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Higher-For-Longer Rates Complicate Once-Easy Decisions On Branch Closures

This Month in Retail Banking

As we enter a period of higher-for-longer interest rates, compressed NIM and slower loan growth, financial institutions will inevitably turn to managing expenses as they work to stay in the black.   

Curinos is already seeing signs of this in recent announcements and our discussions with clients. There will be talk of spans and layers and reductions in technology spending, but the most reliable source of savings over the last decade has been branch closures – and we expect them to accelerate. 

In the face of shifting customer behaviors, Curinos agrees that consolidation is necessary and even inevitable for many banks, but in today’s rate environment many of them may not fully appreciate the financial implications.    

As we’ve maintained in the past, branch consolidations comprise three key financial elements: operating expense (OpEx) savings, near-term customer and balance attrition, and foregone future customer and balance acquisition (i.e., lost sales).  

In the near term, the savings in branch OpEx dramatically outweighs the downside impact of attrition and foregone sales. Over time, however, the compounding effect of foregone sales turns the business case negative. This is why Curinos typically recommends reinvesting 20% to 30% of OpEx savings in marketing or other investments to offset foregone sales (Figure 1). 

Figure 1: Financial Impact of Branch Closures

Source(s): Curinos Analysis

In a low-rate environment, the replacement cost of lost deposits is relatively cheap, which makes for a solid business case for most branch closures. But in a higher-for-longer environment, the replacement cost is much higher, so what may have previously been a straightforward decision about closing a branch can now be more complicated. 

Figure 2: Low-Rate v. High-Rate Impact of Closure​

Source(s): Curinos Analysis​

To be sure, many banks must consolidate further and, in today’s environment, picking the right branches for closure will be as critical as ever. But equally important will be reinvesting some of the savings into driving core, low-cost deposits to replace those lost from attrition and foregone sales. 

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