Richard Davis of U.S. Bancorp remembers a school fitness test that included hanging from a bar for 90 seconds.
The last 10 seconds counted the same as the first 10, even though they were a whole lot more difficult. It really helped to get a friend to shout out the last few seconds.
The 90-second bar hang is the way Davis explains his thinking about maintaining low interest rates, which continue to put pressure on bank earnings. He’s eagerly awaiting the first rise in interest rates since the U.S. Federal Reserve drove short-term rates to near zero at the end of 2008. It seems just seconds away from finally happening.
Davis is hanging on so tenaciously because even a little bump in rates should mean U.S. Bank won’t have to follow the lead of other banks and get earnings growth by cutting the jobs of hundreds if not thousands of employees.
With about 11,000 U.S. Bank employees in the Twin Cities — and because it’s so clearly the right thing to do — it’s easy to cheer for Davis to hang on a little longer.
Any cuts wouldn’t be as the result of some crisis for the bank. The company can still make money with every employee it now has. The only thing that’s really at risk for the bank is being able to report continued growth in earnings.
Delivering earnings growth is Job One for any CEO.
The investors looking closely at a bank’s earnings potential all pay close attention to a measure called operating leverage, so Davis has to, too. Operating leverage is a really simple business concept: It just means that it should cost a little less to generate the next $100 in revenue than it did to generate the last $100. When that happens, of course, profits increase faster than revenue.
There wasn’t any improvement in operating leverage in the first quarter at U.S. Bank and there may not be in the second, either.
Part of the problem is that the cost of doing business in a regulated industry seems to only go up, but a bigger factor is how hard it is to grow revenue with rates so low. A lot of revenue for banks comes from the interest payments collected from customers on borrowed money — from credit card balances to corporate loans.
Banks pay interest for deposits and other liabilities, of course, so the closely watched number is called the net interest margin. In 2006, the year Davis became CEO, it was 3.65 percent. For the most recent full quarter, it came to just over 3 percent.
U.S. Bank has done a great job building its fee-only business, but a steadily eroding net interest margin is a problem for any banking company that wants to grow its earnings.
Investors ask about job cuts at U.S. Bank because it’s what other banking companies are doing to respond to continuing low rates. JPMorgan Chase & Co. has cut employees in 11 of the past 12 quarters. Most recently, news leaked that at least 5,000 more JPMorgan jobs would go.
“There’s no CEO in the world more focused than I am on shareholders,” Davis said. “I wake up every day worried about them. But I also understand that a shareholder wants us to have a future, not just a current quarter. Part of that is finishing what we started.”
What Davis is really trying to protect here is a strategy of revenue growth. When he took over as CEO of U.S. Bank nine years ago it was known mostly for being really efficient. The challenge Davis accepted was to get the bank to also generate revenue growth.
He explained that one way he did that was by flipping the pyramid of priorities at the company. It had been the case that shareholders sat on the top and employees on the bottom. He wanted employees to now be on top.
It didn’t make U.S. Bank an easy place to work, but bankers who knew they were considered assets rather than just costs to be managed would work hard for the customers.
What would laying off 5,000 people do to that idea? The laid-off folks would obviously be devastated, David said, but everybody still coming to work the following morning would be affected, too. They would have to wonder if they are in the next 5,000. What would happen then to customer service?
It’s not as if the company hasn’t been controlling its payroll costs, he said. In February 2014, Davis put a hold on its full-time equivalent positions that weren’t in compliance and audit, meaning a business unit with 900 full-time positions had to stay at 900. Earlier this year, the hold was renewed, this time with managers encouraged to hire stronger performers and let employees go who were not performing well.
Davis is happy to explain all this to shareholders, at the same time he tells them a big layoff isn’t coming anytime soon.
He knows he’ll lose some investors, he said, but a shareholder thinking about continued revenue growth “shouldn’t want me to have some sort of draconian action. You shouldn’t want this company to do some sort of knee-jerk, not at a moment when we are almost through this. In the last 10 seconds.”
As it stands now, the financial markets are looking to September to see if the Fed does finally raise short-term interest rates, with one of the Fed’s governors last week putting the odds of a September raise at 50-50.
Come October with no interest rate raise, Davis would be under even more pressure to stop talking about interest-rate cycles and get on with the task of cutting employees.
He said he’ll do what needs to be done, but it seems all but certain that a lot of other things will get cut before jobs, from marketing budgets and discretionary travel to even wages across the board.
Davis seems likely to try to prove, again, that almost anybody can hang on to a bar for just a few more seconds if they really put their mind to it.