Wells Fargo (NYSE: WFC) is often described as America's largest community bank, but I don't think most people really understand the accuracy of that descriptor. If you examine it on a branch-by-branch basis, it really is a community bank, size and all.
Sure, Wells Fargo may have $1.3 trillion in deposits, making the whole bank quite large, but the pieces (the branches) that make it what is are often quite small. Seriously small -- community bank size small.
Deposits a dollar at a time
Using data from the FDIC, I found that about 10% of Wells Fargo branches have less than $25 million in deposits attributed to them. Raise the bar to $50 million in deposits, and as many as 30% of its branches as of June 2017 still fell below that threshold.
Deposits in those ranges are trivial sums for a bank branch, given the average branch in the United States recently had more than $60 million in deposits. But by comparing Wells Fargo's deposit distribution to a peer, like Bank of America (NYSE: BAC), you can see just how different Wells Fargo really is.
Data source: FDIC. Chart by author.
Of course, Bank of America has already gone through a long process of shedding unproductive offices. It cut deep in the years after the financial crisis, and today, it's actually opening branches in new markets, suggesting that most of its prior bloat has been eliminated.
Wells Fargo, on the other hand, is just starting to follow its peers down the cost-cutting path. It recently announced a deal to exit Indiana, Ohio, and Michigan by selling 52 branches to a Michigan-based bank. And at its investor day in May, it said it was planning on eliminating as many as 300 branches in 2018, and shedding even more by 2020, when it plans to have about 5,000 branches across the country, down from the roughly 6,000 branches it operated at the beginning of 2017.
Why Wells Fargo is shrinking its footprint
There are two possible reasons as to why Wells Fargo is finally thinning its branch network. The somewhat obvious answer is that branches are on their way out across the U.S., because retail depositors now prefer to bank online rather than in person. Maintaining a branch presence to collect a mere $25 million or $50 million in deposits simply isn't worth it, especially if the accounts of that office can be consolidated with one nearby.
Image source: Wells Fargo.
Whereas having to drive 20 minutes to get a branch might have been a good enough reason for a suburban customer to switch banks in 1990, today, online banking makes branch proximity much less important. The days of bank branches on every street corner are forever in the rear-view mirror.
Then, of course, there's the somewhat more cynical explanation for the closures: Wells Fargo's branches became less profitable when the bank remediated its internal practices after the public learned it had opened millions of unauthorized fake accounts, and charged its customers fees for them. That's likely a contributing factor here, since the fake accounts were largely created by personal bankers working from branches. Now that otherwise marginal offices are no longer generating outsize fee income, the case for keeping them open has weakened.
I view Wells Fargo's shrinking branch footprint favorably, since it's my opinion that expense reductions are by far the easiest money to be made in banking. Dollars saved by eliminating unproductive offices are substantially better than those earned by taking more credit risk. Cost cuts are close to risk-free.
Given how well cutting the number of its branches worked for Bank of America, it's hard to imagine Wells Fargo will have anything other than similarly good results. The San Francisco-based bank believes it could save about $500 million in annual costs by 2021 from shedding about 1,000 branches from the end of 2016 to the end of 2020.
This is one bank where I think it pays to take the contrarian view. Opening small-dollar accounts doesn't kill banks; aggressive underwriting does. And, for what it's worth, the unprincipled sales culture of the retail offices doesn't seem to have infected the bank's underwriting department.
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