As Spain reopens after the COVID-19 crisis, its banking industry is seizing the opportunity to shrink its swollen branch network which has long been a drag on profitability, with just four banks so far planning at least 800 branch closures this year.
Despite significant cuts since the 2008 financial crisis and more than 2,000 last year, Spain’s 24,000 bank branches still give it one of the highest ratios to people in the world, according to the International Monetary Fund, trailing just San Marino, Mongolia and Luxembourg.
Union opposition to closures and a population more reliant on using in-branch services than others in Europe have slowed Spanish banks’ progress in closing branches despite their running costs being a major drag on profitability.
But after shutting down huge parts of their networks during the lockdown, lenders are examining whether changes to consumer behaviour mean more branches can remain shut.
“Many of the even older clients will have discovered that you can do things quite quickly and cheaply online. I am not sure they would go back to doing things the same way as before,” said Nick Hill, managing director at rating agency Moody’s.
Bankia (BKIA.MC) and Sabadell (SABE.MC) both plan not to reopen some of the branches they closed during the lockdown imposed in Spain to curb the pandemic, according to sources.
Sabadell and Bankia are closing 235 and 140 branches this year, respectively, while Unicaja is reducing its traditional network by 100 in the next three years. Oscar Arce, the Bank of Spain’s director general for economics, told a news briefing this week that it would be up to each bank to decide on branch closures but said “there were elements in every bank’s network that were not profitable.”
In a sector grappling with higher loan-loss provisions to cope with the pandemic, financial consultant Kearney believes Spanish banks will need to reduce costs by between 2 billion to 3 billion euros in the medium-term to improve profitability – and branch closures are likely to be central to that.
Around 35% of bank branches across Europe have closed in the last 10 years according to Kearney, as lenders slashed costs and customers switched to digital platforms.
But in Spain around 65% of product and service contracts are still agreed in branches, compared to less than 50% in Europe as a whole. That’s left Spanish lenders wary about cutting off access to branch services, particularly in rural areas.
Instead some are set to accelerate a model they were trying before the crisis – using a McDonald’s style franchise to outsource branch services.
Lenders like Unicaja (UNI.MC) and Liberbank have started using self-employed agents to run branches and sell the bank’s products. The ‘financial agent’ is responsible for rent, electricity and water supply bills while the bank provides the technology and the financial products, Jonathan Joaquin de Velasco, the head of strategy and risk policy at Liberbank, told Reuters.
“We get rid of all the fixed costs, we turn them into variable costs, and this obviously has a very relevant impact on efficiency over time,” Joaquin de Velasco said.
When Liberbank first launched this model with one ‘pilot’ ‘financial agency’ in September of 2016, it had 992 traditional branches. As of the end of the second quarter, the lender will have 560 traditional branches and 200 financial agencies.
Though Velasco did not give a breakdown on the cost-savings arising from this model, he said its implementation would on average improve the efficiency ratio by almost three times that of an equivalent branch in size.
Banks can also use the model to incentivize the sale of higher margin products for wealthier customers, making the remaining outposts more profitable.
“Downsizing the network is a long established trend, but more than just downsizing it is the transformation of branches, that will continue”, said Caixabank’s Chief Executive Officer Gonzalo Gortazar during a business school event on June 18.