Bigger is better may not have been what the politicians and regulators envisioned post-financial crisis but that’s what we now have in the banking industry. In short, big banks in the United States have closed ranks and gotten much bigger over the past decade, while smaller banks have either merged their way into the middle tier ranks, or have declined in terms of their market share and their share of branches, according to analysis conducted by BAI Research.
The analysis is based on data from the Federal Deposit Insurance Corp and SNL Financial, and examines activity branch-by-branch over the past ten years. Between 2006 and 2015, the number of banks has steadily decreased from 7,050 to 5,600 – down 21%. But that shift is far from having been felt uniformly throughout the industry.
Since 2006, the number of the so-called “super banks,” like New York’s City’s JPMorgan Chase & Co. and Charlotte, N.C.-based Bank of America Corp., which are defined as having upwards of $100 billion in deposits, has increased from just nine institutions to 14. That’s more than a 55% spike. During the same period, large banks (with between $10 billion and $100 billion in deposits) and mid-sized banks (with between $1 billion and $10 billion), have swelled their ranks by 13% and 21% respectively. The only category of banks that has declined in number has been the small banks, those with less than $1 billion in deposits, which fell by more than 23%, from slightly under 6,600 institutions in 2006 to just over 5,000 in 2015.
During the same period, the number of branch locations, which peaked in 2009, dropped from roughly 97,500 that year to under 91,000 last year. While it has been well-documented that the overall number of branches in the U.S. is declining, the share of branches has again actually increased for the super banks by 33%.
Meanwhile, community banks have seen their branch and market presence significantly reduced, especially in larger or more densely populated areas, down by almost 20% in the past decade.As it stands, super banks have gone from controlling about one-quarter of all branch locations just before the financial crisis to more than one-third (34.3%) of them today, while the situation is essentially the converse for small banks, which have gone from owning nearly one-third of branches in the country to just over one-quarter of them (26.7%).
In essence, coming out of the financial crisis, the retail operations of mega-banks as a group became more dominant while the smaller banks lost market influence.
The Age of the ‘Super’ Bank
Three-quarters of the branch consolidation that happened in the banking industry in the past decade took place right after the crash, between 2008 and 2010. And over 90% of this acquisition activity involved super banks or large banks.
Aside from the fact that the number of U.S.-based super banks has increased by more than half and their branch penetration has shot up in recent years, these super banks are concentrating on larger or urban markets by increasing their branch networks and customer share in these areas in particular. In massive markets, which boast more than 2.5 million households, super banks have increased their branch ranks by 52% since 2006. Similarly, in smaller cities and suburban areas, the number of super bank-owned branches has swelled by 30% during the same period. While the number of super bank branches has grown virtually everywhere, the rise has been less pronounced in towns or areas with fewer than 50,000 households.
When it comes to branch share, perhaps the most telling change is that the percentage of branches owned by super banks has risen in the massive markets from about one-third (33.5%) of all branches to a little more than one-half (50.9%) of branches in these high-population areas. In other words, half the branches the average bank customer in New York City or Chicago sees are going to be a Citibank or a Chase or another super bank-run outlet. Super banks have markedly grown branch share in slightly smaller cities too – they also own half the branches in areas that have between 1 million and 2.5 million households and 39% in towns and cities with between 250,000 and 1 million households.
The slightly smaller brethren of the super banks, large banks such as Utah-based Zions and Huntington Bancshares Inc. of Columbus, Ohio, are also doing fairly well when it comes to building branches and establishing market presence, although not quite to the same degree as the country’s biggest banks. While the sheer number of institutions in this ‘large bank’ category has grown 13% in the past decade, yet these institutions have also decreased their overall number of branches by more than 18%. This is mostly due to the fact that the largest of these “large banks” merged their way up into super-status since 2006, while many banks that had held less than $10 billion in deposits grew into the large bank category in the past 10 years establishing presence in smaller markets.
While the large banks went through a sustained period of acquisition activity through 2009, consolidation efforts have slowed, with most deals focused on joining with other large banks or taking over branches from mid-sized competitors. But this second tier group of banks has not come out entirely unscathed in the wake of the super banks’ phenomenal growth. Large banks have the most branch presence of any category, particularly in larger markets, where they have downsized their physical networks by more than 20% and their market share has dropped from 31% to 22% over the past decade. In smaller markets, large banks have reduced branches by about 16%, while their market share has remained stable.
Since more branch-share in a market translates to higher household-share in the market, and subsequently more deposits per branch, more primary relationships with that bank, and a greater number of loan balances, this puts super banks at a distinct advantage in terms of boosting their customer base. All of this scale and volume also adds up to increasingly higher operational efficiencies for these Goliaths of the banking industry, which are critical in the current low-margin environment.
The super banks need scale to achieve efficiency, so they are concentrating their branching efforts in large markets where the populations are most concentrated and, even more importantly, where they already have at least some branch share already. Meanwhile, the country’s biggest banks are pruning back branches in markets where they don’t have significant branch share because without it, they cannot build balances per branch to make the efficiency numbers work.
No Win for Community Banks
In effect, the country’s biggest banks are not only getting bigger, they are becoming more dominant in the biggest markets, arguably the areas that matter most in terms of building scale. And, in the process, these super banks are squeezing traditional community banks – and, to a lesser extent, the mid-tier – out of the major cities and forcing them to retreat further into small towns or rural markets, relegated almost entirely to areas where they have less of a chance to add customers, build scale and leverage better efficiencies, themselves.
In recent years, with interest rates as close to zero as they have ever been, the biggest banks have been relatively comfortable due to their efficiencies and their reach and their breadth of offerings. These large and super banks have much lower overhead comparatively and a greater ability to invest in technology and support for online and mobile channels to further reduce costs and create more compelling offerings and convenience for new and would-be customers.
Meanwhile, community banks have been forced into the position of needing to reduce their expenses without being able to raise their rates. Smaller banks have been caught at a distinct disadvantage, without the scale, the physical reach of the branch network or the technological bells and whistles of their larger counterparts, and no ability to compete on rates. It’s becoming an increasingly no-win situation for the small banks that cannot at least grow their way into the middle tier.
It’s little surprise, then, that the number of banks in this middle bracket (with $1 billion to $10 billion in deposits) has grown by 21% in the past decade, mostly through the acquisition of other mid-sized peers and smaller institutions. Although these banks have decreased their overall branch strength by 22% since 2006, banks in this segment have redoubled efforts in smaller rural areas, expanding their physical presence here by roughly 20% over the years. Despite the encroachment of the biggest banks, mid-sized banks have been able to retain their place in urban markets as they have grown in smaller ones.
The country’s smallest banks seem to be drawing the short straw, as their ranks have dwindled by 23% in just ten years, and they have been forced to sell off or close 19% of their branches. In 2006, banks with less than $1 billion in deposits owned one-third (33%) of all the nation’s branches; now, they have slightly over one-quarter (26.7%) of them.
The retreat of the community bank is most pronounced in the big cities, where their branch presence has decreased by 30% in the past decade.
Convenience kills. And while some have pronounced the branch to already be dead, we know that the convenience of branches has long been the critical to success in the banking industry. Big banks are getting better at providing a strong customer experience and a wider breadth of offerings, which initially left small banks only to leverage good rates and potential convenience, which have now all but slipped away. As big banks continue to get bigger and more dominant and community banks lose their place in all but the smallest and most rural markets, we will see this trend continue and become exacerbated as super banks and large banks take over big cities and urban and larger suburban markets.
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