De Novo Challenge

By Thomas P. Johnson, Jr.

Branch expansionists must match boldness with discipline if they are to achieve the growth they seek.

Why on earth would major banks be opening hundreds of new branches at a time when the economy is limping along and the threats of war and terrorism continue to roil global politics? It does seem counterintuitive, yet savvy strategists believe this is the time to strike.

While it is always wise to take current circumstances into account, periods of uncertainty, in fact, can provide the best times for undertaking strategic initiatives. As weaker competitors struggle, stronger players can leverage their capital, brands and systems to gain market share. In the wake of the '90s banking consolidation, numerous financial institutions are positioned to make strategic moves on a national basis.

Bank of America Corp., for example, is planning to build 550 branches over the next three years in the nation's top 25 markets. "Even in tough times, you've got to grow your revenue, and we think this is a very good use of our capital," says Liam McGee, Bank of America's top retail executive. Washington Mutual Inc. is engaged in an expansion of similar scope, and many other banks are launching regional de novo programs.

This movement is driven by a search for organic growth. Disappointed with mergers and electronic delivery channels, banks are reaffirming the primacy of the branch in customer acquisition and retention. With new outlets, the logic goes, de novo expansionists can avoid the merger-related problems of systems integration, culture clashes and service disruptions, plus they can pinpoint their target markets.

The trouble is, many banks are targeting the same cities, such as Chicago and New York, setting up a bruising battle for market share. Since customers will ultimately decide who wins, the competitive terrain will shift to subtler factors such as competitive differentiation, marketing prowess and service quality. Strength alone will not carry the day.

To be sure, players such as Bank of America and Washington Mutual seem to recognize that. Both are building branches designed to emulate top retailers, such as Nordstrom and Starbucks, by offering extraordinary levels of visual appeal, technological pizzazz, convenience and service.

This can pose a substantial expense burden, however, at a time when expense control may become more important than executives originally anticipated. Federal Reserve Bank of Dallas economist Harvey Rosenblum, for example, warns that a prolonged period of price stability, of the type last seen in the 1950s, could depress rather than help bank profitability. Consultants at McKinsey & Co., meanwhile, warn that the profitability of the basic deposit-taking business will come under renewed pressure in coming years.

The question, then, is whether the de novo expansionists can match boldness with discipline. In the current environment, one won't go very far without the other.

Mr. Johnson is publisher of Banking Strategies and president and chief executive officer of BAI.

Copyright © 2003 by Banking Strategies, published by BAI.

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