2009Aug10 Pruning Bank of America
2009Aug10 Pruning Bank of America
“BofA Plans to Cut 10% of Branches” Wall Street Journal, July 28, 2009
The meltdown may have abated for now, but the banking system remains quite sick. As the Journal writes, “Bank of America Corp. Chief Executive Kenneth Lewis told investors last week he is planning to shrink the company's 6100-branck network by about 10%, a pullback from the tws-decade expansion that took the bank from coast to coast.
The bank ostensibly insists that the move was the result of “customer preference,” as more banking has shifted online and to ATMs. This explanation seems rather questionable to us. Yes, basic checking and deposit functions can now be done online. But loan origination – the money maker for banks – is still largely done in person. And customers 50 and older – who have the most money of all depositors -- still tend to favor a personal touch to their banking and often do not feel secure conducting financial transactions on the anonymous internet.
A far more likely explanation for Bank of America’s decision is that management simply does not see loan growth in the coming years. With demand for mortgages, auto loans, and even credit cards down during this period of deleveraging, the bank will have a hard time growing its revenues. And with delinquencies likely to remain persistently high for years, the bank needs to cut costs where it can. Hence, the branch closures.
This is not the message the bank is sending the public, however. The same Journal article quotes Mr. Lewis as saying that the economy is in the "seventh inning" of deleveraging by consumers. He also insists that the savings rate will not stay at 6-7% because that level of frugality is “not in the American gene pool."
This is absurd, of course. The savings rate was over 10% as recently as the early 1980s, before the great, multi-decade Baby Boomer spending spree. With the Boomers now forced to save aggressively for retirement, it could easily surpass those levels in he near future. Following the baseball analogy, we are still in the early innings of the deleveraging process.
We understand that CEOs often feel pressure to paint a rosy picture even when conditions are very, very bad. It’s more instructive to see what they do rather than hear what they say. And in this case, Bank of America’s actions say it all.
HS Dent Research Team
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