Analyst To Wells Fargo: Cut Back On Branches

CLSA Analyst Mike Mayo isn’t holding back when it comes to his guidance for big bank Wells Fargo.

Mayo said the troubled financial institution is overbranched compared to other big banks and should consider cutting back on the number of branch locations in operation, Seeking Alpha reported.

Since the bank’s unauthorized account scandal rocked the financial world — sending its CEO and chairman, John Stumpf, out the door and causing the company to cough up $185 million to settle claims — Mayo said Wells Fargo’s new management has “more openness” to possible branch closures.

According to Mayo, if Wells Fargo closed enough branches to match the number Bank of America currently has, it could potentially boost its EPS by 25 percent.

However, Mayo’s guidance is in direct opposition to a recent study from Bain & Company that indicates shutting down branches is not always a bank’s best path to saving money.

The new data revealed that branch closures can come with future risk attached.

For customers who don’t prefer to bank digitally or by device, the branch location is their only option available, and closing locations could impact them significantly. Those customers who don’t want to be moved to mobile or online banking solely may take a closing branch as a reason to switch banks, Bain noted.

And mobile customers aren’t quite as loyal as physical ones and are thus more likely to shop around for loans, cards and other services. That means banks get to keep offering checking accounts — but find themselves losing their customers to others for the bigger, more profitable products.

Moreover, many banks rely on cross-selling (a model that is sure to see a good deal of regulatory attention, thanks to Wells Fargo) — moving customers out of the branch makes that more difficult.

“It’s a scary time for banks,” Gerard du Toit, who leads consulting for banks in the financial services practice in the Americas at Bain, told the Wall Street Journal. “They run the risk of being the dumb regulated utility with all of the costs, while all the high-margin juicy stuff is hollowed out.”

But Bain’s data also highlights that there is an overpopulation of banking branches in the U.S. — about 32 for every 100,000 adults. Bringing the U.S. branch density closer to what it is in parts of Europe (about 24 banks per 100,000 people) would save around $11 billion a year for the 25 largest U.S. banks.