Bank Branches in Belgium
The quest for cost economies and the increasing importance of digital banking can potentially decrease the number of bank branches in Belgium with 30% (1500 bank branches) by 2020 .
Reshaping the branch network is a hot topic amongst Belgian banks. Whereas some banks already explicitly announced the closure of a number of branches, other banks are more cautious in sharing this information. What is clear is that more and more banks started to put their plans into action.
In this study, Sia Partners analyses what already happened in the past and estimate where the Belgian branch network is heading to in the future.
Understanding today’s situation
Belgian banks are closing down branches…
Historically, Belgian banks have built up large branch networks, allowing physical contact with the client and the promotion of their brand in the streets. Today’s macro-economic environment and clients’ habits influenced by technologies are challenging banks to rethink more and more their branch strategy and have already partially reshaped the branch network of some major banks.
When having a look at the Belgian banking environment, we see that all major Belgian banks have cut in their branch network over the last 5 years. Figure 1 shows the decrease in number of branches for a sample of Belgian banks. Since 2010, the number of bank branches has been decreasing by 3,5% per year on average. While banks such as BNPParibas Fortis and Crelan have closed more than 20% of their branches in 5 years, other banks such as KBC and ING have closed down branches at a more moderate rate (close to -10%).
What is particularly interesting to note, is that the pace at which banks are closing branches has significantly increased since 2013. While the average Belgian bank closed between 2 and 3% of its branches per year between 2010 and 2013, the average yearly decrease was close to 5% from 2013 to 2015. This confirms that branch network reform is a very hot topic on all banks’ agendas and that banks already started to put their plans into action.
... And are no exception to banks in other European countries
When having a look at what is happening in other European countries (figure 2), we see that Belgian banks are no exception. All over Europe, banks are adapting themselves. Sia Partners sees two main triggers that have supported, and even accelerated, branch network reform over the last few years all over Europe.
First of all, there is the upcoming digitalization. This trend, of which mobile and internet bank are the most notable examples, has made customers more autonomous. The customer is now able to perform his banking activities where and when he wants. Consequently we see that banking services which once required a branch visit, such as a simple money transfer, have shifted largely to e-banking alternatives. Digitalization is forcing banks to question why, to deliver which services and how/in which format a branch network is required in the future.
Next to that, banks are facing a low interest rate environment. Such an environment decreases the net interest rate margin and puts pressure on the banks’ revenues. In their never ending search for profitability, banks therefore have to reexamine their cost structure. For the major European retail banks, the branch network is an important cost center. Not only the required infrastructure, but also the costs of labor linked to branches.
With percentage decreases ranging from -3% to -54% (2011-2014), it is also remarkable how the magnitude of this trend differs significantly between the different countries. Where countries such as The Netherlands, Spain, Denmark and Finland have experienced a decrease of 25% or more since 2010, the branch network of other European countries has decreased more moderately. But this graph also shows a significant difference in the number of branches per million inhabitants for different countries. Southern European countries are characterized by a high number of branches per million inhabitants, while banking customers in Northern Europe tend to be able to live with a lower number of branches per million inhabitants.
Understanding the Belgian specificities
To know what is driving this difference with other European countries, and more importantly what it could imply for Belgian banks in the near future, we have to gain a better understanding of the Belgian market. Doing this, we have identified a number of variables in play that will very likely influence the pace at which Belgian banks will continue to close branches in the future.
First of all, there are a number of variables which are likely to accelerate branch closure:
- Online & mobile banking: The rise of internet and mobile banking has allowed customers to perform a number of banking activities via internet or mobile banking. This has made classic bank branches obsolete for a number of services. In certain Northern European countries we have seen that once these digital innovations have been successfully adopted by the customer, foreign banks closed down a significant number of branches. Belgian customers tend to lag a little bit behind in this evolution. Whereas the online banking penetration (i.e. the percentage of the population between 16 and 74 that has used internet banking in the last 3 months) is around 70% in Belgium, neighbouring countries such as Denmark and the Netherland are already at 90%.
- Cost cutting: In today’s low interest rate environment, banks are constantly seeking cost cutting opportunities. Given that bank branches entail significant costs (both operational and capital expenditures), and given the fact that more and more of the services offered in bank branches are shifting to e-banking, we expect that branch network reform will be on the main agenda points for the major banks in the upcoming years.
- Bank consolidation: Over the last few years, a number of mergers & acquisitions have taken place on the Belgian financial services market. This trend is expected to continue throughout the next decade. One of the consequences of such consolidations is that the resulting entity often ends up with a (too) high number of bank branches. Banks such as Creland find themselves with a lot of bank branches after a consolidation, resulting in a ratio number of clients/branch which is two to three times higher than for competing Belgian banks. Consolidated banks have not yet been able to adapt their branch network, but will do so very soon and consequently accelerate the pace at which Belgian banks are closing down branches.
On the other hand, we also see variables which are likely to slow down branch closure:
- Belgian customer specificities: As already highlighted in the first part of this study, the Belgian customer highly values physical contact with its bank. Therefore, we believe that in the near future it is very unlikely we will see a similar decrease in number of branches as we have noted in some Northern European countries.
- Branch of the future: Next to closing a number of branches, Belgian banks are also rethinking the purpose and services of a bank branch. Most Belgian banks pursue an “Omni channel strategy” by which they want to seamlessly link the branch experience with the services offered via other channels such as internet and mobile banking make sure that the services. Bank branches remain an important contact points with customers in clue occasions and then continue to occupy an important place in such an Omni channel strategy. A majority of customers continue to attach a great importance to branch advisors. Consequently, we believe that certain banks will in a first phase continue to opt to review the format and role of certain branches, rather than closing them.
- Trade unions pressure: A significant number of people are staffed in today’s bank branches. Banks that aim to decrease the number of branches, will have to take into account that this means the re-deployment of a large number of FTE. Moreover, trade unions are carefully following this topic and will not facilitate banks to pursue their branch reform strategy.
These Belgian specificities help to explain where we stand today. But what’s more interesting, is to the question where we will be heading to in the future. Some banks have already publicly announced to be closing a number of branches in the coming years. Back in 2011, BNP Paribas Fortis announced to close 150 branches by 2015 and recently finished this exercise. But also ING announced that it will close 50 branches in both 2016 and 2017. Yet a lot of Belgian opt to not publicly communicate on this matter, making it very difficult to forecast where we might be heading in the future. In this study, Sia Partners addresses this question and provides a reasoned estimation of how the Belgian bank branch network will evolve in the next few years.
What will the future bring for Belgian bank branches?
Sia Partners estimates the number of bank branches in Belgium to decrease with 30% by the end of 2020
In the first part of this study, we found out that since 2013, Belgian banks have been cutting in their branch networks at an ever faster pace. Since 2013, Belgian banks have on average closed about 5% their branches per year. In the short-term future, Sia Partners believes it is likely we will continue on this trend. We do not expect a faster decrease before 2017 as none of the Belgian banks already announced a major branch closure program and as closing branches remains a sensitive topic for trade unions. If we consider again our sample of 7 banks, a yearly decrease of 5% would imply that between 400 and 500 bank branches will be closed by end 2017.
If we want to make a forecast further in the future, it becomes interesting to have a look at what already happened in similar, neighboring countries. Countries such as The Netherlands and Denmark are comparable to Belgium in the sense that their surface and number of inhabitants is relatively similar. On the other hand, these countries have a remarkable digital advance in comparison to Belgium. Due to the exponential increase of digitalization (e-banking and mobile banking), these countries are good use cases in forecasting the branch network evolution in Belgium.
Figure 4 shows the evolution in number of bank branches for The Netherlands and Denmark between 2010 and 2014. The pace at which banks in these countries have been closing branches is considerable higher than the evolution we have witnessed in Belgian. On average, the number of branches in these countries has decreased with 9% per year. From 2010 to 2014, this has resulted in a decrease of 32% of their branch networks.
From recent figures published by Febelfin, it seems that also the Belgian customer is entering this digital banking area. With more than 11 million e-banking subscriptions and an increase of 50% mobile banking subscriptions in 2014 to 3.1 million, digital became the most important contact points of clients with their bank. We expect that this evolution will continue in the next few years, further increasing the importance of digital banking and decreasing the demand of a very dense & standardized branch network. Consequently, Sia Partners believes that as of 2018, Belgian banks will be able to catch up with the trends we have seen in digitally advanced countries and decrease the number of branches by up to 9% per year.
Figure 4 summarizes our assumptions in what we believe is a realistic scenario of how the number of Belgian bank branches will decrease in the next few years. This scenario asummes a decrease of 32% or 1500 bank branches by 2020.
Not every bank will follow the same path
Eventhough restructuring the branch network is an agenda point for all Belgian banks, figures have to be taken with cautious as not all Belgian banks will follow the same path. While certain banks have already done efforts in the past and may witness a more moderate decrease, others will have to catch up. Some will decide to maintain a high physical presence as a strategic differenciation. In this paragraph, we analyse the situation for some Belgian banks based on different criteria.
Number of clients per branch
ING Belgium recently announced it will be closing 50 branches in both 2016 and 2017, which is equal to a yearly decrease of 7% in the next two years. Even after such a decreas, ING remains a bank with a relatively low number of clients per branch. On average, the bank has one branch per 3000 clients. If we compare this number with the Dutch unit of the bank, we find that it is almost 4 times lower (approximately one branch per 13000 clients). We expect that ING Belgium will continue to close branches after 2017 and even increase the pace at which it will do this.
The situation for BNP Paribas Fortis is not much different. With 1 branch per 4500 clients, the bank is well above the averages of major Dutch bank such as ABN Amro (one branch per 17000 clients), ING NL (one branch per 13000 clients) and Rabobank (one branch per 12000 clients). With a 13% decrease of the number of bank branches since 2013, BNP Paribas Fortis seems to be well aware of this situation. Nevertheless the bank recently annouced that it wants to explore new branch concepts (e.g. without cash services) rather than close down branches. Evolving to “low cost’ branches in which the only service offered to the client is giving advice is another way for banks to decrease costs. It will be very interesting to s how such a pilot project will ultimately help the bank to cut costs and how it will impact the bank’s branch network size.
After already having closed a significant number of branches in the aftermath of the financial crisis, we expect a more moderate decrease for Belfius. Furthermore, with approximately 1 branch per 5000 clients, the bank already has the highest ratio amongst Belgian banks of our benchmark.
When analyzing the local density of bank branches, provinces such as Antwerp, East Flanders, Flemish Brant and West Flanders count on average 1 branch per 4 km². It is clear that for banks with a strong presence in these regions, there is still room to close down branches while remaining physically available to their clients in rural areas.
For instance, with more than 100 bank branches in each single one of these four provinces, KBC is the bank with the strongest local presence. With a total of 552 bank branches in these 4 provinces only, we believe KBC is able to close down a significant number of branches while keeping a close relationship with its clients.
Same logic for Crelan, with around 150 branches in both East and West Flanders, the bank has a very high density in the north-west of Belgium. This presence mainly stems from its history as “Landbouwkrediet” used to be a bank focusing on farmers.
As pointed out earlier in this study, some Belgian banks have a branch network that is largely operated by independent agents. In our sample, this is the case for Crelan, Argenta, and RecordBank. 10 years ago, there were about 7000 independent agents in Belgium. Today, only 3750 of them are left. This confirms that independent agents are no exception to the decreasing number of bank branches. In the case of Crelan, we expect a strong decrease by 2020 as the recent merger has left the bank with a very high number of branches. Moreover, the bank has one of the densest branch networks in Belgium today with circa 1 branch per 1500 clients.
Restructuring the branch network is not an isolated exercise
Defining a roadmap that smoothly aligns with the bank’s digital strategy
This study made clear that Belgian banks are in the midst of a branch network reform exercise and will catch up soon with the trends we have seen in other European countries. As it is an evolution that will strongly impact banks’ distribution models and how the bank manages its relationship with the client, it is crucial that it is supported by a sound strategy.
Bank branches should not be considered as an obsolete channel to welcome and advice clients, rather Belgian banks should aim to seamlessly link the branch experience with the services offered via other channels. As these other channels are becoming increasingly important, the very dense Belgian bank branch network is bound to decline significantly in the upcoming years.
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