Why the Largest Banks are Re-Embracing Branch Expansion

The article about branching activity carries implications for all tiers of the industry. For community banks, the crowding in some of the largest metro areas may indicate pursuing secondary-sized markets instead and ceding the largest markets to banks with the capacity to build marketwide coverage; or alternately, remaining rigorously focused within a single corridor of a larger metropolitan market.

Total branch counts across the U.S. have declined steadily over the past 15 years, to the point that there are now 17% fewer branches in the nation overall than in the peak year of 2010. Large banks have led the way in branch reductions, consolidating thousands of branches, often in the wake of mergers that left significant overlap across the networks of the acquiring and acquired institutions.

Yet even as an assortment of industry pundits proclaimed the declining aggregate branch counts as presaging the imminent elimination of that channel, a countertrend began to emerge, gaining momentum over the past two years to where now many of the nation's largest banks have announced specific plans for widespread branch expansion.

And this raises an obvious question: why the turnaround? To answer that, it is important to understand two key facts. First, branch expansion never ceased; it abated. Even institutions that were in aggregate reducing branch counts still continued to add branches incrementally, to address emerging-growth corridors or franchise gaps within certain geographic regions and/or demographic segments. Second, net branch counts across the industry continue to decline, so the expansion initiatives in some markets are not offsetting contractions in other markets.

Still, given the rise of digital channels and the pace of branch closures of recent years, the expansion commitments are notable, and perhaps surprising. Large regional and national banks, such as Chase, Bank of America, Fifth Third, PNC and Huntington, have all announced significant branch expansion efforts in recent years. Even Wells Fargo, finally having fulfilled the requirements of a consent order that constrained growth, has also announced a sizable branching initiative.

Returning to the question of "why," there are several factors driving the expansion initiatives.

For banks with nationwide aspirations, there are certain "got-to-be-there" markets, including all the top "x" metropolitan statistical areas by population. Different banks will define that "x" differently, but whether it's a top-20 metro or a top-50 metro imperative, the handful of banks striving for true nationwide presence realize that an institution cannot claim that presence without at least some presence in each of those top metros.

Wells Fargo's commitment to the Chicago market exemplifies this trend. Chicago has no shortage of banking offerings, but as one of a handful of banks with the wherewithal to create true nationwide presence, can Wells Fargo bypass the nation's third-largest market, and the financial and business capital of the entire Midwest? Because our industry emerged in an environment of legally mandated state boundaries, we tend to still think of franchises in a regional context. But extrapolating that to the nation's largest retailers reveals the unusual nature of banking: can you imagine if there were no Walmart or Target stores in Chicago or Los Angeles? No Apple store or AT&T outlet in Dallas or Denver?

There are 36 MSAs in the U.S. with at least two million residents, and these markets combine to hold 49% of the nation's total population. Thus, if a bank can establish presence in those 36 markets, it can claim availability to half the nation. Others may frame the objective as top 30 markets, top 50, or top 100; but the general intent is to build a network that leverages the disproportionate concentration of U.S. residents into a subset of large metro areas.

One benefit of this approach is that at some point it becomes less expensive to purchase advertising on a national basis than market-by-market. But if you're purchasing advertising on say, the NFL national Sunday afternoon game, then it's beneficial if the majority of consumers seeing that ad can visit your institution. Once the institution commits to that national advertising platform, each additional market it enters amortizes that cost lower on a per-prospective-customer basis; and the larger the next market the bank enters, the more those costs amortize downward. This explains, for example, Chase's aggressive foray into the Kansas City market.

For regional banks, a primary motivating factor is economic diversification; specifically seen in the form of banks with origins in what are now low-growth markets seeking to build presence in higher-growth markets. Thus, for example, PNC's stated goals of expanding in Florida and Texas; Huntington's pursuit of the Carolinas; and Fifth Third's branching plans in Atlanta. In each case, expansion will avail those banks of markets with greater household growth rates than their home markets, which still house some of their largest concentrations of branches.

Across all these cases, one commonality in these branching initiatives is that they all involve scale. These are not single line-of-business offerings, such as a loan production or wealth management outpost, to address a narrow slice of the market. Rather, in each of the above-cited cases, the bank's announcements regarding their new target markets have indicated broad market coverage, presumably in pursuit of a leading market position. The large banks' new-market initiatives are occurring in the framework of dozens of branches, not one or two.

This may have been most overtly stated by Wells Fargo, which quantified its goal for the Chicago market as having a branch within 15 minutes of 95% of the market's populace. Other banks have not publicly stated their objectives with such precise convenience/coverage measures, but the intent remains clear: to become a leading retail competitor within their respective target markets.

Much of this harkens back to the network effect, the empirically demonstrable phenomenon that large branch networks capture a disproportionate share of balances. Bancography has written extensively about the network effect [see "Revisiting the Network Effect: Despite the Rise of Alternate Channels, Dense Branch Networks Still Win the Day, Fall 2024]. To summarize, the principle holds that a bank with eight branches in a market gains more than twice as much in deposits as a bank with four branches in the same market; and those disproportionate gains continue accruing (so 16 branches gain more than twice as much as eight, and so on).

The network effect reflects that the perception of ubiquity helps fuel consumer choice, both in terms of perceived convenience ("you're where I live, where I work, where I shop!") and in terms of general brand awareness: the more the consumer sees a bank, the more likely that bank will come to mind the next time a need arises. There may even be benefits in terms of perceived fiscal stability and product breadth; the consumer awarding greater trust to an institution of seemingly greater scope.

Further, just as the banks with national aspirations can leverage the ability to amortize nationwide advertising costs over multiple markets, a bank with broad coverage of any given metro area can similarly leverage the ability to amortize marketwide ad costs over multiple branches therein.

For community banks and credit unions, the swell of larger banks entering major metros brings challenges rippling to the smaller tiers of the industry. Faced with additional entry from national and regional brands, smaller institutions in larger markets will face greater need to promote their true differentiating traits, and the benefits a smaller provider can offer. In terms of their own expansion plans, though, the heightened interest of the regional and national banks in the largest metros may direct smaller institutions to instead pursue a smaller tier of markets, even while still ardently defending existing positions in large metros.

This could lead a community bank or credit union in North Carolina to pursue, for example, Wilmington or Asheville instead of Raleigh or Charlotte; in Washington to pursue the Tri-Cities instead of Seattle; or in Georgia to pursue Macon or Savannah instead of Atlanta. Pursuing those second-tier markets also provides a much easier path to market coverage. A bank with 20 branches could add four branches in Macon or Savannah and claim reasonable coverage of those markets, an investment well within the capacity of a bank that size; whereas gaining marketwide coverage of Atlanta would likely require an implausible tripling of the bank's branch network, at a minimum.

The pursuit of the nation's largest metros by the nation's largest banks may just be getting started, and as more banks consider nationwide or multi-region presence, the trend will bring repercussions to all tiers of the industry.

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