Predictable Figures at a Bank Aiming for Just That

At a time when most of the banking industry has begun to whisper about a distant glimmer of normalized earnings, U.S. Bancorp is looking pretty normal already.

It presented an appearance of good health on its first-quarter earnings call, despite having gone without a couple of key crutches that radically boosted the earnings of most larger competitors. U.S. Bancorp's new sources of earnings were commercial banking staples like payments and treasury services, not turbocharged fixed-income trading.

And though Bank of America Corp., JPMorgan Chase & Co and Citigroup Inc. have already begun bolstering profits by drawing down their reserves, U.S. Bancorp added $175 million. Though this is less than the $530 million it added a year earlier, CEO Richard Davis said he expects that the company's loss provisioning is not over — or overkill.

"I don't see a time where reserve recovery is part of our future," he told analysts on the company's earnings call. "If there's an amazing recovery with a speed and slope I don't expect, maybe we'll be able to do that. But I am surprised that that many [banks] went that quickly to equal and then recovery."

The degree to which U.S. Bancorp broke step with its competition on reserving was a surprise, said NAB Research President Nancy Bush.

"That to me is a very telling commentary on what this company wants to be, versus competition," she said, adding that she expects U.S. Bancorp's caution is probably justified. The aftermath of previous banking crises, she said, suggests that it is unwise for any institution to start "living off its loan reserves" so soon.

Bank of America released $992 million from reserves last quarter due to accounting changes that brought certain receivables back on to the company's balance sheet. JPMorgan Chase drew down $900 million, and Citigroup released $53 million.

Despite U.S. Bancorp's markedly pessimistic assessment of the broader economy — "Housing prices are at record low and staying there. Unemployment is at record highs and staying there," said Davis — the company earned $669 million during the quarter, matching the average of analysts' expectations at 34 cents a share and maintaining the company's record of comparatively steady earnings through the financial crisis.

U.S. Bancorp would already have boosted its dividend, Davis said, if it were not for regulators' reluctance to allow such payments while broad swaths of the industry are still struggling. "If it was my decision in hand, I'd do it now," he said. "I'm making it known we're out here and eager to do it."

The company's earnings did not come from a return to growth in loan volume, though it has not seen the degree of shrinkage found elsewhere in the industry. Despite $36.5 billion in new loans, U.S. Bancorp's average loan portfolio, excluding covered loans, was $171 billion in the quarter, down 1% from the quarter before.

Improved pricing in some markets has helped the portfolio's profitability recover to some degree, Chief Financial Officer Andy Cecere said on the conference call. However, competition from troubled institutions desperate to rebuild their balance sheets continues to drive down U.S. Bancorp's margins in scattered markets, he said.

Commercial lending has remained weak as businesses stockpiled cash during the recession, the company said. It is also prepared to wait until credit quality improves to resume consumer lending growth, executives said. Stressed prospective borrowers visiting a U.S. Bank branch are much less likely to get a loan than advice on improving their credit, Davis said.

"As the world starts to evaluate these consumers and businesses that have failed, who's going to be the first to look the other way and say, 'OK, I'll waive that bankruptcy'?" Davis asked. "It isn't going to be us."

Instead, the company has been logging gains from its fee businesses — its payments business in particular, where revenue rose 7.5% from a year earlier.

"Importantly for us, we have not exited businesses," said Cecere in a post-call interview. Though the company is pleased with the high-grade bond operation it introduced late last year, he said, the scope of its other businesses lets U.S. Bancorp be "just fine" without the outsize trading revenues of some competitors.

Reaction from analysts and the market after U.S. Bancorp's release was muted; Sandler O'Neill & Partners' R. Scott Siefers wrote, "Most items look pretty much as expected."

Judging by management's attitude, this comment probably was taken as a compliment.

"Each quarter we will continue to be predictable and repeatable," Davis said on the call, citing the company's preference for simple and nonvolatile business lines. "What I like about that is, when I go to bed tonight, I am going to know it's why we're going to do well in the future."