The U.S. banking sector is undergoing a significant transformation, echoing societal shifts that saw payphones and video stores disappear into obsolescence. The silent erosion of bank branches has been transpiring within the financial sector for over a decade, beginning in 2010 and intensifying in recent years.
According to the U.S. Federal Deposit Insurance Bureau (FDIC), large commercial U.S. bank venues have sharply declined from 8,000 in 2000 to 4,236 by 2021, further dwindling to 4,194 in 2022. Normative banking procedures have been remarkably altered within this period, as evidenced by the dwindling count of U.S. branch bank sites directly linked to mainstream banks.
As per S&P Global Market Intelligence, U.S. banks closed 149 branches and launched 49 in March, culminating in an overall 78,588 operational branches.
Should this declining trend in bank branch numbers sustain momentum, bank branches could disappear within the next ten years. The Self Financial estimates that the U.S. bank branches will dip dramatically from about 60,000 in 2023 to 15,660 in 2030, with numerical reductions continuing until the projected total elimination of bank branches by 2034.
The national shift is exemplified by the Bank of America Corporation (BAC), the nation’s second-largest bank by assets, mapping plans to reduce the extent of its physical footprint through the closure of several branches across the U.S.
According to the OCC's weekly circular, the Charlotte, North Carolina-based bank is actively pursuing authorization from the Office of the Comptroller of the Currency to close the branches. The applications were filed with the regulator on October 5
It has gotten into the act, closing 5% of its physical locations in Philadelphia. The anticipated closures will have a significant impact nationwide.
Let’s first understand the reason behind the closures and identify why this trend has seen a significant acceleration over the past few years.
Recent years have seen an accelerated rate of bank branch closures, amplified by changing consumer behaviors and evolving banking infrastructures. The advent of the COVID-19 pandemic and subsequent social distancing mandates in 2020 and 2021 catalyzed this trend. As foot traffic was reduced to near zero at local branches, there was a soaring increase in the adoption of digital products and banking services.
Banks are directing more resources toward enhancing their online platforms to meet customer demands for digital banking services. Consequently, the need for physical branches has diminished, prompting banks to adjust their physical footprints constantly. The practical implications include enhanced bottom lines fueled by cost savings and greater investment into technological advancements.
As banks become more digitally savvy, the industry anticipates a continuous drop in the number of branches in operation.
The banking industry's consolidation through mergers and acquisitions has also been instrumental in accelerating this trend. Banks often buy out rivals to reduce overlapping staff, services, and facilities expenses. The result is increased profitability, with the closure of redundant branches being key to these cost-saving measures.
Large regional and national banks predominantly lead branch closure as their extensive networks provide ample cost-reduction opportunities. Nevertheless, banks of all sizes are progressively steering their investments away from physical locations and toward digital platforms.
During BAC’s quarterly earnings call, CEO Brian Moynihan shared that the company's consumer business headcount had decreased from around 100,000 to roughly 60,000 – a decline that continues as digital banking experiences an increased adoption.
As of 2022, a clear preference for online banking among U.S. adults at 78% was evident, while only 29% preferred traditional, in-person banking. The closure of BAC branches is unlikely to impact individual accounts directly; the bank provides several channels that allow customers to access and manage their accounts, including online banking, mobile banking, ATMs, and customer service centers.
However, there is an underlying concern that BAC could alienate less tech-proficient customers like senior citizens or those with disabilities. In certain communities, the closure of neighborhood banks has caused substantial damage to local economies and heightened existing financial inequities.
The ramifications of banks disappearing from communities extend beyond convenience — for instance, residents are forced to commute further to make elementary transactions such as deposits or withdrawals. This could potentially instigate a shift of these customers to other banking institutions.
BAC might consider implementing measures such as a fee waiver for retained customers or an added fee for closing an account within a specified timeframe. Both strategies could deter clients from changing banks and concurrently generate some revenue.
Let’s look at other factors investors could consider before investing in BAC.
BAC’s investment holdings presently display considerable unrealized losses, falling short of competitive rates since 2007. As of June 30, 2023, paper losses on their debt securities exceeded $109 billion, which surged to $136.22 billion by the end of the third quarter.
With approximately $603.37 billion entangled in held-to-maturity securities, the bank's considerable holdings in these low-yielding assets curb its capability to amplify profits through cash investments in money markets or higher-return assets.
BAC is anticipated to witness lower overall yields on its securities book for the foreseeable future. However, analysts do not expect the necessity for the bank to liquidate these holdings, thus avoiding additional losses.
The bank's securities portfolio tilts heavily toward debt maturing after ten years. If the Federal Reserve implements another potential rate hike, the valuation of these holdings could decline further, possibly leading to a decrease in earnings from BAC's investments.
Conversely, if interest rates stabilize or gradually decline, share prices may improve, given that the long-term securities held by the bank are expected to increase in value.
Furthermore, BAC reported a 4.5% year-over-year increase in net interest income in the fiscal third quarter of 2023, exceeding analyst expectations. However, it still lags behind its competitors, JP Morgan and Wells Fargo.
BAC has amassed unrealized losses amounting to $131.6 billion on securities, and even with government guarantees, it does raise red flags. Yet, with over $3 trillion in assets and $1.9 trillion in deposits as of September 30, 2023, BAC has sufficient financial stability to weather the storm.
For the average bank customer, an unrealized loss of this magnitude may not be of immediate concern; however, it does present a potential issue for investors. Coupled with the advantage of its massive insured customer deposits, BAC has protection against the kind of deposit flights that regional banks have undone.
Furthermore, BAC’s stocks declined about 11% year-to-date but trades above the 50-, 100-, and 200-day moving averages. However, Wall Street analysts expect the stock to reach $33.76 in the next 12 months, indicating a potential upside of 14.2%. The price target ranges from a low of $27 to a high of $51.
Furthermore, several institutions have recently modified their BAC stock holdings. Institutions hold roughly 69.9% of BAC shares. Of the 2,771 institutional holders, 1,148 have increased their positions in the stock. Moreover, 146 institutions have taken new positions (37,323,335 shares).
BAC continues to streamline its operations, shifting toward a digital business platform as it grapples with decreased branch traffic and escalating maintenance costs.
The strategic shift may leave customers without access to a local branch, highlighting critical considerations for the effectiveness of the traditional cash system and underscoring the potential impact on sections of marginalized society that depend heavily on physical banking services.
Additionally, the prevailing macroeconomic volatility and high interest rates, projected to persist, raise concerns about an increase in BAC's unrealized losses, coupled with the potential customer transition to treasuries or Money Market Funds.
Despite these challenges, shareholders can take solace in knowing that BAC's management seems to be performing skillfully. Additionally, the era of high interest rates has resulted in a net benefit so far.
Interestingly, BAC’s interest-bearing deposits reached $1.31 trillion, reflecting depositor trust in its financial standing.
Although investor sentiment slumped over the past year, BAC maintains an impressive balance sheet fortified by sturdy profitability. Furthermore, it offers an enticing dividend yield of 3.25% on the current share price.
So, it could be wise for investors to hold on to the stock and look forward to a gradual capital appreciation. The unrealized losses might be less daunting for long-term investors focused on continuous dividend payouts.
However, investors seeking steady revenue should proceed with caution. While BAC's forward dividend yield stands at an attractive 3.25%, exceeding the four-year average yield of 2.44%, it still falls short of the 3.78% sector median.
Considering prevailing circumstances, it may be prudent for new investors to wait for a better entry point in the stock.