Bloomberg News

U.S. Bancorp Encroaches on BofA as Davis Seizes Market Share (2)

January 21, 2014

When Brian T. Moynihan was asked at a November panel discussion who he worried would steal his customers, Bank of America Corp. (BAC:US)’s chief executive officer looked to the man seated on his right.

“Richard,” he said, nodding to U.S. Bancorp CEO Richard Davis, drawing laughter from the bankers and regulators in the New York ballroom. Then it was William Demchak’s turn to answer. “Yeah, I’d say Richard,” said Demchak, the head of PNC Financial Services Group Inc.

Under Davis, U.S. Bancorp has increased market share in more than a dozen business lines since 2007. The nation’s largest regional lender beat the four biggest U.S. banks in key gauges of management prowess for most of 2013, including return on equity, return on assets and cost controls. Analysts are predicting more of the same when the company reports full-year results tomorrow.

By stock-market valuation, Davis has already outdone his larger rivals with shares that trade at about 3.3 times tangible book value, more than any of its peers. That’s raised doubt about how much higher it can go. Fewer than half of the 39 analysts following U.S. Bancorp rate it a buy, and Atlantic Equities LLP’s Richard Staite has the equivalent of a sell with a price target lower than the current level.

Earnings Estimates

The bank probably will say annual net income fell about 2 percent, or a 5 percent gain on a per-share basis, according to estimates (USB:US) compiled by Bloomberg. While fourth-quarter profit declined about 3 percent, according to the data, Staite predicted in a Dec. 19 note that the period will include a 16.2 percent return on equity and a 1.59 percent return on assets, the highest among the biggest commercial banks.

“It’s very hard to see how they’re going to improve from an already impressive level,” Staite said. “There are other banks that are going to see their earnings improve at a much faster rate.”

The quarterly report may show whether U.S. Bancorp will continue to outpace peers whose attention is shifting from credit-crisis fallout to the nation’s improving economy. One area of focus for analysts is mortgage revenue, which the firm has said may slide 30 percent from the third quarter as lenders grapple with rising interest rates. A drop in earnings from home loans and corporate payments and an increase in taxes could cause results to miss estimates, Matt O’Connor, a Deutsche Bank AG analyst, said in a Jan. 3 note with a hold rating.

Retail Concentration

Davis, 55, has never posted an annual loss (USB:US) during his seven-year tenure as CEO of the Minneapolis-based firm. He’s done it while eschewing investment banking and riskier assets to concentrate on retail customers and the corporate trust business. He’s also avoided the worst of the mounting legal costs that plague larger peers. With regulators pressing banks to become simpler and safer, U.S. Bancorp is being held up by investors and analysts as a model for how lenders should be run.

“We need more U.S. Bancorps,” said David Ellison, a money manager for 30 years who runs the Hennessy Large Cap Financial Fund, which has beaten two-thirds of its peers for the past five years. “We’re in a significant period of flux in the industry that is unprecedented in my lifetime,” he said. “So I want to own the better management.”

Davis has been able to concentrate on growth while competitors were consumed with “resolving legacy issues,” analysts at Goldman Sachs Group Inc. said in a Dec. 3 report with a buy rating (USB:US). Legal expenses and claims over shoddy mortgages have cost the six biggest lenders more than $114 billion since 2007, and probes and new regulations like the Volcker Rule have put pressure on revenue.

Competitors Refocusing

His advantage may erode as disputes ease at larger rivals. JPMorgan Chase & Co. (JPM:US), the biggest U.S. lender, has lowered its estimate for potential excess legal bills, Chief Financial Officer Marianne Lake told analysts Jan. 14 after settlements drove down fourth-quarter profit.

Moynihan has signaled that Bank of America’s focus is shifting from a four-year legal cleanup toward making the Charlotte, North Carolina-based firm’s operations more competitive. His bank and JPMorgan each have four times the staff of U.S. Bancorp and at least six times more assets.

U.S. Bancorp’s shares have climbed 21 percent since Davis became CEO in December 2006, compared with a 38 percent drop in the 24-company KBW Bank Index. (BKX) The stock didn’t fall as sharply during 2008’s credit crisis and is the only one in the index to post four straight annual gains through 2013. Still, U.S. Bancorp’s 26 percent advance last year was the index’s fourth-worst performance. Some competitors were rebounding from deeper troughs after the crisis.

Not ‘Flashiest’

“They are not going to be the flashiest company, they are not going to be the fastest-growing company, but they are going to be one of the most consistent companies,” said Tom Brown, CEO at Second Curve Capital LLC, a New York hedge fund that invests in banks and counts Davis as an adviser.

Davis’s firm ranks fifth by deposits and assets among commercial banks and has outpaced its larger peers every quarter for more than three years by return on equity, or how well it reinvests earnings, and return on assets, a gauge of how much profit a firm can squeeze from holdings. The bank had the best efficiency ratio, which shows how much a company spends on overhead, in that time, data compiled by Bloomberg show.

Its net interest margin, the difference between what the company pays for funds and earns on loans or investments, probably exceeded those of Bank of America, JPMorgan and San Francisco-based Wells Fargo & Co. (WFC:US) in 2013, according to Staite.

Market Share

U.S. Bancorp has added market share since 2007 in fund services, credit cards, mortgage origination, deposits, commercial and industrial loans and commercial real estate loans, the firm said in a Dec. 11 presentation (USB:US).

“I wouldn’t day-trade our stock; we are steady and consistent,” said Davis in a Nov. 21 interview. His firm’s competitive advantage is its ability to increase market share while avoiding new risks, Davis said. “Our competitors are looking at their balance sheet, but we are focused on fees, trust, payments.”

His first banking job was as a teller. He earned his bachelor’s degree in economics at California State University, Fullerton. As an executive vice president at Star Banc Corp., he oversaw its 1998 merger with Firstar Corp. Three years later, he oversaw that firm’s combination with U.S. Bancorp, where he held posts including chief operating officer before becoming CEO.

U.S. Bancorp has steered clear of subprime mortgages and shunned proprietary trading. That’s a plus, according to Matthew McCormick, who oversees $10.5 billion including bank stocks at Bahl & Gaynor Inc. of Cincinnati.

Whale Hunting

“There’s not a London Whale swimming in U.S. Bancorp’s closet, and they are not going to have a huge legal reserve that is taking from dividend growth (USB:US),” McCormick said, referring to New York-based JPMorgan’s $6.2 billion loss in 2012 on outsize derivatives bets by a trader known as the Whale.

While Bank of America and Citigroup Inc. are closing offices, U.S. Bancorp added 94 branches to its network of more than 3,000 with a Chicago acquisition last month. Deposits have jumped 88 percent since 2008, compared with an average 69 percent for the four largest banks (BAC:US), and assets rose 46 percent to $360.7 billion, compared with 39 percent for the Big Four.

“We are still boring,” Davis said, using his buzzword for relying on conventional banking. “Boring means we won’t get in and out of stuff we don’t know.”

Testing Rivals

The strategy has helped U.S. Bancorp stand out as U.S. regulators seek ways to make institutions safer by forcing them to hold more capital and curb risk-taking activities.

“From the standpoint of how you manage a company, U.S. Bancorp would be the model,” said Second Curve’s Brown. Davis has “struck a balance of risk and growth that regulators want to see.”

Among regional peers, fourth-quarter profit increased 53 percent at Pittsburgh-based PNC and 20 percent for Atlanta-based SunTrust Banks Inc. (STI:US) Earnings rose 1.9 percent at Capital One Financial Corp. (COF:US) of McLean, Virginia.

Since the 2008 credit crisis, regulators have clashed with lenders over stress tests, dividends and liquidity. Authorities also have demanded firms produce “living wills” to show how they can be dismantled if they’re near collapse.

“Big banks are going to be forced to become more conservative, which is a boon to U.S. Bancorp,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management, who invests in large U.S. banks. “They are seen as the good guys.”

Earnings Diversity

Spokesmen for U.S. Bancorp and its larger competitors declined to comment for this article. U.S. Bancorp also has faced regulatory probes of its own, including a dispute with Freddie Mac that was settled last month for $53 million.

The company still has “earnings and geographic diversification of a larger bank without being subject to some of the most binding capital constraints,” Goldman Sachs’s Richard Ramsden said, referring to tougher curbs on leverage that pertain only to bigger firms.

That’s good reason for rivals such as Bank of America’s Moynihan to worry, according to Donaldson.

“You’d be fearful, too, if U.S. Bancorp moved into your territory,” he said.

To contact the reporter on this story: Elizabeth Dexheimer in New York at edexheimer@bloomberg.net

To contact the editor responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net


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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $15.38 USD
    • -0.06
    • -0.39%
  • USB
    (US Bancorp/MN)
    • $43.18 USD
    • 0.08
    • 0.19%
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