Big-Bank Branch Growth May Most Hurt Wells Fargo

Big banks are fueling their next stage of growth by preying on a weakened rival, according to one team of analysts on the Street, highlighting the integral role brick-and-mortar branches continue to serve in the industry.

As financial institutions including Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) dive into new territories with hundreds of branch locations, they are gaining significant share of the market, as reported by a team of analysts from Morgan Stanley in a note reviewing the recent expansions. In each case, rather than local banks taking the hardest hit, it was Wells Fargo Corp. (WFC) that lost the most market share.

WFC, trading down about 0.9% on Tuesday morning at $57.04, has sank 2.7% over the most recent 12 months and 6.1% year-to-date (YTD), as it struggles with various scandals resulting in the Fed's decision to cap its growth in 2018. (See also: Wells Fargo: Fed Action Is a Buying Opportunity.)

Growing at the Expense of Wells Fargo

In January, JPMorgan announced plans to open 400 new branches in 15 to 20 new markets over the next five years. The strategy will double down on areas such as Washington, D.C., and Philadelphia, where Wells Fargo has a strong presence, reports The Wall Street Journal. Last week, Bank of America revealed plans to open more than 500 location in four years, yet did not give specifics on where it will open branches. As the banks continue closing locations in existing markets, total branch count will likely decline. However, expansion into new cities demonstrates the importance of brick-and-mortar locations, even as the digital revolution disrupts the industry. Nearly half of all U.S. customers continue to visit a bank branch at least once a month, and 60% prefer to open a checking account in person, according to a recent survey conducted by research firm Novantas, and cited by the WSJ.

In a note analyzing Bank of America's recent push in Denver and Minneapolis and JPMorgan's expansion into Jacksonville, both over the past few years, Morgan Stanley found that in all scenarios, Wells suffered a market share loss between 1.5% and 5%. Morgan Stanley's Betsy Graseck estimates that one third of JPMorgan's deposit share gains will come at the expense of Wells Fargo, given 60% of JPMorgan's target markets are already home to Wells. She rates JPM at overweight and expects the stock to gain near 20% over 12 months to reach $136.

As America's biggest banks benefit from strong capital levels, looser regulation and higher interest rates, they are likely to keep growing at the expense of Wells' weakened position and other less-well-equipped community banks.

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