Wells Fargo’s Branch Network Is Bloated, But The Bank Is Unlikely To Shutter Many Branches
Recently, CSLA analyst Mike Mayo voiced his opinion that Wells Fargo (NYSE:WFC) can save billions in operating costs – and hence boost earnings – by reducing its over-sized branch network. [1] The conclusion makes sense, considering the fact that Wells Fargo has 6,100+ branches across the U.S. while its two biggest competitors, JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) have networks of 5,300 and 4,600 branches, respectively. Mayo estimates that Wells Fargo would achieve $2.7 billion in annual after-tax savings if it reduced its branch count to 4,800. This translates to a 13% increase in earnings per share for the bank.
While we agree that Wells Fargo could achieve a sizable reduction in costs by shuttering branches in low-profit regions, we believe that the bank’s traditional banking business model could also be hurt by a sharp reduction in the number of branches. Unlike its highly diversified peers JPMorgan and Bank of America, Wells Fargo relies primarily on growth in loans and deposits to make money – something that will be impaired in the long run if Wells Fargo reduces its branch footprint in the U.S. It must also be remembered that a large branch network plays an important role in the bank’s ability to cross-sell its products to customers. Despite criticism drawn by Wells Fargo’s aggressive cross-selling policies over recent months (see Wells Fargo’s Sales Scandal Is A Bad Look, But Bank Is Well-Positioned Going Forward), the banking sector as a whole sees cross-selling as a cost-effective and fundamental way to grow long-term revenues.
We maintain a $59 price estimate for Wells Fargo’s stock, which is about 5% higher than the current market price.
See our complete analysis of Wells Fargo here
Operating Metrics For Wells Fargo’s Retail Business Are Great Compared To Its Peers…
The table captures key metrics for the retail banking operations of Wells Fargo, Bank of America and JPMorgan Chase in Q3 2016. These metrics are then converted to a per-branch figure for each bank to allow for easier comparison.
As seen here, Wells Fargo clearly is doing a better job than Bank of America and JPMorgan to grow loans and deposits on a per-branch basis. Despite a branch network that is 15% larger than JPMorgan’s and 32% larger than Bank of America’s, average loans per branch and average deposits per branch for Wells Fargo are in between the figures for the other two competing banks. Wells Fargo shines in particular when it comes to operating performance, as profits as well as net income per branch are well above the figures for the competitors.
… And There Is A Definite Scope For Quick Gains By Shrinking The Branch Network
Now assume that Wells Fargo reduces its number of branches by 300 to 5,800 in a manner that does not negatively impact the total revenue figure of $12.39 billion while also keeping average per-branch expenses constant at $1.14 million. Wells Fargo can achieve this by shuttering its least profitable branches. In this scenario, pro forma total expenses fall ~$350 million to $6.6 billion, while revenues per branch increase to $2.14 million – slightly above the figure for JPMorgan. At the same time, operating profits per branch improve 14% to $0.89 million and the net income figure per branch swells 10% to $0.58 million.
You can see how a reduction in non-interest expenses for Wells Fargo directly affects our price estimate for the bank’s share price by making changes to the chart below.
But Does This Move Make Sense In The Long Run?
Wells Fargo stands out as a U.S. banking giant that emerged stronger from the economic downturn of 2008, as the bank acquired Wachovia and successfully merged the latter’s branch network with its own to consolidate its position as the country’s largest mortgage lender. Over the years, the bank has grown steadily to become the largest in the country in terms of outstanding U.S. loans, as well as U.S. deposits held.
We believe that a critical factor behind this growth has been Wells Fargo’s huge branch network. Wells Fargo has a presence in 40 U.S. states compared to 23 states for JPMorgan and 34 states for Bank of America. Although JPMorgan and Bank of America have reported a steady increase in loans and deposits since 2010 despite shrinking their branch networks considerably, Wells Fargo has seen faster growth compared to both. Taking into account the fact that the low interest rate environment and strong economic outlook fueled growth in loans and deposits across the banking industry, Wells Fargo’s above-average growth figures can be largely attributed to its presence in key locations across the country. Accordingly, a sharp reduction in the branch network could potentially hurt Wells Fargo’s growth prospects in the future.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Wells Fargo Could Do With Some Pruning, Bloomberg Gadfly, Nov 18 2016 [↩]