Branches Thrive With Consolidation
Consolidation of FDIC-insured commercial banks and thrifts into fewer and larger companies represents a long-term trend with far-reaching business and regulatory implications. But amid charter consolidation, a steady expansion in the number of U.S. bank and thrift branches is also underway that is itself changing the face of the banking industry. Recent research published under the Federal Deposit Insurance Corp. Future of Banking Study showed that while the number of commercial banks declined by 29 percent from 1994 through 2003, the number of bank branches increased by 15 percent over the same period to almost 67,000. (This study only included commercial banks.) The study showed that despite consolidation, branches remained a valuable resource in helping banks generate fee income and possibly better manage their overhead expenses.
New data published as part of the 2004 Summary of Deposits (SOD) release show that the expansion of bank branching continues in place. Further, analysis of the mid-year 2004 data provides yet more evidence that bank branch networks are generally associated with lower expenses, higher fee income and higher profitability. At the same time, the 2004 data show that charter consolidation and out-of-state branching are leading to more highly concentrated deposit markets in a number of states and metropolitan areas, which could restrict the ability of large institutions to acquire more branches given existing state and federal caps for deposit market share.
Branch banking continues to expand, even as the overall number of banking institutions continues to decline. Large institutions in particular continue to branch out geographically, and, by far, new brick-and-mortar offices account for most of this new expansion. Still, the manner in which banks are attempting to reach their customers continues to evolve, as the fastest growing types of branches are those located in retail establishments.
Bank branching continues to thrive because it appears to offer clear financial advantages, at least to certain classes of banks. For small institutions, non-interest income, interest expense and ROE improves with larger branch networks. While similar advantages may accrue to larger institutions, their sparser population makes it difficult to determine whether their branch networks provide them with clear advantages.
The branching data also reflect an increase in deposit market concentration, both at the state level and in certain metropolitan areas. While a number of banks are approaching their market share caps in certain states, there still appears ample room for institutions to grow through merger and acquisition activity.
The above article was taken from an Oct. 20 report by the FDIC at http://www.fdic.gov/bank/analytical/fyi/2004/102004fyi.html.
Banking consolidation and market share is the subject of two recent studies published under the FDIC Future of Banking Study. See "The Declining Number of U.S. Banking Organizations: Will the Trend Continue?" and "The Evolving Role of Commercial Banks in U.S. Credit Markets," available at: www.fdic.gov/bank/analytical/future/index.html. “Bank Branch Growth Has Been Steady – Will it Continue?” is also available at the Web site.