As it awaits for loan demand to meaningfully return, U.S. Bancorp is looking for a revenue boost from its in-house payments business.
Chief Financial Officer Terry Dolan said Thursday that the Minneapolis company is pushing ahead with a plan to integrate new technology into its payments platform that will allow its business clients to manage payroll, inventory and client accounts — as well as make payments — all in one place.
The tech — built off the 2019 acquisition of a Silicon Valley software vendor and modeled after an offering from Square — is designed to encourage more of the bank’s commercial customers to use its payments services and generate more fee income at a time when loan growth has been lackluster.
Only about 28% of U.S. Bank’s borrowers are payments clients as well, the company said in a third-quarter earnings presentation Thursday.
“It’ll be one of those product offerings and capabilities that would help simplify and make it easier for [borrowers] to run their business and do business with us,” Dolan said. “That’s fundamentally what Square is trying to do and they are certainly being rewarded for that strategy, and that’s what we’re trying to do as well.”
Income from the payments business and other fee-based sources, along with ample releases from loan-loss reserves, helped drive U.S. Bank’s third-quarter profits.
The $567 billion-asset company earned $2 billion in the quarter that ended Sept. 30, up 28% from the same period last year.
Noninterest income of nearly $2.7 billion was down slightly from a year earlier, but up nearly 3% from the previous three months and higher than the $2.5 billion estimated by analysts. Total revenue of $5.9 billion fell 1.2% year over year but rose 1.9% from three months earlier.
Earnings also got a boost from the $310 million in reserves released during the third quarter, which lowered the bank’s total allowance for credit losses to $6.3 billion.
That’s down from a high of more than $8 billion in last year’s third quarter and even below the nearly $6.6 billion loss allowance in the first quarter of last year, when the first cases of the coronavirus began to show up in the U.S.
“For everybody in the industry it’s good to see, and maybe unexpected especially if you step back and think of where we were 18 months ago,” Dolan said about the reserve levels.
While reserves are still above the mark at the end of 2019, the bank is preparing to confront an economy that will be tested with less government support. Dolan said it’s unlikely to get loss allowances down to 2019 levels until 2023.
Company executives also warned that income from the Paycheck Protection Program would drop off sharply in the coming quarters.
U.S. Bank brought in roughly $120 million in net interest income from PPP loans in the third quarter, but that total is expected to drop to around $60 million in the final three months of the year and become “immaterial” in 2022, U.S. Bancorp executives said.
Overall, loan demand remained sluggish, though it is beginning to show signs of improving in some areas.
Total residential mortgages increased more than 2% from the previous three months and credit card balances increased 1.4%, while commercial real estate and other consumer loans ticked up slightly.
Demand for commercial and industrial loans, however, remained weak, as total loans fell more than 2% from the second quarter. Executives told analysts Thursday that demand could pick up as PPP balances run out and global supply chain issues now roiling the world economy are sorted out.
Dolan said the bank could also see a significant increase in business lending once its deal for MUFG Union Bank,
The bank submitted the acquisition to regulators for approval in early October. The deal would push the company’s size to $664 billion of assets and significantly boost its market share in California.
Despite issues
“We will be actively working with and doing listening sessions with community organizations as we move this forward,” Dolan said.
