Too Many Bank Branches But Which Ones ?

by Steven van Groningen on 12 November, 2010

Recently I wrote an article for Ziarul Financiar about the high fixed interest rate margins in Romania. I decided to write this as a contribution to a discussion about interest rates that was becoming increasingly populist. I ended the article with the suggestion that we should have a more professional discussion about what can be done to get the cost of credit down in Romania. The English version is posted on my blog here.

The article registered over 6.000 visits on the website of the ZF and I received a lot of reactions. I was pleased to see that more credible players are joining the debate: Doru Lionachescu and Lucian Croitoru both commented with articles in ZF, mainly on administrative costs. I will keep the discussion going on my blog and otherwise.

5 Levers to Push and Pull

I mentioned in the article that we have 5 levers that we can push or pull : Funding Costs, Mandatory Reserve (RMO) Costs, Administrative Costs, Risk Costs and Bank Profit. I’ll discuss all of them over the next weeks and I hope we will see some debate.

So, let us have a look at some of the administrative costs. As pointed out, these are in Romania, on system level based on the statistical reports of BNR, about 4% of the credit margin (down from 4,5%). This is the result of a top down calculation. Individual banks will have rather different levels and of course different products will have different levels of administrative costs. I obviously know the cost structure of our bank in great detail and this gives me a certain insight. On the other hand, I know very little about the cost structure of my competitors. What I can do however, is to point out a number of things that are relevant for a discussion on costs. Let me start with branch networks.

Too Many Branches?

Are there too many branches in Romania? Probably. But how do we look at this? Lucian Croitoru pointed out that the level of assets per branch is very low in Romania. Indeed, here too we occupy our traditional place in the EU, above Bulgaria, below Poland and Hungary. The suggestion seems to be that, by closing branches, banks will reduce costs and become more efficient and credit cheaper. This has indeed a certain relevance but I wouldn’t hold my breath. If things were that simple we would close half of the branches in Romania and would position ourselves somewhere in between Poland and Hungary. Problems solved? Credit cheaper? No, because the volume of assets is not the only important issue. We should also take into account a number of aspects, including:

  • the average ticket size (much lower in Romania)
  • usage of cash from country to country (higher in Romania),
  • ratio between electronic and paper based payments (worse in Romania)
  • level of bureaucracy (high in Romania).

So, in Romania we need more customers with more credit files, more documentation, more paper based transactions and more cash and therefor more costs to get to the same amount of assets per branch as in more mature markets. Assets volumes (per branch) are easy to compare but don’t tell the whole story. That doesn’t mean that, on a system level, there are indeed too many branches.

Where are those branches?

Let me give the following example of two hypothetical banks that are comparable in size in terms of assets and branch networks to illustrate that it is too easy to look at assets per branch. One with 300.000 customers that have mostly mortgage or home equity loans and one with 1.000.000 customers that have salary accounts and a mix of consumer credits, overdrafts, credit cards, home equity and mortgage loans. It will be clear that in this case the first bank will have more assets per branch but less traffic, fewer operations and less revenue. The second one will have more operations and revenue per branch, even though it has fewer assets.

I wanted to point out that it is not so easy to come to the conclusion that “banks should reduce the number of branches” or “the banking system needs to be restructured”. On a system level this might be the case, but that doesn’t mean it is the case for all banks.

There are banks that have invested a lot in branch networks without having the business volumes to justify this. This is a risk that the management and shareholders accepted based on their growth strategies and similar to the situation in other industries.

If those banks – or companies – face losses or lower profits because their strategy was proven wrong, that is not their customers’ problem but their shareholders’. In a competitive market these costs cannot be passed on. As an example, there are banks that have never made any profit in Romania, but have a significant number of branches. Are the services of these banks more expensive than those of profitable banks ? I don’t think so. So, the inefficiency is not paid for by the clients, but by the shareholders that are willing to invest in the hope of future returns. The efficient banks dictate the cost levels for the clients, not the inefficient ones.

Price can be driven down by making efficient banks even more efficient. We can make the ratios for the system look better by closing branches of efficient banks so that the inefficient banks can get more customers and transactions per branch but that will not help to make credit cheaper.

Who pays for this?

If on a system level there are too many branches, this doesn’t mean that all banks have to cut their branch network. Secondly, in a competitive market like Romania, with 45 banks, less efficient banks will not be able to pass on higher costs to their clients. These cost are paid for by the shareholders of those banks in the form of lower returns or capital increases to cover losses. Restructuring those banks will cut losses for shareholders, not contribute to cheaper credit. Maybe the question should have been:

Too Many Branches Or Too Many Banks ?

The costs that are passed on to the customer are the cost that are system related and similar to all banks. The cost that not even efficient banks can get rid of. The interesting thing is that nobody seems to care about these, so I’ll discuss these in a future post.

{ 10 comments… read them below or add one }

yndy November 12, 2010 at 20:44

This is a nice top-down approach for the number of branches. But it is equally important to review a number of KPIs for each branch.
* Is it profitable?
* What is the share of revenues between asset related and fee based?
* What is the Loan/Deposit ratio of that branch?
* Number of corporate and retail clients
* Other banks in the area;
* Estimated marketshare in the area

I am sure that even the most efficient banks in the market will find non-performing branches but the decision to close them down is not that easy. You can claim for a long time that it is the strategy of a bank to take losses in order to penetrate the market but as you said there are too many branches overall. Many of them should be closed and before doing that, the bank should do it’s best to educate clients to use less cash and more electronic banking products.


SvG November 13, 2010 at 00:04

You are right. An important question is how many costs you really cut by closing a branch, even if it is loss making. Closing will mainly shred variable costs. In the case of centralized banks closing of a branch doesn’t save you as much as in a decentralized bank and that will influence decisions from banks to bank.


yndy November 14, 2010 at 19:25

That trait is common to other retail operators and if we consider cost of closing in the equation banks might have already realized that it is more expensive to close a loss making branch than to continue to operate it. Or that additional cost cutting needs to be done at HQ level.

However if they do not act banks must be aware that the inefficiency will remain there on the long term and they will face now or in the future competitors which have already acted or which had less branches in the first place.


Calin November 13, 2010 at 08:39

1. What is an asset from the point of view of a bank? I know what it is in the other economy but do not know exactly what is in banking economy.

2. One of the measure I would take if I were a bank’s CEO is to launch an advertising campaign to inform the customers that everything is transparent in our credit contracts. There are a lot of banks which are transparent but maybe the customers do not perceive them in this way, so I would emphasize this especially in these times. Of course this has to be backed by the attitude of the bank’s staff, to explain all the clauses fair and square.

3. I think from my experience as an end customer, that there is a huge opportunity for bank to grow by investing in their relationship with the customers. In this scenario you do not grow by expanding with more or less profitable branches, but you grow attracting quality customers. If you are a big bank with many customers of course you do not have time to invest in the relationship as 4 people are standing in the line. The best in this is Procredit Bank, talking again from my experience, you always feel welcome there and everybody is truly willing to help. I have worked in the past with Unicredit, BCR, BTRL, BRD so I have some a bit of the wider view.


SvG November 15, 2010 at 23:27

Banks have assets like other companies (building, computers, cars etc ) but most of the balance sheets consists of financial assets, namely loans to customers. The advertising campaign can only be part of a larger campaign about transparency. At the moment the problem is that it is still unclear what we are obliged to do by law (OUG50). You are absolutely right that this has to be backed by everything that a bank does. It is about what you do, not about what you say. I think this also explains the big differences between banks when it comes to customer reactions.
Most banks have (re)discovered the customers and there is a lot of talk about customer focus and customer centricity. This is not so easy to implement and some are much more advanced than others. There is no doubt in my mind that banking is relationship business, with a focus on creating value for the customer over time. THe future will show us who the winners are.


Stefan November 14, 2010 at 14:01

Wat is Raiffeisen’s future (2010-2011) strategy to change the average Raiffeisen customer’s perception of going more electronic (e.g. internet banking/call center/applying for products online) and thus going less to a branch?

I know you have your channels (RZB Online/Direct) in place, but I do not get the feeling that it greatly reduces “branch traffic” or that it gets actively promoted as many people seem to stick to old habits by personally visiting the branch 2-3 a month and to que to pay their bills or do other cash transactions which can be done online …

If you consider the “cash related” operations one of the problems, isnt it a possibility to much more actively promote electronic ways of banking (especially in middle sized and large cities) and to give a much better incentive (money wise!!) for a client to switch?

Even if people dont have internet at home (al though 35,5% of Romanians do) why aren’t there any “internet terminals” in the Raiffeisen branches, where people can do simple banking transactions, currency transfers on their account , bill payments (a system similar as with ING).

Again, using such a terminal should have a huge sign on top of it stating: “25% discount of you do your banking transactions electronically” or something of similar wording. Internet banking terminals in your branches would be a good start to get people even more familiar with internet banking …

I think the only way to lower operational costs is to actively guide people to electronic ways of banking ..But it’s the bank to promote this much more and for these same clients to actually see, know and feel the difference in their pocket by going electronic.


SvG November 15, 2010 at 23:18

You are right Stefan, but is is very difficult to convince customers to use electronic channels, believe me. As you know by far the most efficient way to bill is direct debit, but is is not used a lot. Here the banking industry needs to standardize more but both banks and utilities companies are actively trying clients to use direct debit. Still modest results. By the way, OUG 50 doesn’t allow banks to charge commissions for cash withdrawals if the amount withdrawn comes from a credit, actually stimulating the use of cash…..
These are just 2 examples.


Stefan November 16, 2010 at 12:10

I see your point…but I can only assume the more your promote the product (with incentives) the more people will become convinced to go electronic (especially in medium sized and large cities). And people who have never used internet banking/electronic payment methods could be triggered if (as in my example) a bank would install “electronic payment terminals” (offering comission discounts as well) … the more people get confronted with it, the more likely they will change their old “cash” habits, IF it saves them money.

Regarding direct debit, I wondered why you have to activate this in Romania at the bank instead of the supplier (Orange/Vodafone/Utility company etc etc). For instance If I sign a contract with Vodafone, I could also sign for direct debit on this same contract. Isnt it then pretty easy for Vodafone to send batch-payments to the banks who then processes those direct debits?

In other countries there is also a 30-days “get your money back” clause in place (without dispute a direct debit can be returned in the client’s account upon request, whereas the dispute over the amount would then return between supplier and client). It would make life so much easier compared to signing a 3-4 page banking contract per supplier at the bank itself …(or to revoke this means another visit to the bank). In the said example, to revoke a direct debit in other countries you simply do this by sending the supplier an email or give them a call or send them a letter cancelling such direct debit.

Maybe this method can not yet be implimented due to BNR regulations?


Luminita November 26, 2010 at 13:02

Domnule van Groningen, dincolo de toate aceste explicatii,justificari etc, considerati ca BNR este un sustinator al activitatii dvs? Comentariile din ultima perioada ale guvernatorului, ale lui Lucian Croitoru (ma rog, nu-i un bun exemplu) demonstreaza contrariul. Ma insel? Vis a vis de avertizarea d-lui Ghetea in sensul ca bancile nu vor mai da credite populatiei din cauza protectiei excesive legiferata de ORD.50, mi se pare a fi o decizie excelenta! Bancile trebuie sa finanteze productia si nu consumul! Macar in aceasta perioada!


Marian February 3, 2011 at 17:45

Hi, do we really have to many? yes / no, all depend on the
perspective. 1st why we have open them? Mostly beacuse of market
share war started early in 2007, by major players who decided to
sell more money without interfere with, or using brokers, in their
war strategy trust in brokers was like sleeping in bed with
enemies, so their “succesfull managers” succesfully sold the
“branch extension” to shareholders/stakeholders. This has happent
because in the war madnes they forget the 80/20 principle,
customers come to your front office, and have HR selection on a
round table filled with enginers and techicians as candidates
Perspective, – TCO / KPI – there is no one that can argue when
looking at the balance sheet, – is honesty inside? – can we accept
our own mistakes and support consequences, no way when get used
with privileges, bonuses and benefits that may be lost, no one cand
afford to loose them especialy in this particular time, so they
will continue to sell the same story with future benefits, till the
day when shareholders wake up in one morning and get with the foot
on the solid ground – customers – in to a “cash only” economy like
romania and after the OG-50, they do not trust to much in to the
business, CRM and beeing near by may justify the cost Are them too
many? yes there are to many, cost is without justification, and
most of them has to be closed down before becaming to costly if
they are not already, but this can’t be done overnight, they have
to be replaced by something else. I personal believe that business
model has to be changed, aproaching, and CRM has to be changed. The
future than will belong to those who have the capability to
understand, sale to shareholders, get acceptance and change the
existing business model that will replace near by brances with
something new and old in the same time imported from other
industries business models and adapted to finace and insurance
sector. Marian


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