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Branching out to draw in customers: Chase and Citibank, after years of allowing rivals to tap into their customer base, want to bounce back to top Chase vs. Citi(Newsday (Melville, NY) (KRT) Via Thomson Dialog NewsEdge) Apr. 3--On a heavily traveled corner near Manhattan's Union Square there is a branch of JPMorgan Chase, but you might not see it. Three years ago, at a time when Chase was cutting costs, the bank leased its ground-floor space at the site to New Jersey-based Commerce Bancorp, a new rival in the New York-Long Island area, and moved to the second floor. Now passersby get an inviting view of Commerce's bright-blue ATMs and red neon ceiling decorations, while the side entrance to Chase's escalator, hung with faded-looking signage, is easy to overlook. "There are some decisions made historically that we would undo if we could," Michael Cleary, chief operating officer for Chase's consumer banking unit, said in an interview last month. The situation near Union Square is a legacy of what analysts say was a sluggish initial response by Chase, historically the dominant consumer bank in the metropolitan area, to a horde of new competitors that entered the area beginning in the late 1990s. While newcomers employed a so-called de novo strategy of building new branches, some with trendy designs, Chase was slow to expand its branch system and let some of its existing locations become down-at-the-heels. Citigroup, the area's second-largest bank in terms of consumer business, was even slower to react, analysts say. And they say the delays may be one reason why federal data show that each bank's share of deposits has eroded recently in the metropolitan area - an area the banks count on for huge amounts of such funds. Unprofitable times Chase's and Citi's relative neglect of their branches stemmed from a perception by banks in the 1990s that customers could be handled more cheaply and efficiently with ATMs, or online or by telephone, industry experts say. But the two giant companies also were distracted by other problems. Chase, an amalgam of six banks put together between 1987 and 2004, has had trouble integrating its various parts. And as "financial supermarkets" engaged in a variety of businesses besides consumer banking, Chase and Citi were caught up in recent scandals involving their investment banking and brokerage operations, such as New York Attorney General Eliot Spitzer's Wall Street probe and the collapses of Enron in 2001 and WorldCom in 2002. Now, however, the two behemoths are fighting back. After a period in which they actually trimmed their branch locations slightly, Chase and Citi are putting up new branches, spiffing up existing ones and spending money on advertising and marketing campaigns to draw in customers. "They see this [erosion of deposit share] as a massive problem, and they're reacting aggressively to solve it," Richard Bove, an analyst with Punk Ziegel & Co., said of the two banks. "Because in the last analysis, if you try to figure out where the profits come from in banking ... deposits are the biggest source." Prodded by James Dimon, who was chief executive of Chicago's Bank One when Chase acquired that bank in 2004 and now heads the combined company, Chase has added 10 Long Island branches and 29 in New York City in the past two years. This year it plans to build five more on the Island and 25 in the city. Beginning this year, older Chase branches in the metropolitan area will get a makeover including new carpets, paint and signs that are brighter and "more inviting," Cleary said. Interiors will be updated to include more "comfort zones" where people can sit, he said. Citi returns to home turf Citi expanded its metropolitan area branches by buying European American Bank in 2001, but it didn't begin a serious branch-building campaign until this year. Citi, which recently overhauled the leadership of its retail banking unit, plans to build about 100 new branches in the United States in 2006. About one-third will be in the metropolitan area, including a "fair share" slated for Long Island and New York City, Rob Julavits, a spokesman for Citi, said. John Stewart, who heads Citi's North American branch operations, said in an interview the bank is "picking locations" on Long Island, but is especially interested in having a presence in eastern Suffolk. Citi also will begin upgrading its existing branches in the metropolitan area this year, Stewart said. "We view this as our home turf." Stewart said. "This is [the Citi] franchise that's been here the longest." Citi, which originated in New York in 1812, draws nearly 60 percent of its total U.S. deposits from New York City and Long Island, according to SNL Financial, a financial information provider. Chase, which traces its roots in the area to 1799, depends on the city and the Island for nearly 43 percent of such funds. Banking on rewards The banks also are spending money to draw new customers to the branches. Citi recently offered extra rewards under its "ThankYou Points" program to customers opening new checking accounts in the metropolitan area. Chase is offering 7-month CDs carrying 4.5 percent interest to checking account customers who deposit a minimum of $10,000 in a CD. It also promises $100 to people who open free checking accounts with direct deposit in the metropolitan area before May 15. Deposits by individual consumers are the lifeblood of banks because they provide relatively cheap funds that can be used for lending, investment banking and other profit-making operations. "The big money in the banking business is in collecting retail deposits," said John Kanas, chief executive of Melville-based North Fork Bancorp, which has expanded rapidly on Long Island and in the city in recent years. "They ebb and flow with the interest rate cycles but always provide a deep cushion of money you can use to invest." Last month, Capital One Financial Corp., a giant credit card company, cited North Fork's growing share of the region's retail deposits when it announced it will buy North Fork for about $14.6 billion. North Fork has more than doubled its Long Island branches since 1996, and in 2005 it overtook Chase as the bank with the largest share of the Island's deposit market, according to the Federal Deposit Insurance Corp. In New York City, North Fork went from nine branches in June 1996 to 141 in June 2005, replacing Citi as the bank with the second-largest branch network after Chase. North Fork was fifth-largest in the city in terms in terms of deposit share. Other competitors that have recently infiltrated New York City and Long Island include Seattle-based Washington Mutual and Commerce, which is headquartered in Cherry Hill, N.J. Washington Mutual, which acquired Dime Savings Bank of New York in 2002, grew from 97 area branches in 2002 to 157 in 2005. Commerce expanded from 11 to 56 locations over the same period, solely by building branches. Looking to bounce back While the competition has grown, Citi's share of all deposits in New York City and Long Island has dropped for three straight years, and Chase's share also dropped slightly in 2005, the FDIC data show. Stewart, the Citi consumer banking executive, said although some questions could be raised about the data, "it certainly is directional, so we take it seriously." The FDIC numbers can be influenced by banks' deliberate movement of headquarters deposits, such as large escrow accounts, to other areas. A Chase spokesman, Tom Kelly, said "over a long period of time, FDIC data is indicative, but not on any one given day." Important as deposits are, gathering them isn't the only reason why a large branch system is crucial to banks' profits, experts say. In recent years, banks have begun to see branches as ideal places to sell products such as personal loans, home mortgages, small-business loans and credit cards. While Chase and Citi "didn't think it made sense to pump all that money into building brick and mortar branches," now they're "deeming it worthwhile in terms of ... face time," Brian Shullaw, a senior analyst with SNL Financial, said. "If you've got your checking account somewhere, it's easier for them to get other products in front of you." Moreover, diversified banks such as Chase and Citi have come to appreciate the relative stability of consumer business. "You're going to always have volatility in investment banking earnings," said Chase's Cleary. "But retail generally will be more consistent." Still, building a new branch is expensive and time-consuming. It can cost up to $2.5 million just to open the doors, another $1.5 million for the first year of operations, and the branch may not break even for two years, Chase retail bank head Charles Scharf recently told analysts. Jason Goldberg, a Lehman Brothers analyst, said in an interview that Chase and Citi "are kind of playing catch-up" in metropolitan area consumer banking, but their abilities to produce profits shouldn't be underestimated. "They're both big companies, they have big advertising and marketing budgets, and they have full sets of products" to sell at their new locations, he said. Some banking observers speculate, however, that one or both banks might try to speed up the process by acquiring an institution with a sizable branch system in the metropolitan region. Last week, there were reports that Chase is in discussions to acquire most branches of Bank of New York. "We always look at growing our distribution system through various avenues, and we've been pleased with our new-built branches in New York," Calmetta Coleman, a Chase spokeswoman, said. Chase and Bank of New York wouldn't comment on the reported talks. "If the right opportunities come along, we're certainly always open" to them, Stewart, the Citi retail banking executive, said. "[But] we're committed to the de novo strategy ... whatever happens." CHASE vs. CITI Branches The number of branches on Long Island as of June 30 of each year. Year Chase Citibank 1996 39 33 1997 97* 33 1998 80 33 1999 79 33 2000 71 33 2001 69 34 2002 67 87** 2003 66 85 2004 67 82 2005 69 82 * includes acquisition of Chemical Bank ** includes acquisition of EAB (European American Bank) SOURCE: FEDERAL DEPOSIT INSURANCE CORP. Deposit share Deposits as a percentage of total deposits in Nassau and Suffolk. Data are as of June 30 of each year. Year Chase Citibank 1996 3.81% 5.08% 1997 14.8* 4.77 1998 13.38 4.96 1999 12.44 4.99 2000 13.03 5.13 2001 13.06 5.61 2002 14.64 13.82** 2003 15.37 11.50 2004 15.79 10.88 2005 14.26 10.39 * includes acquisition of Chemical Bank ** includes acquisition of EAB SOURCE: FEDERAL DEPOSIT INSURANCE CORP. Where the money is Top metropolitan-area retail deposit markets in the United States, excluding large corporate deposits. AreaDeposits (in billions) New York** $431 Los Angeles $238 Chicago $178 Miami $111 San Francisco $104 Philadelphia $100 Boston $94 Washington, D.C. $84 Dallas $64 Atlanta $64 Houston $62 Detroit $61 Seattle $45 San Diego $45 San Jose $43 ** includes Long Island, New York City, northern New Jersey, Westchester, Rockland counties SOURCE: SNL FINANCIAL |