Problem on Bank branch networks

Question

While banks across the United States and Europe are cutting down their number of branches, the number of bank branches in Hong Kong has increased in the same period. Hong Kong Monetary Authority statistics show the number of bank branches in Hong Kong at the end of 2009 was 1,293, up from 1,220 in 2006.

a) Please provide three reasons that banks in the US and Europe are generally reducing the number of their branch offices. Discuss each of these reasons critically.

b) Explain why the number of branch offices of banks in Hong Kong have been increasing. On the other hand, discuss why the local banks in Hong Kong tend to increase their branch networks.

Answer 1

a) The first reason is the increasing popularity of alternative banking methods. Traditional branches serve as the place for individuals and businesses to handle their daily banking activities. Major users of branches include individuals and small and medium-sized businesses. The introduction of alternative banking methods such internet banking and increasing installation of ATMs in the US and Europe reduce the demand for individuals to go to bank branches to handle their banking activities. However, this can only explain partially the reason of the number of branches has been reduced in the US and Europe. Compared to branches, ATMs and internet banking can operate 24/7 which provides a lot of flexibility to clients and reduce the costs of operating branches.

The second reason is that operating costs of branches is high compared to other mediums. With the decreasing interest rate margin for banks in the US and Europe, it is therefore more likely for them to reduce costs in order to keep profitability. Operating branches is a relatively high-cost for distributing banking services. However, some banking services such as wealth management require close interaction between clients and banking professionals. Reducing the number of branches will reduce efficiencies of communicating with clients for these services.

The third reason is that the integration of banks in the US and Europe led to reduction of branches. However, recently study done by academia has shown that financial consolidation was a feature of the banking markets in the European Union during the 1990s, although cross-border mergers and acquisitions were rare, and this came along with a reduction in bank branch numbers (Molyneux, 2003). 

b) The major reasons for increasing branches is that there are increasing numbers of bank corporations setting up their offices in Hong Kong, as their hub for their business in Asia-Pacific. With the increasing number of banking corporations in Hong Kong, the number of branches grows undeniably, as branches still serve as the major method of interacting with clients, according to the research done by McDonwall (1993).

With the low interest rate environment, the net interest margins for banks are undeniably suffering from shrinking. In order to maintain banks’ profitability, local banks start to reallocate their resources to non-interest linked businesses, such as insurance, investment products, wealth management and financial planning services. Most of these services require close interaction between banking professionals and their clients. The most proper place to have this interaction is branches. As the non-interest portion account for a growing portion of revenue for local banks, it is therefore likely for banks to operate more branches in an attempt to increase their market share in this business area.