Both JP Morgan Chase and Wells Fargo made major acquisitions just two weeks apart at the end of September, 2008. JP Morgan landed WaMu, and Wells Fargo acquired Wachovia. One year later, Chase has completed the WaMu conversion. Where is Wells? Just starting branch conversions in Colorado, with other states to follow.
The conventional wisdom is the quicker the better: get the rebranding done, integrate people and systems, get moving forward as the new company.
Why is Wells going taking it so slowly? It’s in their culture to take a paced and thoughtful approach, as they did with community bank mergers in the old Norwest days. And they have the reputation of taking the best of both, as they did when Norwest acquired Wells but retained the brand and most of the management.
How do the numbers look? Wells claims they are exceeding expectations for cost savings, and doing a superior job in retaining customers. Chase lost 3% of its deposits, a trend attributed to high rate CD runoff from WaMu. Wells, by contrast, grew deposits 6% in the 4th quarter of 2009 and 20% on an annualized basis.
Every merger is different. The cultural fit, deposit mix, and brand perceptions of WaMu may have made it important for Chase to move more quickly. But when it comes to retail banking, Wells Fargo has always been a standout performer. But you just have to wonder if the situation was reversed (Wells got WaMu, Chase got Wachovia) whether we’d still see the same results: Chase did it faster, but Wells retained more customers.
I expect that merger activity will increase significantly as the economy improves. Many banks have strongly improved their capital position, and are probably over-reserved
- they are in an excellent position to be acquirers. Higher capital requirements, increased regulation and a more difficult earnings environment will act as an incentive for others to merge. As more banks consolidate, it is worth thinking through the lessons of the Wells “tortoise” vs. the Chase “hare”.
Ed Depenbrok and Beth Clark are the principals of dbrok group, which specializes in financial and treasury management support to Community Banks. I’ve known Ed, and respected his knowledge and advice, since we worked together at Bank One (now J.P. Morgan Chase). He and Beth wrote the following particularly timely guidance to their clients, which is reprinted below.
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Certainly, the next sustained move in interest rates will be up – rarely, has there been such certainty. Yet, much of the banking industry sits with balance sheets with even larger positions of long term assets, funded with short term liabilities, than they had when rates were declining a few years ago. Why?
- Focusing on credit risk (understandably so) has taken the eye off the ball of interest rate risk, while credit problems have also made banks hungry for earnings to compensate
- The extremely low level of interest rates, especially short term, and the markedly positive yield curve, have enticed banks to extend out their assets; at the same time, low rates have discouraged retail depositors from wanting to commit their funds for longer terms
- Community banks are booking more residential mortgages because demand from secondary market participants has dwindled dramatically
- National market funding has often been cheaper and more available than local deposits
While the Fed will undoubtedly be trying to keep rates under control on the way up by taking small steps, the market may have other views (due to inflation expectations, other supply/demand factors, etc.). This could push the Fed to ratchet the Fed Funds rate up more quickly than they would like, with the rest of the curve following suit. This would put pressure on margins, and capital, at a time when many banks can ill afford it.
Community banks are particularly at risk, because of the more restricted nature of their outlets for both loans and funding. The latest data from a couple of UBPR peer groups of banks under $1B in assets, shows marked lengthening of assets relative to liabilities, and of long assets relative to non-maturity deposits, between 2006 and 2009.
What are some actions that you can be taking now, keeping in mind that we may still see the low rates for awhile? Continue reading
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I’ve always admired U.S. Bancorp’s success with in-store banking. Nationally, they rank number one in total number of in-store (supermarket) branches with about 730, typically adding 40-50 per year.
But it’s not just grocery store banking. They’ve extended the concept to university campuses, hospitals, and corporate office complexes. U.S. Bank has about 60 university and workplace branches, adding 10-15 annually.
Here’s the key: these small footprint branches only cost 20-25% of the cost of a traditional branch but generate 30-40% of the income, and are sales leaders when it comes to new account opening.
While Bank of America and others have backed away from this strategy, U.S. Bank embraces it. Why have they been successful? Chuck Stroup, U.S. Bank’s EVP responsible for the in-store channel explained in a recent Chicago Tribune article:
- They manage in-store separately from stand-alone, traditional branches. “Our mantra is it’s 50% the same as traditional branch banking and 50% different”.
- They leverage their host partner’s knowledge – not just traffic patterns, but also demographics and purchase propensity during different day-parts. “We employ different marketing tactics, offer different promotions, pricingwise, from what traditional branches do.”
- They hire differently, looking for individuals with retail experience, then teach them about banking.
As consumers write fewer checks, and teller transactions in traditional branches continue to decline, we believe U.S. Bank’s experience in non-traditional branches will give it a competitive edge, enabling it to – expand distribution while at the same time reducing overall cost.
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