US Banking: Mobile Banking Will Increase Scale Economies


Despite a strong rally off October 2011 lows, large-bank valuations remain attractive with WFC, JPM, and BAC trading at price-to-book multiples of 60%, 40% and 30% relative to the S&P500 – at or below the low-end of pre-crisis ranges. Valuations have responded to lower normalized returns-on-equity (that we estimate at 13-15% for large banks vs. results of over 20% in some pre-crisis years) but do not reflect either that current returns (of 4%, 9%, and 13% for BAC, JPM, and WFC respectively) are below the new-normal or the re-rating that typically accompanies de-risking.

The scope for returns to improve arises from a normalizing yield curve (see, for example, our note of March 6th titled “The Dynamics of Net Interest Margins at Selected US Banks”) and lower costs-to-serve as customers shift basic-transaction activity from branches to mobile, online, and ATM channels. This channel migration is at the tipping point; for example, BAC reported that 10% of deposit transactions were executed “remotely” through mobile in 2014Q1 (up from 6% in 2013Q1 and none in 2012Q3) rather than via teller.

The expense lever is important to bank profitability with the industry generating the same return-on-assets today as coming out of the recession of the early 1990s. This is despite net interest margins being over 100 basis points lower; the reason is that the ratio of expense to average assets is also 100 basis points lower at 2.9%, and we expect this to fall to 2.5% over the next 5-years. Efficiency gains, historically driven by industry consolidation[1] (with large banks operating meaningfully more efficiently than small banks), will increasingly be driven by optimization of the delivery network.

Our thesis is that the shift to mobile will disproportionately benefit the three largest US depositary institutions because they have the scale to make the necessary marketing, infrastructure, and data-strategy investments and the scope to best optimize across the branch, online, mobile, and ATM channels. More regional institutions will outsource to infrastructure providers such as FIS and FISV (generating opportunity particularly for FIS given its mobile capabilities) but white-labeling makes it more difficult to create the differentiated offerings that large-banks are likely to evolve from proprietary infrastructure such as ChaseNet and even shared infrastructure such as clearXchange (a P2P mobile platform jointly owned by JPM, BAC, and WFC).

While it may seem counter-intuitive for the benefits of mobile to accrue to banks with the largest branch networks, we believe branches will remain a critical sales channel for meaningful consumer segments and hence important to the scale economies that support investment in mobile infrastructure. WFC CEO John Stumpf reminds us: “Half of the US population and half of businesses in America reside within two miles of our stores. Just think of that. And while people, a lot of times join us online, they pick the location, they pick the provider that they are familiar with or that’s close by them because they still use the store even for the millenials who are very technologically advanced and savvy”.

Furthermore, as customers continue to migrate to mobile, online, and ATM channels, the largest banks have the greatest opportunity to invest in the associated delivery platforms to reduce cost-to-serve. JPM, for example, reduced branch staffing by 8% in 2013 and an expected 20% over the next two years even though it is not planning a net reduction in branches; it comments that the variable cost of a remote deposit transaction is 3 cents vs. 65 cents for a teller-assisted deposit.

More typically, banks have reduced branch-counts and the trend is accelerating: industry-wide branches were down 2% in 2013 vs. 0.8% in 2012 and 0.4% in 2011 (see Exhibit). BAC has been particularly aggressive in branch cuts with CEO Brian Moynihan highlighting the expense-save opportunity: “The strategy in our retail segment has been to lower the cost of service, so we could improve our customer experience. We do that by continuing to optimize our delivery network of all types in response to customer behavior changes. Banking centers and basic teller transactions continue to decline as customer move their business to mobile and online transactions … People effectively carry a branch in their pocket. This, coupled with other measures, allowed us to reduce cost in our consumer banking business by 4% from last year’s first quarter.”

Please see our published research for the full note and tables.

[1] The top-11 depositary institutions now control 54% of US deposits, up from 28% in 1998.


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