Wells Fargo & Co. [WFC] has rarely felt the need to make major incursions into markets occupied by entrenched competitors. In fact, its bread-and-butter strategy dictated the opposite.

But when a company makes a big purchase, like Wells' acquisition of Wachovia at the height of the financial crisis, it has to figure out what to do with businesses it might not have embraced otherwise.

Case in point for Wells: the branch network Wachovia left it in New York City.

During the decade before its demise, Wachovia Corp. moved beyond its roots of Southeast dominance to pry junior shares from the country's biggest markets, from Los Angeles to New York. Wachovia's Western forays have simply added to Wells' already dominant status on its home turf, but its new positions in some Middle Atlantic and Northeast markets leave it playing the unusual role of local underdog.

Nowhere is the change more stark than in the greater New York area — where it is sixth in deposit market share.

How the company manages the New York market may have important implications for its national strategy.

"There was a time not all that long ago, when people said that some markets were intrinsically so good, even if I don't have a strong position, I'm just happy to be there," said Christopher Leech, head of McKinsey & Co.'s consumer and small-business banking practice. But industry sentiment has shifted in the last couple of years, Leech said. Research by his firm and others suggests local scale plays the preeminent role in separating highly lucrative franchises from marginal ones, and that presence in a hot market accounts for only 20% of a branch's success.

While it is possible to earn a return with a smaller share by targeting a distinct client base, "it's actually frustratingly important to be a leader," Leech said.

Joe Kirk, regional president for New York and Connecticut at Wells, said the New York-area Wachovia network will pay dividends and bolster Wells in further-flung markets. (The company intends to bring the branches into Wells' network next year.)

"The real value is in the national banking franchise that Wachovia and Wells gives us," Kirk said. "It's a substantial advantage to our customers that are mobile. Our commitment to the market is strong."

Wells' exposure to the area's high level of competition, though, comes as the rest of the industry seems to be adopting Wells' traditional focus on market concentration over market presence.

Like many outcomes of the financial crisis, Wells' leap to the East Coast had more to do with a sudden opportunity than a long-term plan. "My guess is we'll do some more smaller deals," CEO John Stumpf told National Public Radio in June 2008, five months before Wells bought an institution slightly larger than itself.


Stumpf's reluctance wasn't just that mergers were messy. Wells had been successful with organic growth and "smaller infield acquisitions," he said, and had no intention of changing. "Part of the cost of [big deals] is 'What does it do to the organic strategy?' "

It was a concise summary of a model that had built the biggest branch network of any bank in the West while avoiding pricey market-share battles in popular markets. Even before the Wachovia acquisition, for instance, Wells had the most California branches of any bank, even though it was outdone by Bank of America Corp. with the borders of Los Angeles and in Wells' hometown of San Francisco (where B of A also has historic roots). Instead of picking a fight, the bank made up the difference in markets like San Diego and San Jose.

Wells stuck to that model outside of California, too. While it has settled for a solid second in prized markets like Phoenix and Dallas, it has a demonstrable hold on Albuquerque and Minneapolis.

"Local concentration is the game, and Wells has always known that," said Columbia University Business School Professor Bruce Greenwald, who has studied Wells' and Wachovia's development as a case study in geographic economies of scale and barriers to entry. Federal Reserve surveys show that concentration draws borrowers, and it lowers per-branch marketing and operating costs. Like Wells, the North Carolina-based Wachovia thrived on local dominance, though it expanded more aggressively after being sold to First Union Corp.

"You can always tell when someone thinks they're a genius and they're not, is when they open in New York without viable share," Greenwald said.

To be sure, trying to gauge the success of a bank's branch network in a major market does not produce exact answers. There can be variation in how banks match deposits to branches. And while fees and product sales generally accompany deposits, it's possible for them to diverge. Moreover, maintaining a foothold in a high-traffic destination city like New York may help retain customers who either visit or move.


Rick Spitler, a managing director for Novantas who handles retail distribution strategy, said that establishing an institution in the New York market can be worth the effort. Deposits per branch significantly outstrip the rest of the country, and its demographics for income, density and growth attract the nation's top banks.

"How could you ignore 10% of the country by ignoring the New York metro areas?" he asked.

Deposit statistics bear out that New York is fertile ground. Nationally, a typical branch for one of the country's four biggest banks brings in deposits of around $50 million, according to SNL Financial. The median for every large bank operating in the New York market exceeds that.

Where some institutions distinguish themselves, however, is by how much. Citigroup Inc.'s median deposits per branch yields a phenomenal $150 million for locations open more than three years, according to SNL's data. Wells' Wachovia branches are in the middle of the pack with a median of $72 million, JPMorgan Chase & Co. clocks in at $60 million, and Bank of America follows with $59 million.

But those numbers don't tell the whole story.

Judged solely on Manhattan, JPMorgan Chase's numbers are almost as superlative as Citi's. But the company's median has plunged over the last few years as it doubled its New York branch locations through acquisition and organic growth, much of it focused on the lower-watt suburbs. In short, it's sacrificed its per-branch numbers and created significant excess capacity to preempt any other institution from rivaling its scale.

While Bank of America (9.3%) has now surpassed Citi (7.8%) to grab the second largest New York market share, Greenwald says its struggle to escape single-digit market share should be a warning to the recently arrived Wells.

"If they do not get rid of the subscale local branch networks, it means they've abandoned their sensible policy of understanding regional and local policies of scale in banking."

A spokeswoman for the bank said that its national strategy is only an updated version of its West Coast habit of building where it is strong. And according to Kirk, the combined company doesn't need to start an un-Wells-like market-share fight to make its branches in the New York market worthwhile.

"It was more of a niche presence that we were focused on," he said, adding that the company will differentiate itself through a united platform and customer service. "As Wells Fargo, we have a great story to tell, and we're going to tell it often," he said.

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