In sports, home-field advantage can be the difference between winning and losing. Whether its the familiarity of staying in your own home the night before the game, or the support from the friendly home-field crowd -- or perhaps the absence of an antagonistic crowd on the road -- home-field advantage is real (link opens a PDF). Home teams are just more likely to win.
But this isn't sports... this is business
Every year, the FDIC releases data for every metropolitan area in the U.S., breaking down the market share of every bank in any region. You can look up your own home town at the FDIC's website here.
After playing around with the FDIC's data, you'll find that a few institutions keep coming up over and over again, seemingly dominating every market in the country. Time after time, you'll see Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC), among others, at the top of the lists. They don't call them "megabanks" for nothing, I suppose.
This data, and these two banks in particular, present an interesting opportunity to take a look at home-field advantage in banking. Neither bank is headquartered in New York City, instead choosing to call regional finance cities their homes. They are also the only major banks headquartered in their respective hometowns.
If there is a home-field advantage in banking, then this will surely show it.
Off to Charlotte and San Francisco
Let's dive right in. First up we have Charlotte, N.C., headquarters of Bank of America, the Charlotte Hornets, and the Carolina Panthers.
Here's the breakdown:
With more than 3.8 times the deposits in Charlotte as Wells Fargo, Bank of America makes a strong opening case for home-field advantage. These two banks have a virtual monopoly on the market; the third place bank has just 2.83% market share.
Let's move to San Francisco, home of Wells Fargo, the San Francisco 49ers, and San Francisco Giants. If the theory holds true, we should expect to see Wells Fargo with a commanding hold of its home market's deposit base.
Surprisingly, Bank of America controls more than double the deposit share in the San Francisco metro area than Wells.
This explodes our home-field advantage theory in banking. I would hypothesize, however, that in smaller cities and towns, it's highly likely that a locally headquartered regional or community bank would more often than not command a majority of the deposit market.
The bigger picture about deposits
The significance of deposit market share is, to be honest, not that critical to a bank's investment outlook. Where deposits come from are much less important than their costs.
For example, Wells could easily offer a special, high-interest savings account to San Francisco residents, and increase its market share. But by doing that, Wells would also be increasing its cost of funds. Higher cost of funds means lower profits.
Warren Buffett actually points to that exact fact when explaining why he considers Wells Fargo the best bank in the U.S. Wells has such a strong and low-cost deposit base that it creates a competitive advantage over its competitors.
While home-field advantage may not be all that useful of a concept for bank investors, a bank's deposit base is arguably the most critical component of the business. For mega banks like Wells Fargo and Bank of America, the ability to collect deposits virtually anywhere is a major advantage that lowers the bank's cost of funds, and can contribute to greater profitability over the long term.