Tuesday, December 05, 2006

Banks Renew Commitment to Branch Networks

Investment Executive, Rudy Mezzetta, 5 December 2006

Canada’s biggest banks, flush with cash and looking to grow, are aggressively extending their retail networks. They will be opening scores of new branches across the country after a decade of consolidations and closings and years of concentrating on building the self-directed channels.

“Ten years ago, there was a belief that the alternative channels would rule. Most banks eliminated or consolidated branches,” says Steven Luckie, a financial services industry consultant for Capgemini Canada. “Now they’re playing catch-up.”

Although there’s no question that Canadians have eagerly adopted online, call-centre and ATM banking, they continue to demand in-branch, person-to-person service — especially when it is time to purchase products or seek advice.

A decade ago, there was a perception in the industry that branches were costly and doomed to increasing irrelevance. Banks gently nudged their customers toward self-directed channels, which Canadians took up eagerly, appreciating their convenience. The banks consolidated some branches within their own networks, and either sold off or closed branches in small communities or low-income neighbourhoods.

Today, it appears the banks are making a new commitment to their retail networks. The branches are seen as a critical channel to attract and keep new clients and to tap into attractive markets, especially the economically surging Western provinces, immigrant communities and baby boomers who are set to retire over the next several years.

“Customers still make the vast majority of their purchases in branches, despite the presence of all the other channels,” says Wendy Hannam, executive vice president of domestic personal banking and distribution for Bank of Nova Scotia in Toronto.

“So, our focus when we open branches is to meet the full financial needs of our customers: loans and deposits, wealth management, wills and estates, small-business services — the entire range of services,” Hannam says.

Scotiabank will open 50 new branches, with an emphasis on British Columbia and Alberta, by the end of next year and will hire 700 people, including 125 advisors, for the new branches. Scotiabank is also hiring another 120 advisors for its existing network, and continues to refresh and refurbish older branches.

In October, the bank converted 10 branches of National Bank of Greece (Canada), which it bought about a year ago from National Bank of Greece SA, into Scotiabank branches.

Hannam disagrees with the notion that the industry overestimated the migration to self-serve and is “catching up” after years of ignoring the branch network. “The volume of transactions that are done through our call centres, ATMs and online are quite phenomenal, and worth every bit of investment there,” she says. “The focus on growing the branch network is simply a reflection of the economy and that people are migrating to Alberta and B.C. The economy is doing extremely well in those provinces.”

Scotiabank’s 50 new branches will be opened in one of two formats: traditional full-service branches with both teller and advisory services, and smaller branches that won’t have tellers but will offer customers access to advisory staff and services, ATMs and online banking kiosks for transactions.

The smaller tellerless branches will be placed only in neighbourhoods and communities that have a full-service Scotiabank branch nearby.

Industry observers suggest that the importance of branches is not about the number of transactions done through that channel (although 30% of Canadians still use their branch as their primary banking channel, according to the Canadian Bankers Association), but on the opportunity it gives banks to acquire clients, sell them products and advice, and cement relationships by offering support.

A study on the Canadian banking industry released in October by U.S.-based J.D. Power and Associates indicates that the in-branch experience is the key driver for overall customer satisfaction, despite the fact that most transactions are now done online. And having branches in small communities and urban neighbourhoods, industry insiders agree, makes the banks visible to potential customers.

“Forty-four per cent of Canadians still have their bank account at their first-ever bank. By far, people select where they’re going to do their banking based on having a branch close to where they live or work,” says Tim Hockey, head of personal banking at TD Bank Financial Group in Toronto. “So, we’re very conscious of having great locations and warm and inviting branches. It’s a very important part of our growth strategy.”

TD opened 21 new branches in its fiscal year ended Oct. 31, 2005, and had plans to open 31 in 2006 and 30 more in 2007. The bank also completely replaced its ATM network this year and will continue to renew and refurbish existing branches.

TD’s branch expansion plans represent a shift in direction for the bank, which spent the early years of this decade shutting down hundreds of branches as it consolidated the Toronto-Dominion Bank and Canada Trust branch networks following their 2000 merger.

“Our intention was always to get back to putting branches in growth markets. So, we have a rigorous program in which we look at where customers are moving to live or work. And if we don’t have a branch there, we put one in,” Hockey says.

The Big Six banks have posted record profits in recent years, a large part of which was realized in the retail sector, and are sitting on piles of cash, so they can easily afford the capital outlay to extend their branch network and hire new staff.

“This isn’t an investment in which we’re paying in short-term earnings for the long term. We’re making sure we keep our expense growth inside our revenue growth so that we can get the short-term earnings as well as invest in the future,” Hockey says.

Bank of Montreal plans to open 16 branches in 2007. This past year, it acquired an additional eight branches through the acquisition of Bcpbank Canada, the Canadian arm of Portugal’s Millennium Bcp. BMO has upgraded 85% of its current branch network, hired 1,000 new employees to bolster its Canadian retail services and will have replaced all its ATMs by the end of 2006.

CIBC plans to move, expand or build 70 branches between 2007 and 2011, with an emphasis on Ontario, B.C. and Alberta.

National Bank of Canada, which has 348 branches in Quebec and 105 in the rest of Canada, has announced no plans to expand its branch network, opting to open, consolidate or close branches on an as-needed basis.

Royal Bank of Canada, the country’s largest bank, has announced aggressive expansion plans, saying it will open 112 new branches, representing about a 10% increase in the size of its network, by 2010, with 50 branches in the greater Toronto area and another 62 nationally. It is renovating 525 of its existing branches, with that program expected to be completed by early 2009.

Ann Bowman, RBC’s vice president of distribution strategy, says that today’s branches are being designed with more focus on the advisory business than transactions.

“If you look at the branch floorplate today, there is significantly less space focused on administration,” she says. “We have more sales roles than we did 10 years ago. In our average branch size, we used to have nine offices. Now we have 13.”

Bowman says that banks are borrowing design principles from the retail world to make their branches more welcoming and easier to navigate. This includes clearer signage, greeter areas, private living room-like “discussion rooms” for relationship managers to meet with clients and even redesigned teller wickets.

New branches can more easily incorporate the technological tools that allow staff to access customer information more readily and offer appropriate additional products and services.