The future of bank branches is a topic sparking much debate among banking professionals. But most of the industry analysts tend to focus on changes in consumer behavior and the shift toward digital channels. There is, however, an even bigger challenge facing the industry: the sheer number of branches that are too small to be profitable. Many simply aren’t growing at a sufficient rate, and will never reach profitability.
According to Peak Performance data, just slightly more than half (52%) of all branches in the banking industry are achieving acceptable levels of profitability. Over one quarter (28%) are below breakeven, and most of the remainder are at least contributing to overhead even if they are not achieving acceptable ROI.
Half of the branches that are unprofitable today will never cross the breakeven threshold.
That might be tolerable if unprofitable branches were growing at a sufficient rate to become profitable down the road, but they aren’t. Half of the branches that are unprofitable today will never cross the breakeven threshold; they will forever be a drain on resources.
Too Many Small Branches Growing Too Slowly
We analyzed every bank branch in the United States and categorized them by type. After locations with limited services, HQ locations, and supermarket locations, we are left with about 78,000 “traditional” branches. (Note: credit unions were not included in the analysis because data is not available at the individual branch level. It’s safe to assume the same conclusions apply to credit unions, and could be even more pronounced.)
For traditional locations, a branch typically costs between $600,000 and $800,000 a year to run, including overhead and back office support costs. In 2017, total loan income — less loss provision and interest expense, plus deposit-based fees — was equal to 2.85% of the deposit base. Not all loan income is attributable to branches, so it is reasonable to say that branch revenue is slightly lower — about 2.0% to 2.5% of deposits.
A branch needs about $25 million in deposits to achieve breakeven.
For purposes of simplicity, we took the low end of costs ($600,000) and the higher end of revenue (2.5%). Based on those assumptions, a branch needs about $25 million in deposits to achieve breakeven. Branches are often counted on to generate double their cost in revenue. That leads us to a balance level of $50 million in deposits to reach the desired ROI target.
These are reasonable benchmarks for high level analysis. Based on this, 48% of branches today are below desirable ROI, and of those low or unprofitable branches, almost 60% operate at a loss. The real question is, will they ever get there? The outlook is not good.
We calculated the average annual deposit growth between 2014 and 2017 for every individual branch and projected forward. If we focus on branches with less than $25 million in deposits — even if we exclude those under $5 million — a third have negative or zero growth. At current growth rates, they will never reach breakeven and will always be a drain on profitability. Another 14% are “growing,” but so slowly that they will not reach profitability in our lifetime.
As for target profitability, we looked at branches between $25 million and $40 million. These are contributing to overhead and are not achieving their ideal ROI target, but are within striking distance. In that group, 28% will either never hit $50 million or it will take over 100 years to do so at current growth rates.
With $5 Million to
$25 Million in Deposits # of
Branches % of
Branches Average Years to
Hit $50 Million
Flat or Negative Growth 4,898 33% Never
Very Slow Growth 2,003 14% 100+ Years
Remainder 7,737 53% 35 Years
With $25 Million to
$40 Million in Deposits # of
Branches % of
Branches Average Years to
Hit $50 Million
Flat or Negative Growth 3,432 25% Never
Very Slow Growth 435 3% 100+ Years
Remainder 9,973 71% 15 Years
Assessing The Problem
38% of traditional branches are under $40 million in size and are some distance away from desired profitability. The clear majority are either not growing or growing very slowly. What can be done about that?
The first step in managing the problem is to understand the data. If you don’t have the right analytics, then you can’t know where the problems are, and which levers to push to create opportunity. And we encourage you to believe the models, in the same way you believe the credit risk models. They tell you the risks, and sometimes the uncomfortable truths, that need to be confronted.
First, assess the problem. Develop a fact-based, objective view of the issue. Is the branch on track to achieve break even, or desired profitability, in a reasonable period of time? If so, great! If not, be clear eyed about why not.
Is it a market growth issue? If it is, it probably can’t be fixed. Low growth markets don’t suddenly change unless there is significant new investment in business or household growth. You can’t control that.
Is it a site or location (convenience) issue? Poor access, parking or signage can torpedo even a great location. More often, small branches are in a poor location. If this is the issue, address options to relocate or improve. Site issues can have a 20-30 percent impact on the performance of a branch, and multiple types of site or facilities related problems can compound this, increasing the impact. Are you competing against yourself with too many branches in one area?
Is it a problem of not enough distribution in the market? Should you invest in more ATMs or branches because you are simply too inconvenient compared to competitors. This factor alone can result in 40% lower performance.
If none of the above, it’s a performance problem. Is there an opportunity to rejuvenate the branch with better marketing support and sales process? Small branches typically have low transaction volumes – are you using Universal Bankers and using them effectively to generate more sales?
What to Do: Taking Action
The problem is clear: too many branches that have too few customers, and are not growing at a sufficient rate, to ever either achieve break even, let along desired ROI. In the face of declining branch transactions and changing branch channel usage, there are more headwinds than tailwinds.
Targeting $50 million in deposits helps assure that the branch will more than cover fully loaded expenses and help the bank achieve a good efficiency ratio. Many bank branches are well below that with little hope of getting there anytime soon. Generally, a good approach is to evaluate top performing branches and apply best practices to lower performing branches. What if that is not enough?
If the issue is related to the facility or site then downsizing, relocation, consolidation or closure may be considered. If the facility and site are adequate, a stronger emphasis on sales and marketing may turn the corner. In either case, this problem will not easily resolve itself unless there is clear eyed managerial action.