U.S. Bancorp looks to snatch business from its major rivals

After posting its fourth straight quarter of double-digit profit growth, U.S. Bancorp is gambling big that it can continue to steal customers from its large-bank rivals simply by sitting still.

In recent months, giant banks such as Bank of America have scrambled to find new sources of revenue to make up for new limits on fees, including charges when people overdraw their accounts. For many banks, the solution has been simple: Introduce new fees on checking accounts that previously had none.

But U.S. Bancorp is taking a decidedly different strategy. Flush with cash, the bank's executives have decided they can afford to sit on the sidelines -- for now, at least -- and keep fees unchanged. The bank is betting new customers it wins from its rivals will offset costs of the regulatory changes.

The strategy is already paying off. The bank said Wednesday its deposits rose nearly 10 percent in the third quarter over a year earlier, outperforming many of its rivals. Analysts attributed much of the growth to the fact that U.S. Bancorp has kept a lid on fees, while rivals such as Bank of America, Citigroup and others may have scared away customers by altering terms on their checking accounts.

In essence, the bank has deemed it's profitable enough that it can watch how customers respond to fee increases at other banks before moving forward with changes of its own, analysts said. U.S. Bancorp said Wednesday its third-quarter profit rose 51 percent to $908 million, or 45 cents a share, from $603 million, or 30 cents a share, a year earlier.

"We're going to wait," Richard Davis, chief executive officer, said in a conference call with analysts, when asked when the bank might raise checking-account fees. "We have the luxury and we've earned the position to watch and learn."

This wait-and-see approach also poses substantial risks. The bank estimates new federal restrictions on overdraft fees and credit cards could cost the bank $690 million to $730 million a year.

Analysts say the risk is that U.S. Bancorp's rivals will structure their new checking-account fees in such a way that customers will stay. For instance, while many banks have introduced monthly maintenance fees to generate new income, they are also creating ways for people to avoid the fees. The extra options take some of the bite out of the new fees and may keep people from switching banks, analysts said.

Wells Fargo's third quarter

Wells Fargo in July eliminated free checking for new customers, a potentially risky move. The bank introduced a new checking-account product called Value Checking that included a $5 monthly maintenance fee. However, Wells Fargo softened the blow by waiving the fee for people who agree to have their paychecks deposited directly to the bank or for account holders who maintain average daily balances of $1,500.

So far, Wells Fargo is not having difficulty retaining its deposit customers. In fact, the bank reported its average checking and savings deposits rose 9 percent over a year earlier, virtually on par with U.S. Bancorp's increase for the quarter. Wells Fargo also turned in a strong third quarter, posting a 19 percent profit gain on stronger mortgage-servicing income and reduced losses on bad loans.

"The risk for U.S. Bancorp is that customers stay with their banks, and they lose money that they might not have had to lose had they raised fees like everyone else," said Jaime Peters, a bank analyst at Morningstar.

Unlike most of its big-bank rivals, U.S. Bancorp made a profit in every quarter during the financial crisis and even managed to expand, hiring new employees and buying failed banks and thrifts. The bank has bought $35 billion in assets since 2008, and many analysts expect the bank to continue its buying spree by doing niche acquisitions of smaller banks.

The bank is also stockpiling huge amounts of cash. Two years ago, amid the depths of the recession, U.S. Bancorp slashed its quarterly dividend nearly 90 percent. Though unpopular with shareholders, the dividend cut means the bank is keeping hundreds of millions of dollars that used to flow to shareholders each quarter. As of Sept. 30, the bank had about $32 billion in capital.

Andy Adams, an investment manager at Mairs & Power, a St. Paul money management firm that owns 4.2 million shares of U.S. Bancorp, said the bank should take advantage of its strong capital position to try to steal customers from its rivals.

"They're in a great position relative to their peers," Adams said. "To the extent that they're picking up market share, we'll take that over short-term profitability."

U.S. Bancorp rose 2 cents Wednesday to $22.83 a share. The bank's stock is up 2 percent this year.