“E” Stands for “Economics” in Branch System Management
Taking the Emotion out of Branch Rationalization 

By Alan Smith, BancIntelligence

Much like the stores of any retail franchise (witness Starbuck’s recent decision to close 600 locations), a bank’s branch network should be evaluated and rationalized on an ongoing basis; yet, many banks don’t evaluate the economics of their branch network with the frequency and discipline that they should. Often producing negative feelings, rationalization brings to mind one of the most difficult actions that a bank must take – closing a branch – and all of the potential reputational risk that comes with it. 

Branches have historically been viewed in more emotional terms, as opposed to economic, but declining margins are putting more pressure on all aspects of a bank’s business, particularly the effectiveness of its branch infrastructure. Bankers cannot afford to let emotions prevent them from performing analysis that identifies the profitable, marginal or struggling branches within their networks. What you don’t know can hurt you – your bank could be missing opportunities to capture additional revenue in the markets it's currently serving, or it could be compromising the profitability of the overall franchise by subsidizing a branch that’s failing. 

Is your bank evaluating the economics and effectiveness of its branches, and is this analysis discussed at the board level? Does the bank have a methodology in place to measure the profitability and growth potential of individual branches? If it has been more than two years since the bank has reviewed a profit and loss statement at the branch level, then it’s time to drive dialogue that can assist the bank in establishing a process for effectively evaluating the ongoing health of its branch network. Here are some key considerations.

Evaluating the Existing Branch Infrastructure
Every bank, even the high performers, should take a disciplined, systematic approach (every 12-24 months) to branch evaluation. Begin by identifying the branches that are making money and those that are losing money (analyzing data from profit and loss statements, balance sheets, etc. by branch) and create a “watch list” of the branches that are marginal or losing money. The critical next step is to evaluate the markets they serve. Based on an understanding of the defined markets’ respective demographics and competitive landscape, do the “watch list” branches have the market growth potential and related growth objectives to reach breakeven within three to five years? If so, what are the bank’s plans for getting them there? If not, then it’s time to have the tough discussions about consolidation or complete divestiture.

Opening a New Branch
The process of analyzing new markets for branch expansion is similar to the evaluation above, but the most important consideration for opening a new branch is – developing an objective, quantified projection of how the potential branch can contribute to the franchise in a three to five year period. Bankers often have a reasonable understanding of what the average expense will be to open and operate a branch (bricks and mortar, real-estate, staff, spread, etc.), but they don’t often have hard numbers to back up their instincts about the growth potential of the market(s) they wish to move into and ultimately, the projected size of the particular branch. 

So, how does the bank determine growth potential? By systematically analyzing a number of key consumer, commercial and competitive factors in a defined market, such as number of households, household growth, the concentration of business establishments, projected growth of businesses in that area and branch saturation. Armed with this information, banks can predict the relative supply and demand for banking products. If the economics of these factors are favorable, then it’s highly likely that the particular market is a good place to open a branch. 

A Branch is a Business
Banks can effectively serve their communities while making business decisions based on sound economics. It’s time to begin viewing the bank’s branch network, objectively versus emotionally, as a critical component of the business as a whole. Market demographics and the economic factors that impact your bank’s performance, much like the larger retail businesses, are ever-changing, don’t make the common mistake of assuming that that a brick and mortar branch (whether new or 30 years old) should be “there to stay” for the long haul. The bottom line – evaluating and rationalizing branches on a regular basis in order to gain greater insight into how to drive greater profitability and build franchise value has become a necessity in today’s banking environment.

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