JPMorgan's Contrarian Bet on Bank Branches

Charlsey Smedley, a retired schoolteacher in Orlando, started moving her checking account last month to JPMorgan Chase (JPM) from Bank of America (BAC), where she has been a customer for more than 35 years. "The service at Bank of America was O.K., but they just kept adding more and more fees," Smedley, 74, says 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 as a promotional enticement helped seal the deal, she says.

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 (WFC).

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. As customers cut back on borrowing and mobile and online banking take hold, doubts about the expense of branches have arisen. "Two thousand is a mind-bending number, even for a bank the size of JPMorgan Chase," says Bob Meara, a senior analyst with Boston-based consulting firm Celent. "Branch building on a large scale seems tough to justify."

Dimon's plan is based on the theory that having more branches enables the bank to attract deposits, a cheap source of funding and a big edge in the post-crisis, Dodd-Frank era of stricter bank regulations. A larger branch network enables JPMorgan to sell investment products to customers and offer banking services to businesses, analysts say.

It also allows JPMorgan to expand its brand in markets such as Florida and California where it gained a foothold by buying Washington Mutual in 2008, according to 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," he says. "We view it as a very big opportunity."

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. The bank had 5,268 retail branches at the end of 2010, the third-largest network in the U.S. behind those of San Francisco-based Wells Fargo, with 6,314, and Bank of America, with 5,856, according to yearend filings.

Dimon estimated at an investor conference on June 2 that each branch makes on average about $1 million a year in profit. That would mean the new outlets may contribute $2 billion to annual profit once they've been open for several years. Dimon's wager is that JPMorgan can soak up deposits from shuttered community banks or beat-up regional lenders forced to trim their footprint, says Brian Foran, an analyst with Nomura Securities International in New York: "They see blood in the water."

Other analysts point out that banks with large branch networks such as JPMorgan may gain little benefit from deposits since they have few attractive ways to deploy the funds amid a decline in borrowing and historically low yields on fixed-income securities. "I would love to know what advantage they see in their retail-banking model," says Nancy Bush, a contributing editor at SNL Financial, a bank-research firm in Charlottesville, Va. "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," she says.

Bank of America 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, has chosen to add resources to existing branches rather than open hundreds of new outlets. The bank, which opened 47 branches last year, placed about 5,000 more bankers into former Wachovia offices, CEO John G. Stumpf said on June 3.

Bank of America already has a fully developed branch network in Florida and California, says 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. "Our strategy is much more focused on strengthening relationships with existing customers," he says. "It's not about customer acquisition."

A 2010 survey by the Washington-based American Bankers Assn. found that 36 percent of respondents preferred banking online compared with 25 percent who said they would rather bank in person. Even so, "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," says Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Me. "Banking has yet to find the killer app to make branching obsolete."

The bottom line: By adding as many as 2,000 branches in five years, more than half in California and Florida, JPMorgan would have the nation's largest network.

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