U.S. Bancorp (USB) made the same New Year's resolution as the rest of us: to watch its weight.
The $353 billion-asset company, long noted for its strong revenue growth, cautioned Wednesday that 2013 would present a more challenging operating environment. Expense control will be crucial in meeting its commitment to increase operating income, Chief Executive Richard K. Davis said.
"We do expect [revenue growth] to slow compared to 2012 because we are prudent and careful," Davis said in a conference call on Wednesday. "I also promise you positive operating leverage for 2013. So that just means we are going to be watching our expenses."
Many banks will be looking to (further) trim expenses to preserve earnings momentum from last year, analysts say. They will continue to face a fiercely competitive loan environment, low interest rates and a potential cooling of the mortgage market. Earnings per share will be determined by how well companies manage their expenses and their ability to repurchase stock.
"We are projecting for 80% of incremental growth through 2013 to be related to bringing expenses down and deploying excess capital," says Marty Mosby, an analyst at Guggenheim Securities. "There are just not a lot of levers left to pull to offset the low interest rate environment."
Managing expenses is often a euphemism for branch closures, layoffs and other tough cuts. There will likely be plenty of those across the industry. But that will not be the case for U.S. Bancorp, Chief Financial Officer Andrew Cecere said in an interview. He noted that the company has been one of the few that did not announce big layoffs in the downturn.
"Revenue will be higher than it was in 2012, but the rate will be modest and the rate of expense growth will also have to be modest," Cecere says. "The key is not to add where you don't have revenue growth. Your expenses can't grow more than your revenue."
U.S. Bancorp is already lean, with an efficiency ratio in the fourth quarter of 52.6%. That leads the industry, analysts say. Still, its ratio rose from the third quarter and was at its highest point since the end of 2011. (Efficiency ratios basically measure how much banks have to spend, excluding interest costs, for each dollar of revenue; the lower the ratio is, the better.)
One area where it can reduce expenses is in spending to fix problems from the financial crisis. For instance, U.S. Bancorp said it expects to eliminate $50 million a quarter of professional services expenses after the industry's mortgage-servicing settlement with regulators. It also reported a year-over-year decrease in insurance costs paid to the Federal Deposit Insurance Corp. The company will likely save more as it needs less help from outsiders in dealing with bad loans or the costs of new regulation, analysts say.
U.S. Bancorp, despite its own tempered outlook, is better off than many of its peers, analysts say. It has added market share in the last few years, made large investments in growing businesses like its payments division and built its fee income to 46% of earnings compared with 40% for most banks, says Greg Ketron, a managing director of equity research at UBS.
"One of the benefits of having above average revenue growth is that there is not as much pressure on the cost structure," Ketron says.
The company reported revenues of $5.11 billion in the fourth quarter, down 1.3% from the third quarter and up 0.2% from a year earlier. Year-over-year revenue growth was 5.6% when adjusted for a gain last year from the settlement of litigation tied to a merchant-processing referral agreement. Still, even the adjusted fourth-quarter revenue growth fell short of the 8% to 9% clip for the first three quarters of the year.
The moderation was attributed to a few things: as expected, the company increased loans in the quarter at an annual rate of 6.4% compared with the 7%-plus rates in each of the previous two quarters. Net interest margin slipped four basis points from the third quarter, to 3.55%. Mortgage revenues also fell slightly, which the company attributed to seasonal conditions.
Those drivers were expected; the analysts' consensus for the quarterly earnings per share was 74 cents, and the company reported 72 cents per share, with an $80 million expense accrual from the mortgage settlement eating three cents per share.
In the company's third-quarter conference call, Davis had said worries over the fiscal cliff were causing borrowers to tap their brakes. As a result, it projected loan growth of 4% to 6% for the quarter. With the debt ceiling now the headline story, Davis projected a similar range for loan growth.
"I don't think that people care as much about the debt ceiling and the debate that will occur later in the quarter as they do about the bottom line to their paychecks as they did about the fiscal cliff," Davis says. "But I do think it is still a fairly uncertain environment, and people at the first of the year aren't jumping on anything new."