Bankers Talk Bluntly About Closing, Streamlining Branches

Several banks that have been active on the M&A front are taking an ax to one of their biggest expenses: branches.

FirstMerit (FMER) in Akron, Ohio, has eliminated assistant branch managers. PNC Financial Services Group (PNC) in Pittsburgh is spending heavily on mobile banking services and high-tech cash machines so that it can spend less on face-to-face banking. And KeyCorp (KEY) in Cleveland is closing a lot of branches while being choosier about where to open new ones.

"We are seeing fewer branch transactions," said Paul Greig, the chief executive of FirstMerit, which acquired FirstBanks, a failed bank with 24 branches, in 2010 and has been actively looking to acquire another bank or thrift since then. "The assistant branch manager duties were reassigned within the branches."

Greig and other executives spoke about their cost-cutting plans Monday at a Barclays financial services conference. Though the fate of the branch has been debated for many years, the discussion has intensified in the last two because of tepid loan demand, falling branch traffic, regulatory costs and the march of mobile technology.

The executives from FirstMerit, PNC and KeyCorp made it clear they think there are too many branches. KeyCorp aims to close 5% of its 1,062 locations by yearend while FirstMerit just finished closing about 4% of its branches network, which now has 198 offices.

Technology can replace tellers and bolster profits, the executives say.

PNC — which has been digesting its recent $3.5 billion acquisition of RBC Bank (USA) — expects to have 1,500 automated teller machines equipped with check-scanning technology this year, up from 900 last month, Chairman and CEO James Rohr said during his presentation. Its investments in mobile banking resulted in phone-to-bank transactions increasing at a rate of 20% per month during the first half of 2012, Rohr said.

"Unlike a branch these [new] ATMs lower our costs," Rohr said, adding that the typical transaction at a branch can cost "almost six times more than the same transaction at an ATM."

PNC is now booking about 7,000 mobile phone transactions daily. "At that level … we should be able to eliminate 40 to 45 tellers," Rohr said.

Rohr did not say specifically how many of PNC's more than 3,000 branches will be closed as it goes about "optimizing the number of branches we have."

His other plans for doing more with fewer branches involve relying on smaller branches staffed with sales specialists in growth markets where its presence is smaller. Its business lending officers are also under a stiff mandate to sell treasury management and other services to clients.

KeyCorp, which this year bought 37 former HSBC branches in western New York from First Niagara Financial Group, was specific about its plans, too.

"We have identified 19 branches to consolidate by year-end against a broader target of 50 to 60 branches," said Beth Mooney, Key's chairman and chief executive. "While branches are still important, our clients are increasingly considering online mobile" banking as "critical attributes in their primary banks."

FirstMerit is keeping its options open, Greig said.

"We carefully looked at the branch network over the last seven, eight months and we feel that the eight that we have closed is sufficient for now," Greig said. "That does not mean that it's a forever situation."

The stakes are high. Increased acquisition expenses, legacy loan problems and the general economic malaise have KeyCorp and PNC in particular grappling with sharply higher efficiency ratios than they had before the downturn. KeyCorp was spending roughly 69 cents for every dollar of revenue at the end of the second quarter, up from about 65 cents at the beginning of 2007. PNC's cost-to-revenue ratio stood at 67 cents per dollar, up from 59 cents in early 2007.

FirstMerit's efficiency ratio — which works out to about 62 cents of expenses per dollar — is roughly on par with where it was five years ago, though the company hopes to send it lower over the next two years through a new cost-reduction program.

KeyCorp's online banking business is up 20% since overhauling its website last September. August was a record month for online bill payment while the company closed eight branches and pegged eight more that it plans to shutter this month, Mooney said.