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The decision not to sell the loans and purchase more mortgage-backed securities reduced revenue in the third quarter, but should provide better returns in the long run.
October 12 -
Bankers who are poised to report third-quarter earnings in coming weeks will likely face tough questions about how they will grow in an environment where net interest margins are sinking to unprecedented lows.
October 9 -
Banks are growing increasingly worried that the failure to stem impending tax hikes and steep budget cuts could reduce lending demand, savage profits and cripple M&A activity.
September 27 -
Fidelity Bancorp, Western Liberty and Savannah Bancorp artfully structured deals to sell themselves, and are rushing to complete them, in case Congress raises capital gains taxes next year.
September 26 -
Second-quarter results were predictably solid, but the earnings call was anything but dull as the CEO blasted the city of Los Angeles and its motives.
July 18
U.S. Bancorp (USB) is forecasting a slowdown in lending as it approaches a cliff — the fiscal cliff.
The Minneapolis company is expecting loans to expand at an annual rate of 4% to 6% in the fourth quarter, compared with the 6% to 7% it has been producing, Chief Executive Richard Davis said during a conference call Wednesday.
Customers are "feeling less comfortable," and that's understandable given question marks in Washington and elsewhere, Davis said when asked whether borrower caution had dampened lending expectations.
"You've got the near-term election uncertainty, you've got the fiscal cliff uncertainty, you've got the European recession, you've got the economy. … So I am going to be pleased with 4% to 6% annualized. We'll take anything we can get above that."
Economist and politicians use the term "fiscal cliff" to describe yearend deadlines tied to the federal budget. Lawmakers have to decide whether to renew the Bush-era tax cuts and payroll tax cut and settle other spending matters, or steep cuts will kick in automatically. The Congressional Budget Office predicts that if lawmakers fail to act, the economy will likely fall back into a recession.
Despite their tempered forecast, U.S. Bancorp executives spoke optimistically that the cliff would be sidestepped.
"I am hopeful that they come to some kind of resolution," said Bill Parker, the chief credit officer. "The fiscal cliff was designed in such a way that it is so severe I think it is unlikely that there won't be some political solution that cuts the middle ground and mitigates that risk."
R. Scott Siefers, an analyst at Sandler O'Neill, said Davis' guidance was "a little disappointing, but not surprising."
U.S. Bancorp's average loans, which totaled $216 billion for the quarter, rose 1.3% from the second quarter. That pace was slower than the 1.9% between the first and second quarter, and the 1.5% between the fourth quarter of 2011 and the first quarter of this year.
"There was a stronger commercial and industrial recovery in the first part of the year, and that has since deflated a bit," Siefers said. Although Davis is known to be conservative, reality will likely track with Davis' guidance, Siefers said.
"I think that is going to be the way it pans out. There is already evidence of the slowdown," Siefers said. "He was being pretty candid."
When asked if U.S. Bancorp has different scenarios for 2013 based on whether Barack Obama or Mitt Romney wins the presidential election, Chief Financial Officer Andrew Cecere said no.
"We don't try to model based on the election," he said in an interview after the conference call. "But we do try to model for a moderate-growth environment and a low-growth environment."
The earnings improvement included a 9% increase in net interest income after its provision for loan losses of $2.2 billion. Noninterest income also rose 10%, to $2.3 billion; those figures included a 112% increase in mortgage banking revenues, to $519 million.
Net interest margins have commanded attention this quarter, as companies battle the protracted low interest rate environment and patchy loan demand. Though Wells Fargo (WFC) and PNC Financial Services (PNC) experienced large drops from the prior quarter, U.S. Bancorp's net interest margin ticked up one basis point from the second quarter to 3.59%.
Cecere attributed the slight increase to higher-cost debt maturing in the quarter. He warned that U.S. Bancorp, which has $352 billion of assets, would be susceptible to the pressure this quarter.
"Given the current interest rate environment we expect the net interest margin to be down a few basis points in the fourth quarter, principally due to the repricing risk on the investment securities portfolio," he said during the call.
U.S. Bancorp's margin held up because the company had roughly $6 billion in higher cost debt run off the balance sheet in the third quarter, Cecere said in the interview. The maturing debt is expected to be smaller this quarter. Securities that were yielding 2.30% to 2.40% that are maturing this quarter would be replaced with similar holdings priced 75 basis points lower, he said.
One of the best ways to protect the net interest margin is to pursue the customers of competitors, Davis said during the call.
"The way we are going to make money in this difficult long-term environment with rates low and yield curves flat is we're going to have to do it by market share," Davis said. "That is the only way you can do it."
