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Branch warfare


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Branch warfare

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

Seldom in the history of banking has the announcement of the opening of so few branches occasioned so much frenzy among the ranks of the financial press. That's all I could think on March 13 as I received my third press call for commentary on the not-too-startling news that JPMorgan Chase & Co. would open 90 new branches in 2019 in a number of cities, with some of them being placed in the hottest markets of the Southeast (Charlotte, N.C.; Raleigh, N.C.; Nashville, Tenn.; and Greenville, S.C., most notably). Perhaps all this attention was inevitable, given the public's fascination with CEO Jamie Dimon and the widely held belief among analysts and the press that his actions always signify something larger to come for the banking industry. And indeed, the questions all seemed to come down to one big theme — What does this MEAN?

Well, my reply is succinct and borrows from that noted modern philosopher, Paris Jackson: Chillax, my dudes. (I think that's a hybrid word for "chill" and "relax," but I'm not really sure.) For one thing, Mr. Dimon is certainly not aiming for world domination with this move — those 90 branches (and 700 additional employees to be hired) come on a base of 5,036 branches at year-end 2018, so a 2% addition to the branch count does not seem to qualify as a major branch opening campaign. In addition, there are nine cities targeted for this branch expansion, so this initial effort does not exactly qualify as a blanketing of the countryside with the blue Chase logo.

But I must admit that this move is intriguing for those of us who have known Jamie Dimon for some time and know that his motives are often multidimensional and that he seldom does anything without a payoff in mind. This further expansion outside the Northeast is, I think, an acknowledgement that that space is very crowded from a competitive standpoint but is also a reflection of what we here in the Southeast have known for some time — that the Northeast is increasingly moving here, a long-term trend that has been exacerbated by the caps on deductibility of state and local taxes enacted in the 2017 tax law. As I see it, Mr. Dimon is simply hedging his bets on the path of future regional growth as well as making sure that the Chase name gains greater currency as a regional banking brand and is less identified as that of a large money center player.

I also found the list of cities where the new expansion is to take place to be interesting. The Southeast markets where the new branches are to be placed are all markets that I would categorize as already "disrupted" and about to become more so. Nashville has seen an enormous amount of change as mega-community bank Pinnacle Financial Partners Inc. has expanded its clout with commercial customers there over the last few years, often at the expense of SunTrust Banks Inc. The merger of that same august Southern bank with regional competitor BB&T Corp. is almost sure to produce more fallout (both on the retail and commercial sides), and Chase will be there to offer a very large portfolio of products accessible through multiple channels.

Ditto for Raleigh — which is an increasingly important center for technological incubation both regionally and nationally — and Charlotte, which is already being roiled by the travails of Wells Fargo & Co. and will be even more so as BB&T establishes its new corporate headquarters there. (Similarly, the hot market of Greenville, S.C., is dominated by Wells Fargo, with roughly 30% deposit market share and is fertile ground for change.) The list of non-Southeastern markets is equally interesting — Minneapolis and Pittsburgh are among the new markets for entry — as JPM will be heading into competition with already-formidable large regional competitors. I have to wonder if Jamie Dimon sees something coming that I don't — more large disruptive mergers, perhaps? — and is positioning Chase to be there to pick up the pieces.

The other thing that seemed to throw the press for a loop was the fact that Chase was opening new branches, given that the bank had previously been on a branch closing program and the banking industry as a whole has been shedding branches rapidly in favor of mobile delivery. There seems to be an absolutist mindset within the financial press (and for some in the analyst community, for that matter) when it comes to the subject of bank product delivery — either mobile or physical will rule — and there has not been much middle ground on the subject.

The reality is that branches will retain the banking industry's dominant means of product delivery for some time to come, and these recent moves on the part of Chase are perfectly illustrative of that fact. For one thing, it is not politically expedient (or smart) for banks to close all their unprofitable branches, as many of these reside in communities that are having an increasingly hard time gaining access to financial services, and these "bank deserts" are likely to gain increasing congressional and regulatory attention in coming years.

Even the branch-shy millennials will need to access branches at some point in their financial lives — and my bet is that aging cohort will come to regard branches in the same way that aging Baby Boomers (like me) do. I want a branch nearby where I can do necessary transactions, and a branch presence does make a difference in my financial choices. Online is great, but nothing resolves a problem and lends certainty like a face-to-face conversation.

The Federal Reserve has now thrown a major spanner into the banking works with its unexpected backing down on the path of future rate increases, and the narrative of slowing growth and approaching recession is almost sure to gain greater credibility as a result. The bank stocks are presently bearing the brunt of the Fed's change of direction, and the market seems to be headed back to the "tech stocks good, bank stocks bad" narrative that has prevailed intermittently over the last few years. Indeed, almost all of the earnings guidance that I heard during the fourth-quarter earnings season incorporated at least one increase in rates for this year, and similarly, there was widespread optimism that the economy would support continued healthy loan growth.

Will there now be a rethink of this overall positive outlook on the part of the bank managements? We all should hear more about this in a few weeks, and I will be especially interested to hear the thoughts of CEOs and CFOs on the necessity of competing for core deposits in an environment where rates are no longer rising and where expectations for better loan growth may be disappearing. Will cost cutting once more take center stage, and will branch closures become even more widespread as a result?

I'm pretty sure that Jamie Dimon and his retail managers have already thought about the possibilities, and I'm pretty sure that we will not see any abandonment of these expansion plans as a result of whatever the Fed may do. It's not exactly branch warfare on the part of Chase — more like an expeditionary force sent out to probe the weakness in the enemy lines — but it's an effort that is guaranteed to give us something to talk about in what may be an increasingly subdued year to come.