It pays to listen to U.S. Bancorp CEO Richard Davis whenever there's an opportunity to do so. Not only does Davis lead one of the nation's most profitable banks, he's also full of prescient insights on banking. Here are five such insights from U.S. Bancorp's third-quarter conference call with analysts.
1. U.S. Bancorp is a "believer in the branch network"Big branch networks are no longer what they used to be. Once considered the cornerstone of competitive advantage in the industry, the adoption of online and mobile banking has led many of U.S. Bancorp's competitors to prune branches in an effort to reduce expenses.
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Bank of America serves as a case in point. Since the beginning of 2011, the Charlotte, North Carolina-based bank has shuttered over a thousand branches, or 17.5% of its once industry-leading network.
But Davis is circumspect of this trend. He noted that branches are unattractive right now in large part because interest rates are low, which reduces the value of deposits -- collecting deposits being a branch network's primary purpose. Davis believe this will change once rates increase:
2. Banking and baggage handlersNew rules and regulations, as well as the threat of public and private lawsuits, have left an indelible mark on the bank industry since the financial crisis. In addition to increasing costs, these forces have changed how banks approach compliance. Davis explained this by noting that all of the bank's employees have "gone from baggage handlers to pilots."
3. One-two punch on expensesU.S. Bancorp has long been one of the most efficient banks in the country. In the third quarter, it reported a 53.9% efficiency ratio, meaning that only 53.9% of its revenue was consumed by operating expenses. For the same period, by comparison, Bank of America's efficiency ratio was 66%. And even the notoriously efficient Wells Fargo trails in U.S. Bancorp's wake, with an efficiency ratio of 56.7%.
Data source: Quarterly earnings releases from JPMorgan Chase, Bank of America, Wells Fargo, and U.S. Bancorp.
In an attempt to further drive down expenses in response to the prevailing low-revenue environment, weighed down by near-zero-percent short-term interest rates, U.S. Bancorp had previously frozen its full-time employee (FTE) count. New employees could be hired, but only to replace ones that were leaving. The Minnesota-based bank is now taking this one step further, by attacking discretionary expenses.
According to Davis:
4. What will happen when interest rates riseOne of the big question marks in the bank industry right now concerns the fallout from higher interest rates -- assuming, of course, that the Federal Reserve eventually decides to push them up. Davis has been one of the few big bank CEOs to discuss this issue candidly on record. As he sees it, there will be two effects: deposits will flee in search of higher yields and commercial customers were scurry at the last moment to lock in lower lending rates.
5. Timeline for future acquisitionsIf bankers learned anything from the financial crisis, it was to be more judicious with acquisitions. Bank of America discovered this the hard way, with its 2008 purchase of mortgage-originator-cum-criminal enterprise Countrywide Financial, which has cost the bank $100 billion or more in subsequent legal fines and expenses. To a lesser extent, JPMorgan Chase learned the same lesson from its government-assisted acquisitions of Bear Stearns and Washington Mutual.
U.S. Bancorp avoided these pitfalls and is intent on continuing to do so. In response to an analyst's question about acquisitions, Davis explained that U.S. Bancorp won't be buying banks until at least 2017, at which point the statute of limitations should have run on crisis-related legal claims that could be brought against potential acquisition targets.
The article 5 Valuable Insights From U.S. Bancorp CEO Richard Davis originally appeared on Fool.com.
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