Higher interest rates can’t come soon enough for U.S. Bank.
As the Federal Reserve mulls when to raise historically low rates, bankers are rooting for quick action. A rate hike will make lending more profitable, and should cause a spike in borrowing and refinancing. Until then, big banks will face a challenge in growing revenue.
“Believe it or not, after all this torture, I still think rates will move some time in ’15,” U.S. Bancorp CEO Richard Davis said Wednesday. “Until rates move up, it continues to impinge the ability for banks to be particularly financially successful.”
U.S. Bancorp posted a $1.4 billion profit in the first quarter of 2015, 2.4 percent more than it did in the same period a year ago. Revenue edged up, but loan growth over the past few months has slowed.
The bank, with headquarters in Minneapolis and the fifth-largest in the nation, is focusing on efficiency and high-quality lending, and keeping its head count constant as it awaits action from the Fed. Once there’s a real sense rates are about to rise, people will rush to borrow money and refinance loans at the current low rates, Davis said.
“There will be a tsunami effect, particularly on the corporate and wholesale side, of people wanting to lock down low rates before they finally get stuck having missed that opportunity,” Davis said.
Bank customers will begin making more money on their investments as rates go up, which should give them confidence to borrow more on their lines of credit.
Earlier in the year, analysts believed the Fed would start to raise interest rates in June and hike rates several times before Christmas. Now consensus is shifting, said Kathy Rogers, U.S. Bancorp’s chief financial officer. Most people in the financial industry believe the Fed won’t raise rates until September, and then only once more before the end of the year.
“That looks like it’s going to be slower and it’s going to start later,” Rogers said. “That will put some pressure on our net interest income, but we’ve been in a low interest rate environment and we’ve been able to successfully manage through that.”
Later Wednesday, the president of the Federal Reserve branch in St. Louis, James Bullard, said falling unemployment and an improving U.S. economy are evidence that the Fed should start raising rates. “Now may be a good time to begin normalizing U.S. monetary policy so that it is set appropriately for an improving economy over the next two years,” Bullard said in a public appearance. However, he stopped short of setting a precise time to act.
U.S. Bank saw that average total loans grew 5.1 percent compared with a year ago, and average total commercial loans grew 15.1 percent, slightly slower rates of growth than in the fourth quarter of 2014. The bank continues to be one of the most efficient in the industry. Return on assets in the first quarter was 1.44 percent. Return on equity was 14.1 percent.
The company, which employs about 10,000 people in the Twin Cities, reported strong growth in commercial real estate lending, and declines in net charge-offs, when a bank takes a loss on a bad loan.
Revenue edged upward to $4.9 billion, which was an increase over the same quarter a year ago but a decline from the fourth quarter of 2014. While loan growth slowed in the first quarter, Davis expects that lending will pick up the rest of the year.
An analyst asked whether the bank can move more of its workforce into revenue-generating positions. Davis said the bank’s need to comply with new and changing regulations won’t allow that. Compliance divisions are the only places where the bank has been adding positions.
“That’s just a new world, and even if I thought we had everything right, I’d still keep everyone there to double-, triple-check that we were still doing things well,” he said.
Other departments are still hiring, but they’re keeping their head counts constant as long as interest rates stay low.
“If you told me interest rates are going to be flat for the next three years, or if I believed that to be the case, we do have the broken-glass scenario,” Davis said. “It would be a reduction in force. It would be a very aggressive, but thoughtful, precise reduction in people and expenses.”
But Davis and Rogers do not believe interest rates will stay low that long.
“We are proud to be a Minneapolis-based company,” Rogers said. “We once again delivered performance measures at the top of our industry, which enable us to continue to be a strong employer in the market.”