Is Branching Today at the Edge of Reason?

By Arp D. Trivedi, DEI Incorporated

The current economic state leaves much to be desired in terms of growth initiatives. Most financial institutions reel from lower capital positions and some teeter on the brink of insolvency. Branching at this time seems to be the least important aspects of a strategic plan. In such a disorderly macroeconomic state, it is imperative that branching be part of a Western banker’s strategic plan. Whether it is expansion through branching (build or buy), optimizing the operations of an existing branch, or relocation and/or closure of a branch, the contemplation of location analysis and feasibility is paramount in the current market.  What is more important, and beyond reasonable, is great execution.

Assemble the location analysis and feasibility using three key ingredients: quantitative data, qualitative research, and financial scenario building. In the quantitative analysis, the demographic, competitive, and loyalty (your own customers) tranches of data are of utmost importance. For qualitative analysis, understanding the microeconomic realities of a given area – planning, economic development, transportation and infrastructure – fall outside of the hard, numerical facts but should also be documented and used in the final ranking. Finally, building the correct financial scenarios and identifying the exact timing and priority of moves is paramount. 

Your Existing Branches
This is usually the toughest of the decisions. Branches are like children. Banks birth them with great care and due diligence. Orphaning a branch is not easy but not orphaning a branch could lead to disaster. Understanding the value of a branch is more than just considering the transaction volume or even the sales. Really understanding the market, determining whether or not the current customers are the right customers, and assessing the physical presence of the branch is all critical. Finally, as a group, when the facts are clear, the cord must be cut.

Other People’s Branches (OPB)
In the movie, Other People’s Money, a ruthless investment banker leverages debt to steal away companies, break them up and sell the pieces, and make a tidy little sum. Other People’s Branches is a bit different, but, in many ways, similar. The goal is to buy up the remnants of branch networks and make them part of your institution. Leveraging Other People’s Branches is not a new phenomenon. However, this latest round looks to leave many branches available compared to recent branch downsizings. First, a word of caution, don’t buy on price alone. Assessment of the same aforementioned factors is crucial to the analysis. Network analysis (consideration of many locations at once) will pit the branches being considered for purchase against the existing network. A second word of caution, do not sacrifice on location. Understand past performance. Critically determine the ingress/egress, site lines, and traffic patterns for the given branch. Do not be irrational in the decision-making process. Other People’s Branches do not need to become your bank’s burden. 

De Novo Branches
Given all of the potential in the first two types of branches, why then should a bank consider a new branch? Looking at your existing branches and Other People’s Branches will lead to decisions. The culmination of decisions may still leave gaps in your retail market footprint. De novo branches may play a role here. Also, hub branches may be new in that they meet the needs of a more regional branch system, serving as a key commercial or mortgage center.

The need to address a strategic branching plan is here and it needs to take place now. This risk mitigation strategy will fortify the institution to face yet more cycles, both good and not so good.

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