Bloomberg News

U.S. Bancorp Expands Underwriting as Investment Banks Cut Pay

November 02, 2011

Oct. 24 (Bloomberg) -- U.S. Bancorp, the nation’s biggest regional lender, is expanding its underwriting business as larger rivals fire workers and cut pay for investment bankers.

The company, ranked fifth by deposits in the U.S., has hired about 200 people since 2009 to build units that handle high-grade bonds, municipal debt and syndicated loans. The Minneapolis-based firm is ranked 17th among underwriters of U.S. investment-grade debt, with $3.86 billion this year, according to data compiled by Bloomberg. That’s more than quadruple the total for 2009, when the company was ranked 35th.

U.S. Bancorp is bolstering its corporate-banking business with companies such as grain merchandiser Andersons Inc. and chemical maker Ashland Inc. The lender reported record profit for the third quarter while the biggest Wall Street firms such as Bank of America Corp. and Goldman Sachs Group Inc. cut headcount and pay amid their worst results for investment banking since the depths of the financial crisis.

“They see an opportunity to steal market share from the bigger players,” Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets Corp., said in an interview. “I will always question building up underwriting when loan demand’s going to be relatively weak, but you can’t argue that with USB because they’re growing the loans, and they’re definitely stealing market share.”

‘Started From Zero’

Chief Executive Officer Richard Davis, 53, said in an Oct. 19 presentation to analysts that investment-banking employees in New York and Charlotte are “at the top of people’s call lists” for underwriting deals. The business is “growing very nicely, especially since it started from zero two years ago,” he said.

“We’re sought after as an employer of choice,” Chief Financial Officer Andrew Cecere, 50, said in a telephone interview. “It’s actually exceeding our expectations.” Cecere declined to name firms where recent hires were recruited.

The lender employs 200 to 300 people in the unit, spokesman Thomas Joyce said, out of 60,500 companywide. He wouldn’t say how many more will be added.

The bank likely will offer a complete array of services such as equity underwriting, FBR’s Miller said. While analysts including Matt Burnell of Wells Fargo & Co. have referred to the unit as an investment bank, U.S. Bancorp avoids the label.

“There are elements of investment banking that we simply don’t do,” Joyce said. “We don’t advise, and we don’t do the mergers-and-acquisitions piece.”

Record Profit

Net income at U.S. Bancorp rose 40 percent to a record $1.27 billion in the third-quarter as revenue and lending expanded and fewer borrowers fell behind on payments, the company said this week. It didn’t break out results for the underwriting units.

U.S. Bancorp’s stock gained 9.5 percent including dividends in the 12 months ended Oct. 21, while the 24-company KBW Bank Index’s total return was a 14 percent loss for the same period. The shares closed at $25.39 on the New York Stock Exchange. Berkshire Hathaway Inc., the insurer run by billionaire Warren Buffett, is the fourth-biggest holder with a stake of about 3.6 percent, according to Bloomberg data.

The bank underwrote three U.S. corporate debt issues totaling $86 million in 2008, Bloomberg data show. Business since then surged more than 14-fold, with 44 issues comprising $4.1 billion in bonds this year.

Ashland, Andersons

Revenue from U.S. Bancorp’s commercial-products division, led by Dick Payne, increased 7.6 percent in the third quarter to $212 million. It was the sole bookrunner for credit facilities valued at $1.1 billion for Columbus, Ohio-based Andersons, and joint bookrunner for a $3.9 billion facility for Covington, Kentucky-based Ashland, the maker of Valvoline motor oil, according to USB.

“They’re being asked to participate in more loan syndications, and secondly, they’re taking higher positions in existing loan syndications,” Peter Winter, an analyst with BMO Capital Markets Corp. in New York who rates the stock “outperform,” said in an interview. “They were able to hire people that maybe they might not otherwise have been able to hire, given the downturn in the market. As the global banks pull back, it just creates more opportunities.”

Goldman Sachs said Oct. 18 that it set aside $10 billion to pay employees in this year’s first nine months, 24 percent less than the same period last year, as revenue slid 25 percent. JPMorgan Chase & Co., the biggest U.S. lender by assets, reported earlier this month that it reduced its investment bank’s workforce by almost 4 percent in the third quarter and cut employee compensation costs 28 percent.

Bigger Banks

Bank of America CEO Brian T. Moynihan said in a memo to senior managers on Aug. 19 that the Charlotte, North Carolina- based company will eliminate about 3,500 jobs this quarter in addition to 2,500 cuts made earlier in the year. The bank, ranked second by assets after JPMorgan, plans to eliminate 324 jobs in New York starting next month, including investment bankers and equity traders, according to filings with state regulators.

Wells Fargo, ranked fourth by assets, said last year it also planned to seek a bigger share of U.S. equity underwriting, abandoning its stance that investment banking was “incompatible” with a consumer-banking culture. The San Francisco-based company said in a third-quarter presentation that its U.S. investment-banking market share was 4.8 percent so far this year, compared with 4.2 percent a year earlier.

Cecere said the attraction for U.S. Bancorp’s recruits is the prospect of working for a company “that is doing fairly well.” As for the pay cuts at other firms, “I’m certain that’s a factor on the list, but I wouldn’t call that a No. 1 or 2 factor.”

--Editors: Rick Green, David Scheer

To contact the reporter on this story: Charles Mead in New York at cmead11@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green in New York at rgreen18@bloomberg.net.


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