U.S. Bancorp's earnings checked by subdued lending activity

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U.S. Bancorp in Minneapolis posted a higher profit in the third quarter, but revenue fell 2.4%, constrained by lackluster lending.

The $686 billion-asset bank's average total loans slipped 1% from the year-ago quarter, led by a fall in commercial credits. Declines in business lending and commercial real estate more than offset a rise in credit card balances and an uptick in residential mortgages.

U.S. Bancorp said its net interest income of $4.1 billion was down 2% from a year earlier. Its net interest margin contracted seven basis points to 2.74%.

The bank, like many of its peers, has tried to navigate a lending landscape marked by pockets of weakness following the COVID-19 pandemic and the remote work trends it hastened.

U.S. Bancorp's third-quarter ratio of nonperforming assets to loans and other real estate was 0.49%, up from 0.35% a year earlier. The increase was primarily due to higher commercial and commercial real estate nonperforming loans.

"Credit quality results were in line with expectations," Chairman and CEO Andrew Cecere said in a news release Wednesday.

The nation's seventh-largest bank by assets reported net income of $1.7 billion, or $1.03 per share, up from $1.5 billion, or 91 cents, a year earlier. Results included an $89 million after-tax net securities loss largely offset by lower income tax expense

Net revenue was $6.9 billion, down from $7 billion in the year-ago period.

Noninterest income fell 2% to $2.7 billion.

Adjusted for notable items in prior quarters, the bank reported a 1% decline in noninterest expenses from a year earlier to $4.2 billion.

U.S. Bancorp's struggle to muster momentum comes amid a still murky lending environment for big banks overall. A day earlier, PNC Financial Services said loan growth proved elusive in the third quarter, while Bank of America said its loans ticked up.

"Signals are mixed on the return of loan demand," said Chris Stanley, a Moody's analyst.

For all U.S. banks over the four quarters ended June 30, loans inched up just 1%, according to S&P Global Market Intelligence.

An American Bankers Association panel of senior bank economists projected commercial and industrial loan growth would contract by 0.2% this year before rising by 3.3% in 2025.

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The bank economists blamed lofty interest rates for the modest lending activity this year. Over the course of 2022 and last year, the Federal Reserve boosted rates to the highest level of this century to combat inflation. The central bank's campaign brought inflation from a peak above 9% in 2022 down below 3% this year.

Following that improvement, the Fed in September cut its benchmark rate by 50 basis points and signaled further reductions could follow. The bank economists said they expect loan demand to increase next year as borrowing costs fall. They see rates declining an additional 150 basis points by the end of 2025.

"It's the longer-term path that matters more, and our expectation is for the Fed's policy rate — which is still restrictive — to reach a more neutral level by the end of next year," Luke Tilley, chair of the ABA committee and chief economist at M&T Bank's Wilmington Trust, told reporters in September.