DBRS Ranks U.S. Super-Regional Banking Franchises – Bigger, But Still Not Dominant

Dominion Bond Rating Service (DBRS), in its new report on the seven biggest U.S. super-regional banking franchises, finds that despite the ongoing branch expansion of most leading banks, they still face strong competition in almost every local market. Although the super-regional banks keep getting bigger, they still do not dominate in the United States the way one might expect given their enormous size, concludes DBRS in its update of a report originally published in 2005.

Referred to as the “big banks”, the companies included in the study are Bank of America Corporation (rated AA low), Citigroup Inc. (AA (high)), JP Morgan Chase & Co. (A (high)), Wachovia Corporation (AA (low)), Washington Mutual, Inc. (not rated), Wells Fargo & Company (AA) and U.S. Bancorp (AA (low)).

The study, titled “Bigger, But Still Not Dominating – DBRS Reassesses U.S. Super-Regional Banks,” focuses on the seven largest super-regional franchises that stand out by the size of their deposits and assets. Each of these seven institutions has at least $200 billion in assets, with three having more than $1 trillion, and operates a branch network that extends across many states in multiple regions.

Out of the seven biggest super-regional banks, JP Morgan Chase & Co. has made the most progress with its franchise, by adding more than 450 banking locations on a pro forma basis after agreeing to take over the branches of The Bank of New York Company, Inc. in the New York metropolitan area. Bank of America Corporation is the only of the seven big banks to have reduced its branch count since DBRS first analyzed the super-regional banking franchises. Still, the bank operates the broadest branch network among all U.S. banks with about 5,800 branches.

In an extension to last year’s study, DBRS analyzes the branch market position of the biggest banks not only by state level but also in each of more than 16,800 U.S. cities. This analysis confirms the strength of Wells Fargo & Company’s and Wachovia Corporation’s franchises, which are the only two banks to have more than 40% of their branches in cities where they have a dominant market position.

“Our detailed analysis of the big banks’ market position at the state and city level shows that they face strong competitors in every local market, ranging from other super-regional banks to regional financial institutions to community banks,” comments Roger Lister, Chief Credit Officer of DBRS’s U.S. Financial Institutions Group and author of the study.

A new map in the updated report depicts the intense competition between the seven super-regional banks and the next-largest eight multi-regional banks in the 24 U.S. states with the highest number of branches. In each state, the market leaders are up against strong rivals.

DBRS’s analysis focuses on the portion of branches a bank operates in states and cities where it enjoys a strong market share. This approach is based on the observation that economies of scale in branch banking tend to make market leaders more profitable and less vulnerable to competitive pressures. “Even though they do not dominate their local markets, their large, geographically diversified branch networks give the big banks a stable funding source and added resiliency against increased competition and allow these banks to realize cost and revenue synergies,” says Mr. Lister.

DBRS analyzes branch shares at the state and city level because U.S. banking competition is local in nature and national size does not ensure local success. DBRS regards a bank with more than 20% of all branches in a local market as “dominant” – however, almost no bank reaches this position in any U.S. state. A branch share of 10.0% to 20.0% is viewed as “robust”; banks operating between five and ten percent of all branches are deemed “well-established”; and anything less is regarded as a “foothold”.

Using this framework, DBRS has updated its ranking of the seven U.S. super-regional banks as follows:
– In the top tier, Wachovia Corporation, Wells Fargo & Company and Bank of America Corporation stand out because of the robust position in most states and local markets that they compete in.
– JPMorgan Chase & Co. and U.S. Bancorp, in the middle tier, maintain somewhat weaker, but still well-established, overall franchise positions.
– In the lowest tier of super-regional franchises, Washington Mutual, Inc. and Citigroup Inc possess robust positions in their home regions, but are merely well-established or have footholds elsewhere.

DBRS considers the strength of a bank’s branch-based franchise as an important factor in its ratings. However, DBRS also looks at other aspects of a bank’s franchise such as non-branch distribution channels, including consumer finance offices, mortgage banking and retail brokerages. “Despite the growth in online banking and other alternatives,” notes Mr. Lister, “branches remain the key channel for banks to serve their retail, small business and even many middle-market customers, making a strong branch network a key part of a bank’s overall franchise.”

All data in this report has been updated based on June 2005 regulatory reports of the banks, with pro forma adjustments made for announced mergers, acquisitions and divestitures through June 2006. The state-level analysis is enhanced in this edition with analysis of market positions at the city level. Also, more statistical information on the next group of eight multi-regional banks has been added in this update.