still look at this as a broad, marvelous opportunity,” Smith said when asked about paring back the Boston network. “Basically, we like the position that we have. We like the offices that we have.”
Webster says it also remains confident that it can accelerate its growth and still hit its longer-term goals of having $1 billion in deposits and $500 million in loans over five years, Smith said.
Ciulla added that Webster’s loan pipelines are expanding.
Webster also addressed the issue of expenses, telling analysts that the cost of operating the branches is falling by about $500,000 a quarter. Management aims to reduce costs even more.
“We’re going to have opportunities, if we choose, as leases mature, to move to smaller locations,” Smith said, including opportunities to target underserved markets. “Some of the offices are pretty large. We’ve actually had some success talking about subletting … so we can defray some of that expense. That should help us along the lines to earning economic profit.”