Banks managers are having a difficult time maintaining the viability of their branches in towns and villages. The business planners in bank head offices need to re-orientate their criteria when deciding if a branch should be retained.
Whilst the profit records of banks in Northern Ireland are expected to be comparable with (if not better than) most other private sector companies, the results for individual branches are more variable.
Branch profitability has been squeezed in recent years as key features of normal commercial life have been changing.
A viable high street branch needs to attract deposits and/or borrowers on a scale that makes a profitable margin. In an era when interest margins between payments by borrowers and payments to depositors have narrowed significantly, the net return available to meet staffing and overhead costs has fallen.
For a small high street branch, with account holders who use their bank balances simply to hold relatively small amounts to meet day to day routine transactions, the structure of the business model has changed. The convenience of a bank account to maintain household accounts remains useful to account holders but the relative size of deposits has diminished as account holders are less likely to see a bank account as a favoured form of saving.
From the perspective of the bank customer, the convenience of a local high street branch remains attractive. From the perspective of the management of the bank branch, the staffing and overhead costs remain significant (or may have increased) but the profitability of the funds under management is, relatively, smaller. The manager of a bank branch would ideally hope to attract an increasing number of credit-worthy borrowers.
If the head office of a commercial bank decides that lending decisions above a set amount should be handled in a head office decision-making system (as well they might), then that takes the discretionary management function and costs away from the high street branch. No surprise, therefore, that in recent developments there have been branch closures in apparently successful urban or suburban locations.
As bank branches have become of reduced daily significance to individual customers, the footfall has diminished, personal contact has been reduced as transactions go on-line, casual payments are increasingly met by contactless transactions and more elaborate financial services have moved to specialised providers. Bank branch managers are increasingly supervisors of well-developed routine actions.
The changing profitability of individual bank branches is as evident in Northern Ireland as in other neighbouring regions. In Great Britain closure of high street branches is a recurring process. In towns with a population of under 30,000 people there are examples where there is no remaining local branch of any bank.
The scene in Northern Ireland is still uncertain. Of the four bank organisations with local high street branches (Danske, Ulster, Bank of Ireland and AIB) the trading results have been changing.
AIB no longer formally trades as First Trust. There are no separate published financial results for the Northern Ireland business.
Bank of Ireland is reported to be considering scaling back its local presence with an 'all options are on the table' comment from the chief executive.
In Northern Ireland, latest annual profits of £57m stayed buoyant in 2019. In a separate company, Bank of Ireland owns and operates a successful finance company, N.I.I.B.
Ulster Bank, a wholly owned subsidiary of (newly renamed) Nat West, reported profits of £20m in 2019.
This was a fall from £53m in 2018.
Danske Bank in Northern Ireland is the trading name for the still formerly named Northern Bank. Danske Bank registered healthy profits of £90m in Northern Ireland in 2019.
The position of these commercial banks in Northern Ireland in 2020 is less certain than even a year ago.
A major recession boosted by Covid-19 and stressed business confidence, means that to a still uncertain degree, local banks will be making large provisions for future loan impairments.
In the first half of 2020, Danske Bank has set aside £30m for these unwelcome consequences.
Be ready: the branch near you may have an uncertain future.
There is no certainty that all four banks will emerge profitable and stronger from Covid-19.