Almost all banks have grown by acquisition, resulting in a mix of facilities. Many older branches are oversized and single purpose in nature: former bank headquarters or large branches built for when the industry needed many more teller stations, drive-up lanes and deposit operations space than today.
So it’s no surprise that on the cusp of 2017, we have far more invested in facilities than needed—and in an ideal world, we would reduce branch configuration and cost. This would make banks more efficient and free up capital to invest in new channels that better meet changing customer needs.
The question is not whether this should be done. It’s how. As one bank CEO told us, “I know we have facilities that aren’t suited to our needs, but given the capital investment I can’t afford to do anything about it.”
But we need to do something about it.
New channel creation shows no sign of slowing down: It takes time and money to internally develop or purchase. Given the expense of regulatory burdens and other financial pressures, how can banks fund new services, delivery channels and technology?
- Plan to align resources to market opportunities. This directive may sound obvious, but all too often banks neglect it. Avoid jumping to the ease and convenience of addressing a specific site before determining the overall market potential; develop a “clean slate” view of your bank’s total distribution. We’re often surprised by the significant unrecognized opportunity in markets that management believes have low potential. Use data to ensure that staff resources are aligned at locations where room lies for greater income—and focus divestment or restructuring with an eye toward minimum market impact.
- Leverage the Financial Accounting Standards Board new sale-leaseback rules. With a strategic sale-leaseback, banks sell a branch but still operate from the same location. This has become an attractive option under a recent FASB accounting change. The new rules enable banks to enjoy immediate recognition of gains on a sale as tier-1 capital that’s non-dilutive to shareholders. Strategic sale-leasebacks unlock bank branch capital to fund a host of strategic initiatives. These include loan growth, new technology and branch redesigns.
Downsizing a branch via a sale-leaseback can provide unique benefits. Besides any immediate capital gain, expenses shrink due to reduced square footage. This also lessens costs for facilities upgrades or technology implementation. Additionally, a bank will often not have to pay for the construction and development costs of a downsizing—in fact, downsizing can be a provision of the sale-leaseback, meaning the new landlord pays for demolition, construction, and build-out to resize the space.
- Subdivide branches or re-negotiate leases to reduce space. In a sale-leaseback downsizing, the square footage the bank no longer uses will most likely be leased to a co-tenant, which can help increase foot traffic and customer opportunities. For smaller branches, the co-tenant may be a small CPA office. For large branches, the co-tenant may be a full retail space, such as a coffee shop.
If a bank has the time, resources and desire to retain branch ownership, leasing a portion of an underused branch or the entirety of an unused one can generate income. As a landlord, the bank may be required to update, upgrade or renovate new tenant space. This arrangement also requires resources for continued tenant maintenance, and monitoring potential co-tenancy and ongoing regulatory issues.
If the branch is leased, the option to downsize may still exist. In many cases landlords will renegotiate—especially if the branch occupies a desirable location—or the request can be packaged with other location options. Alternatively, the bank could downsize on its own and sublease the unused space: a worthwhile option for banks with adequate resources or real estate experience. But it could also invite the stress of hosting a less-than-stellar tenant. Partnering with a company that offers design-build services may be a better solution. A bank should also check its lease and talk with its landlord as to whether vacating or building out the space and then sub-leasing the vacancy are allowed.
- Sell unneeded or struggling branches. Closed, soon-to-be-closed, or re-tenanted branches are prime candidates for sale, either individually or as a branch portfolio. In 2016, Fifth Third bank sold 114 unneeded branches to help fund new technology initiatives. If a bank contemplates selling branch assets, it may want to start the process sooner rather than later; Citigroup estimates that more than 31,000 branches will hit the real estate market over the next ten years, which can lower the value of a bank’s holdings as competing supply floods the market.
- Build a new branch. Sounds counterintuitive? Sometimes a new branch may prove more efficient. In some cases, banks saved money while enjoying a brand-new, right-sized branch with lower operating costs. But this depends on many factors, including a bank’s rent, the real estate market and the price of new build in the area. If building a new branch is right, a bank can either handle it or connect with an experienced developer for a long-term sale-leaseback. This may be especially relevant if the new branch absorbs business from several existing facilities.
Regardless of how far along your bank is in implementing—or not implementing—a distribution analysis and restructuring plan, move now. Physical facilities, while important, do not have the same value to customers as in the past. Furthermore, there’s greater need than ever to fund new channels and technology. Banks that lag in these areas will only face greater challenges to remain competitive. Then, branch closings could become far less a matter of choice.
Guenther Hartfeil is a consultant at Austin, Texas- based Peak Performance Consulting Group, which specializes in banking strategy and distribution. He can be reached at firstname.lastname@example.org.
Gianna Whitver is an associate at Brookline Branch Services, a firm that helps banks optimize and downsize branch real estate. She can be reached at email@example.com.