Branch Banking Is Still a Moneymaker for Banks

With the proliferation of Internet and mobile banking, you might think the old-fashioned branch bank may be falling out of favor. While it's true that some banks have closed branch locations to save money, evidence abounds that bank branches are still popular with customers -- and lucrative for banks.

A consumer favorite
A soon-to-be-released report by Fitch Ratings addresses the subject of branch banking, noting that banks have historically viewed opening branches as a way to reach out to customers. The report states that bank mergers over the years have caused a glut of branch locations in many markets, making them unprofitable. The agency sees a slow but steady decrease in the number of branch locations, with a growing reliance on technology to take up the slack.

In reality, this scenario doesn't seem imminent. A study conducted by Chadwick Martin Bailey earlier this year shows that customers value convenience when it comes to banking, and branch banking tops the list. Of more than 1,400 survey participants, 67% cite nearby branch locations as most important, while 43% consider online services paramount. It's interesting to note that only 35% see ATMs as crucial to their banking convenience.

Banks spread their influence through branches
It appears that many banks are aware of this situation, and several have been ambitiously opening branches and making acquisitions to increase their reach. Last summer, JPMorgan Chase (NYSE: JPM  ) announced plans to open up to 2,000 branches, concentrating on areas where Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) predominate. The bank is looking to stockpile deposits, as well as extend its line of products aimed at businesses and investors.

Smaller but equally ambitious banks are also spreading out. Just recently, M&T Bank (NYSE: MTB  ) agreed to purchase Hudson City Bancorp (Nasdaq: HCBK  ) for $3.7 billion, instantly plumping its branch network by 135 locations throughout the Northeast. Despite Hudson City's balance-sheet troubles, M&T expects the acquisition to be immediately accretive to its own bottom line.

In the southern part of the U.S., JPMorgan, PNC Financial, and BB&T are looking to expand in southern Florida, with the latter two banks eyeing recently turned-around BankUnited to help them with their agenda.

One bank bucking this trend is Bank of America. In an effort to cut costs, the bank has closed approximately 160 branches, with plans to sell or shutter 750 others over the next several years.

Fool's take
Branch banking is still very important to a bank's bottom line, and popular with customers. That may change, as banks offer more Internet and mobile options. Historically, these institutions have been slow with these technological innovations, so the threat to branch locations seems minimal, at least for the foreseeable future.

As for Bank of America, the bank still has about 5,600 branches, a handful more than JPMorgan -- which seems intent on catching up to Wells Fargo's 6,200. In the short run, cash from branch sales in addition to cost savings may temporarily bolster the bank's balance sheet. In the long run, however, the bank may suffer -- particularly if its two closest peers continue to expand. The value of branch locations just might be another lesson that B of A has to learn the hard way.

Thousands of banking locations aren't the only reason Wells Fargo has been called The Only Big Bank Built to Last. Check out our special free report on one of Warren Buffett's favorite investments.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Wells Fargo, PNC Financial Services, Bank of America, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Wells Fargo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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