With profit rising, U.S. Bank passes a milepost in digital banking

One out of two U.S. Bank customers now use the firm's digital apps and online services, executives said Wednesday, a crossover point that shows the company's success in migrating to a new form of business while maintaining profits.

Its parent, Minneapolis-based U.S. Bancorp, reported another record quarterly profit, shaped by gains in fees for nonloan businesses like credit cards and helped by this year's cut in federal corporate tax.

Nearly all of the company's financial metrics remained at the top of the U.S. banking industry during the July-to-September period. And executives gave an upbeat outlook into 2019.

"Momentum is building in our core businesses as we head into the end of the year," Andy Cecere, the company's chief executive, said on a call with analysts and investors. "We expect loan growth to continue to accelerate in the fourth quarter and our fee businesses remain on a good trajectory."

But inside those fundamentals, U.S. Bank, like most businesses, has been under pressure to adopt digital technology in delivering services and information to consumer and business customers. The company is spending more than $2.5 billion a year on technology investments, about one-tenth of its revenue, and rolling out services online and via apps at an increasing pace.

Next year, the firm will roll out a new mobile app for consumers, one that is more reflective of how consumers interact with money, said Terry Dolan, the company's chief financial officer. That comes on the heels of a new online product for small business loans and a new product for consumers to get short-term, small-amount loans in minutes digitally.

Also like many businesses, U.S. Bank has seen the migration of customers into digital apps and services begin slowly and then accelerate. Dolan said the company is now in the midst of that acceleration.

On the call, Cecere said that half of the company's 11 million full-service customers use digital platforms to bank with U.S. Bank and the majority of them are using apps on smartphones and other mobile devices.

As the rise of digital banking continues, U.S. Bank executives review their need for branches and other physical space and essentially everything about the way they operate. "We are continuing to invest in the future while recognizing that some of the things we've done in the past we can do better or do less of," Cecere said.

The company's latest results showed that it was able to grow revenue and trim expenses amid such change. Its overall profit climbed 16 percent to $1.82 billion, or $1.06 a share. That beat the consensus of analysts' forecasts of $1.04 a share. The company's shares rose 3.8 percent on the news Thursday, to $52.90.

Its pretax profit, a measure that eliminates the effect of the federal tax cut, rose 4.7 percent.

Revenue rose 2.4 percent to $5.7 billion. Net interest margin, the difference between what it pays to attract deposits and what it is paid for making loans, was 3.15 percent, up from 3.14 percent a year ago.

The company saw revenue gains of more than 8 percent in two of its largest fee-producing businesses, trust and investment management and credit and debit cards.

Its loan base grew 1.2 percent as its commercial portfolio, the largest portion at about one-third of the overall business, growing 2.5 percent. The company continued to rein in lending on commercial real estate, with that portion of its portfolio contracting 5 percent. In addition to "disciplined underwriting," U.S. Bank said commercial customers paid down real estate loans at greater rates.

Executives said those paydowns decelerated in the latest quarter and the commercial real estate business may reverse upward again. "That's an opportunity for us and one in which we're not taking more risk," Dolan said.

The company bucked the trend of other banks in recent months, however, by reporting sizable growth in residential mortgages, which were up 5.1 percent. As interest rates have risen, banks broadly have seen originations and requests for refinancing slow down.

Dolan noted the mortgage business is one that illustrates the benefits of the digital changeover. U.S. Bank 18 months ago rolled out a digital app for mortgage lending and, today, sees three out of four mortgage applications come through that way.