Colin Barr

Following the money in banking, economics, and Washington

Whitney sees 5,000 bank branches closing

November 23, 2010: 5:53 AM ET

The bank shakeout is about to pick up steam.

So says Meredith Whitney, the analyst who made headlines around this time three years ago by predicting the demise of Citi's (C) dividend. Whitney predicts in a report released Monday afternoon that profit-strapped U.S. banks will close 5,000 branches over 18 months.

Not bullish on the banks

That would amount to about 5% of bank offices, and would mark a new twist in a decades-long consolidation process.

There were more than 12,000 U.S. banking institutions as recently as 1992, but deregulation and global competition have fed the rise of megabanks like Bank of America (BAC) and JPMorgan Chase (JPM).

At the same time technological and regulatory shifts have made it harder to make a living as a small banker, fueling a feeding frenzy by bigger players at the expense of the smallest banks. The U.S. bank count slipped below 8,000 this year for the first time ever.

Until now, the feeding frenzy hasn't actually resulted in fewer branches for consumers: While the number of federally insured commercial banks has dropped 18% over the past decade, the bank branch count actually surged 28% over the same span, according to FDIC data.

But Whitney says regulatory reform may change all that. Efforts such as this summer's Dodd Frank Act will keep a lid on bank profits and expand the already ample universe of customers who aren't worth chasing, she says. Something will have to give and the branch down the street may be it.

"The most regrettable unintended consequence of some of the quickly written regulatory reform, we believe, will be the inevitable 'de-banking' of the U.S. financial system," she writes in a report that warns that bank profits are in "structural decline."

The comment comes as the Federal Deposit Insurance Corp. prepares an update on the health of the banking industry, which has been plagued by a surge in failed banks and only recently returned to substantial profits, at least at the biggest institutions. The FDIC's list of banks at risk of failure, due out Tuesday morning, is expected to approach 900, up from 829 at the end of the second quarter.

But Whitney notes that problem banks are far from the only problem. The ranks of the unbanked will rise to 41 million households in 2015 from 30 million now, she says, as bankers reconsider the costs and benefits of all manner of products.

The FDIC has made numerous efforts to reach the poor with programs encouraging banks to expand their low-cost offerings, but there is little sign those efforts have paid off.

Many branches to lop off

Regulators' decision to crack down on egregious practices like $35 overdraft fees will end up pushing up prices on services such as checking, prodding even more customers into the market for nonbank services such as check cashing.

"We believe the greatest unintended consequence of regulatory reform, post credit crisis, will be the banks' ability to price for risk," she writes. "Owing to an inability to price for certain risk, we believe the banking industry will simply no longer be able to service upwards of 10% of their current customer base."

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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