U.S. Bank turns a corner on efficiency, momentum builds for revenue growth

U.S. Bancorp executives began 2017 thinking higher interest rates and an improving economy would produce faster growth. Six months in, they are being proved right.

The Minneapolis company — operator of U.S. Bank, the nation's fifth-largest bank — on Wednesday reported second-quarter profit that beat investors' expectations and was underpinned by solid loan growth and an uptick in net interest margin.

As well, U.S. Bank's efficiency ratio, which measures its ability to turn deposits and other resources into revenue, turned in a positive direction after years of modest but steady pressure. Executives said it will improve sharply the rest of this year.

"It was really a quarter where we started to see some nice momentum building," said Terry Dolan, the company's chief financial officer.

U.S. Bancorp said it earned $1.5 billion, down 1.4 percent from $1.52 billion a year ago. Excluding one-time gains and costs in the year-ago period, the company said its year-on-year profit rose slightly. The profit amounted to 85 cents per share, ahead of analysts' forecast of 84 cents.

Revenue was $5.49 billion, up 3 percent. Net interest income grew 2.4 percent to $3 billion and noninterest income rose about 3.9 percent to $2.5 billion.

Loans grew 3.4 percent, led by big jumps in retail leasing and construction. Deposits grew 7.7 percent. Net interest margin, the difference between interest income and the amount of interest paid to depositors, was 3.04 percent, up from 3.02 percent a year earlier.

While the company for years has led other major U.S. banks on most performance metrics, including efficiency ratio, that measure had moved to levels that were high for its historic range. The figure is a percentage reached when expenses are divided by revenue. The lower the figure the more efficient a bank is considered, with analysts viewing 50 percent to be optimal.

Before the latest quarterly results, the median efficiency ratio among nine other large U.S. banks was just below 62 percent. On Tuesday, Wells Fargo Corp. reported an efficiency ratio of 61.1 percent, for the second quarter as the company continued to be affected by higher expenses and lower revenue growth tied to its false accounts scandal.

U.S. Bank on Wednesday reported an efficiency ratio of 55.2 percent, down from 55.6 percent in the first quarter but still above 54.9 percent a year ago.

Cecere attributed this year's higher figures to personnel and technology costs related to complying with regulations.

With some of those expenses ending and revenue growing, the efficiency ratio should fall closer to 50 in coming quarters, he said.

Now, while there may be some seasonal variation, Dolan said he expects the efficiency ratio to move steadily lower for the next couple of years.

"The investments we have been making are going to strategically drive growth in the future," he said. "The efficiency ratio and the revenue growth numbers are going to be results from those actions."