Charlsey Smedley, a retired schoolteacher in Orlando, Florida, started moving her checking account last month to JPMorgan Chase & Co. (JPM) from Bank America Corp., where she has been a customer for more than 35 years.
Jamie Dimon, JPMorgan’s chief executive officer, had people like Smedley in mind when he announced plans in February to open as many as 2,000 branches, more than half of them in Florida and California, expanding the New York-based bank’s network by almost 40 percent. He’s targeting states dominated by Bank of America, the biggest U.S. bank by deposits, and Wells Fargo & Co. (WFC), which has the largest branch network.
The strategy runs counter to Bank of America’s plan to close 10 percent of its offices as analysts question whether the industry needs a bank on every corner. Doubts about the expense of branches have arisen as customers cut back on borrowing and mobile and online banking take hold.
“Two thousand is a mind-bending number, even for a bank the size of JPMorgan Chase,” said Bob Meara, a senior analyst with Boston-based consulting firm Celent. “Branch building on a large scale seems tough to justify.”
Dimon, 55, is hoping to lure more customers like Smedley, who said she was fed up with extra costs, as local and national competitors retreat.
“The service at Bank of America was okay, but they just kept adding more and more fees,” Smedley, 74, said in an interview outside the sleek, gray JPMorgan branch that opened last July on Town Center Boulevard.
It’s one of 18 JPMorgan outlets in Orlando and a five- minute walk from where Smedley used to bank. The $150 JPMorgan offered to put in her account helped seal the deal, she said.
Dimon’s plan is based on the theory that having more branches enables the bank to attract deposits, which provide a cheap source of funding in a post-crisis era, as well as to sell investment products to customers and offer banking services to businesses, analysts said. The strategy could add $2 billion a year in profit, according to company calculations.
It also allows JPMorgan to expand its brand in markets such as Florida and California where it gained a foothold by buying Washington Mutual Inc., said Ryan McInerney, CEO of the firm’s consumer bank and a member of its executive committee.
“We don’t have nearly the density or branch presence we think we need to serve our current customers or acquire new customers in those markets,” McInerney said in an interview. “We view it as a very big opportunity.”
Analysts said the opportunity may be overstated. Banks with large branch networks like JPMorgan may gain little benefit from deposits since they have few options for the funds amid a decline in borrowing and historically low yields on fixed-income securities, they said.
“I would love to know what advantage they see in their retail-banking model,” said Nancy Bush, a contributing editor at SNL Financial, a bank-research firm in Charlottesville, Virginia. “It’s good, but is it wildly superior?”
With consumers trying to pay off debt and avoid new loans, “the macro trend would be for the entire financial sector to contract, and that means fewer branches, not more,” Bush said.
JPMorgan’s five-year strategy calls for 525 to 700 new outlets in California, 375 to 500 in Florida, and an additional 800 elsewhere, according to an investor presentation. California and Florida are among the top five U.S. states by deposits.
The bank had 5,268 retail branches at the end of 2010, making it the third-largest network in the U.S. behind San Francisco-based Wells Fargo with 6,314 and Bank of America with 5,856, according to year-end filings.
Bank of America is closing unprofitable branches, Joseph Price, head of the lender’s consumer and card-banking business, said at a conference for investors in March. The Charlotte, North Carolina-based company shut 200 branches in the last five quarters through March, CEO Brian T. Moynihan said in April.
Wells Fargo, still digesting its 2008 purchase of Wachovia Corp., has chosen to add resources rather than hundreds of new outlets. The bank, which opened 47 branches last year, placed about 5,000 more bankers into former Wachovia offices, CEO John Stumpf said June 3. Forty-six percent of U.S. households are within two miles of a Wells Fargo branch or automated-teller machine, according to Mary Eshet, a spokeswoman for the bank.
“We continuously adjust our store network, and as a result we add stores in some markets and reduce them in others to make sure we have the right number to help us serve our customers,” Eshet said.
Bank of America already has a fully developed branch network in Florida and California, said Walter Elcock, the executive responsible for branches. The bank has plans to add bankers to about 1,500 branches to sell more investment, mortgage and small-business products, he said.
“Our strategy is much more focused on strengthening relationships with existing customers,” Elcock said. “It’s not about customer acquisition.”
From 2000 to 2004, Dimon was CEO of Bank One Corp., where he staged a turnaround that included opening more branches and overhauling compensation. He required branches to stay open longer after realizing competitors were closing an average of two hours later, according to “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase,” by Duff McDonald. Results at the Chicago-based lender swung from a $511 million loss in 2000 to a $3.5 billion profit by 2003.
When JPMorgan merged with Bank One in 2004 and Dimon was named president and chief operating officer, he shuttered lagging businesses and started monthly management reviews in local branches. The bank, now the largest in the U.S. by market valuation, was one of the few to navigate the credit crisis without a quarterly loss.
That period included the September 2008 purchase of Seattle-based Washington Mutual, the largest bank to fail in U.S. history. JPMorgan bought the thrift for $1.9 billion, acquiring 2,200 branches in 12 states. Three hundred were closed in the first six months and another 100 by the end of the first year in markets where the two banks overlapped, according to a person familiar with the consolidation.
Dimon estimated at an investor conference June 2 that on average each branch makes about $1 million a year in profit, meaning that the new outlets may contribute $2 billion to annual profit once they’ve been open for several years.
Absence of Profit
Over the last nine years, JPMorgan has opened 1,000 branches and expects them to contribute $1 billion by 2018, according to a February presentation from Charles Scharf, head of the retail business.
In the early years, opening and operating expenses outrun costs, with the 117 branches that opened in 2009 reducing 2010 pretax earnings by an average of $600,000 an outlet, or $70 million, Scharf said.
It cost between $2 billion and $3 billion to build the 1,000 branches, Deutsche Bank AG’s Matt O’Connor estimated in a May 19 report, and JPMorgan added 6,200 salespeople between 2006 and 2010, according to Scharf’s presentation.
The new branches “aren’t going to contribute a lot to profit over the next several years,” Scharf said in February.
Last year, JPMorgan’s retail division reported $31.8 billion in revenue, 30 percent of the bank’s total, and $2.53 billion in profit, or 15 percent of the total, according to the year-end filing. That compares with revenue of $14.8 billion and net income of $3.43 billion in 2005, or 27 percent and 40 percent, respectively.
Branches typically need about $40 million of deposits to be profitable, Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia, said in an interview. About 15 percent of bank branches in the U.S. hold less than $15 million in deposits, said Brian Foran, an analyst with Nomura Securities International Inc. in New York.
Nationwide, JPMorgan ranks second in deposits with $996 billion, behind Bank of America’s $1.02 trillion, according to data compiled by Bloomberg. JPMorgan ranks fourth in California, with $61 billion in deposits, and sixth in Florida, with $10.5 billion. It lags behind Bank of America, which has $222 billion in California and $74.8 billion in Florida, and Wells Fargo, which has $162.1 billion in California and $66.6 billion in Florida. JPMorgan holds the top spot in New York and Texas.
JPMorgan’s new branches may bring an added $90 billion in deposits, Miller wrote in a Feb. 16 report. To do so, they’ll have to draw customers from competitors with well-placed branches, attractive promotions and good customer service, analysts said. New outlets must be located in high-traffic areas, not hidden in strip malls, as many of WaMu’s branches were, Miller said in a phone interview.
Soaking Up Deposits
Dimon’s wager is that JPMorgan can soak up deposits from shuttered community banks or beat-up regional lenders forced to trim their footprint, Nomura’s Foran said.
SunTrust Banks Inc. (STI) and Regions Financial Corp. (RF), the third- and fourth-biggest banks by deposits in Florida, are pulling back, and Bank of America may close branches in the state, he said. On top of that, 34 banks failed in Florida since the end of 2009, and 15 have been shut by regulators in California as of May 6, leaving a void for JPMorgan to fill.
“They see blood in the water,” Foran said.
The largest banks aren’t the only ones targeting those states. Competitors include BankUnited Inc., the Miami Lakes, Florida-based lender brought back from collapse in 2009 by John Kanas, and OneWest Bank, the successor to IndyMac Bancorp after the California-based lender failed in 2008.
Michael McCoy, a spokesman for Atlanta-based SunTrust, said his bank has 500 branches in Florida and is “very committed” to the market. Tim Deighton, a spokesman for Birmingham, Alabama-based Regions, which has about 400 branches in Florida, said the state “remains a core market for us.”
Online and Mobile
Some customers are shunning branches. A 2010 survey by the Washington-based American Bankers Association found that 36 percent of respondents preferred banking online compared with 25 percent who said they would rather bank in person. Even so, a March 2011 research paper by Elif Nilay Yilmaz, a doctoral candidate at Boston University, used Federal Deposit Insurance Corp. data to show that a 1 percent increase in the number of branches raised a bank’s market share by 0.72 percent.
“The banks have figured out they need to be able to deliver their products through multiple channels, and branches are one of those that will be here to stay,” said Gerard Cassidy, a banking analyst with RBC Capital Markets in Portland, Maine. “Banking has yet to find the killer app to make branching obsolete.”
To contact the editor responsible for this story: Rick Green in New York at email@example.com.