Desjardins is rationalizing its branch network. Can (or should) banks and credit unions follow?

As reported in today's Le Soleil, Desjardins plans to close 30% of its branches and ATMs over the next three years. This amounts to almost 190 locations from its current complement of around 700 in Quebec and Ontario. While smaller banks such as Laurentian have slashed their physical presence, Desjardins is the first major financial institution to do so. This move will signifantly change the economics of branches for the cooperative. Desjardins' current average of $480M of personal and commercial assets per branch will rise 40% to over $670M per branch, well ahead of the Big Six. Is it only a matter of time before the competition follows suit, or will they take a different path? 

Economics of branches

Each of the Big 5 banks operates in the order of 900-1100 branches in Canada (Scotiabank and TD actually run more international branches than domestic, but that's not the focus here). Each branch serves a specific set of customers across retail/commercial banking, wealth management and advisory. Branches can vary widely, from multi-billion dollar commercial and high net worth urban locations to tiny rural outposts. And some financial institutions are already experimenting with advice-only locations that ditch the teller window.

Average assets are the easiest metric of comparison. To attempt a like-for-like analysis, each bank's domestic personal & commercial assets are divided by the number of domestic locations (in these examples we're using 2022 annual reports). Desjardins, TD, RBC and Scotiabank all operate at $450-480M/branch. The smaller Big 6 banks follow in the $300-375M range, while credit unions trail at $177M/branch.

Following its planned rationalization, Desjardins will jump to almost $700M/branch. Wealth management and other advisory services will also scale up. Desjardins operates at a higher efficiency ratio vs the banks, and a 30% cut to branch costs could go a long way to improving the metric. 

What would a copycat strategy look like?

Major rationalization does not appear to be in the cards - yet. RBC, for example, boasts that it operates Canada's largest branch network and has a stragegic goal of "Continu[ing] to reimagine our branch network to meet the evolving needs of our clients". In FY 2023 RBC's domestic branch network contracted by a mere 2% (source). TD notes that its "Canadian branch network continues to lead the market in total hours open", while also promoting the option of virtual services (source). While the shift from teller services to advice is clearly underway, banks do not currently appear to be planning a major retreat from brick and morter.

So, what would happen if other FIs followed Desjardins' lead? If all of the Big Six were to adopt a $670M/branch average almost 40% of locations would disappear, from over 5,400 to about 3,300. For credit unions the difference would be even more pronounced, dropping from 1,669 to a mere 441.

This disparity is even more pronounced when one looks at individual credit unions. Large credit unions such as Vancity and Coast Capital are very similar to Desjardins and the Big Six in assets per branch. However, others such as Meridian and Servus with a ground game strategy operate significantly smaller locations. One notable standout is Steinbach, with three locations that are amongst the largest branches of any financial institution in Canada.

​Should the banks and credit unions follow?

Desjardins does have some marked differences from the other big financial institutions. It is geographically concentrated in one province, with a very strong market share in Montreal, Quebec City and smaller communities. Desjardins runs significantly more branches in Quebe than the Big Six banks, providing opportunities to reduce duplication. And unlike credit unions in the rest of Canada, Desjardins can make central decisions that the member caisses must follow. 

Is Desjardins making the right move? Should it be holding onto physical locations, or should it go even further towards an all-digital future? Does continued brick & more investment provide an opening for digital-only challengers? And is Canada's branch network going to continue on a slow decline or is it heading for a cliff? I'd be interested to hear your thoughts.

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