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Bank Overexpansion Hits Brick Wall


The point of negative returns is still large and in charge.


Banks have finally come to a realization there does not need to be a branch on every corner. If this story sounds familiar it is because the same discussions took place in 2000.

Here are some interesting comments from this headline story on Bank of America (BAC):

From Bank of America spokesman James Mahoney: "Over the longer term, as customer demands evolve, we see a fewer number of branches that provide more services."

From Analyst Richard Bove of Rochdale Research: "While the bank is likely to close the branches, the reason being given is simply farcical," Bove wrote in a research note Tuesday. "The branches will be closed because they are not economically viable."

Pruning Branches to Strengthen the Banks

Barron's picked up the story, in Pruning Branches to Strengthen the Banks: "Some banks have been deemed too big to fail. But could some banks simply be physically too big? That seems to be the case with Bank of America, which was reported to be planning to shut 10% of its 6100 branches."

Point of Negative Returns

I have to side with Bove on this one: "While the bank is likely to close the branches, the reason being given is simply farcical. The branches will be closed because they are not economically viable."

Cheap money from the Fed created a false economic signal of prosperity and growth. The grand party went on for close to seven years. The bust is likely to be at least that long so don't expect miracle recoveries.

More space will be coming available from Bank of America, Citigroup (C), Wells Fargo (WFC), and others. The sheep always line up. If one bank starts closing branches the rest will too.

Expansion for expansion's sake failed miserably, as it always does. And the Fed forever blowing bubbles of increasing amplitude is the primary reason.

That being said, it's important to note that commercial real estate in general is the key take away from this story. Indeed, the same over-expansion problems that plague banks also apply to Starbucks (SBUX), Home Depot (HD), Lowe's (LOW), Target (TGT), Pizza Hut (YUM) -- and, for that matter, nearly every business on the planet.

So while everyone else is putting their party hats back on, celebrating the end of the recession, I caution the "horn tooters" this is not an ordinary recession.

I touched on this in The Incredible Shrinking Boomer Economy: "If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades."

At some point, the economy will bottom. Perhaps it already has. However, the brick wall of reality -- the point of negative returns -- is still large and in charge. A "job loss recovery" looms. There's little reason for businesses to expand beyond inventory replenishment; there's no good reason for banks to increase lending.

And if one reads between the lines, various members of the Fed are becoming increasingly aware of that fact.

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