Branch growth used to be a fairly simple concept. If a financial institution wanted to grow its presence in a particular market, more branches were built. Today, growth strategies are more complicated. The economic landscape looks vastly different than it did a decade ago, and very few institutions are in a position to build new branches.
Fortunately, value growth via the branch is far from dead. It simply requires a different perspective. The challenge for bank leaders in 2013 is to determine the best strategy to drive their branches forward into a new era of banking – whether it’s increasing market presence through acquisition, consolidating branches for efficiency or selling facilities to offset weak performance.
Expanding Branch Presence Through Acquisition
It’s a buyer’s market, given the number of bank failures in the last 24 months. But, while institutions purchasing a branch have a tremendous market advantage, it doesn’t mean it’s the best decision. Here’s why:
Many executives make the mistake of focusing the bulk of their due diligence analysis on fiscal health. Bank leaders must first ask themselves whether or not a branch purchase is, in fact, the right path to growth. Perhaps instead, financial institutions might be better served by optimizing their existing branch networks. By analyzing key metrics such as core deposits, revenue and accounts per office, executives may find they can increase revenues and market presence from within.
Justifying branch acquisitions often involves more than just citing the need for financial gain. The business case for adding branches might be to attract new types of customers; in others, it could be to sell new offerings or establish a new business hub in a region. Alongside these incentives, institutions must evaluate what types of customers they serve well today and determine if the target branch is complimentary to those strengths. This forward-thinking analysis will expose incompatibilities, and improve the chances of a branch acquisition being profitable.
Consolidating Branches For Increased Efficiency
The stigma attached to branch consolidation no longer applies in today’s banking environment. If timed correctly, consolidation can be a strategic, positive move towards growth. The key is knowing when to take action, and that requires keeping a constant watch on market position and market growth potential. Having up-to-date insight into which branches are operating at under-capacity levels and which markets and sectors are becoming oversaturated by competition, allows banks to easily identify consolidation targets before profit losses pile up.
Once target branches have been identified, bank leaders need a strategic plan to minimize customer attrition. That takes knowing the most profitable customers and assigning the most knowledgeable associates to the task of migrating customers to other branches. Proactively working to retain VIP customers and making sure that skilled associates are in place to serve the consolidated customer base will go a long way in minimizing runoff.
Selling Branches To Offset Weak Performance
Branch selling has become a tactical necessity for many institutions. But, like branch consolidation, it’s often a pit stop on the way to growth. With that in mind, the sale of branches that are underperforming should be handled just as strategically as a branch purchase. The ability to make branches more attractive for acquisition can be the difference between trimming the fat and holding onto dead weight.
One of the first steps in a successful branch sale is determining urgency based on the selling institution’s needs. A bank that needs to quickly improve capital ratios may have a shorter timeframe for success than a bank that’s simply trying to improve profitability. Regardless, banks must be prepared to mitigate the risk of losing high value customers to the acquiring institution. Many of these customers may be hesitant to leave a convenient branch location, thereby making them attractive targets for attrition. For that reason, bank or branch executives should identify select customers they want to transfer to other branches, and have a plan for motivating those customers to do so.
The role that volume and real estate will play in a bank’s selling strategy should be carefully weighed. If a bank is trying to sell a group of several branches, it may make sense to package loans, deposits, and brick and mortar locations for one or two large buyers. If it’s just one or a few branches, banks should consider selling loans, deposits and facilities separately. And, given today’s commercial real estate climate, bank executives need to anticipate a scenario where they are not able to easily offload their physical location to another bank. In those scenarios, facilities may be more easily marketed to another type of buyer, for purchase or lease.
New Era, New Insight
The success of branch banking can no longer be defined by the number of new locations. Today’s economic realities demand banks grow through branch optimization, acquisition, rationalization and strategic closures. Those banks that make calculated decisions rooted in objective insight will be able to identify growth opportunities with speed and accuracy.
Andrew Grinstead is senior vice president and senior bank strategist of bank intelligence solutions at Fiserv. Contact him at Fiserv at 800-846-6681 or andrew.grinstead@fiserv.com.
