Facing dramatic changes in retail business trends, U.S. Bancorp is planning an overhaul of the operation but admits the efforts will not bear fruit in time for the company to be able to meet earnings expectations this quarter and next year.

Instead, top U.S. Bancorp executives said that major investments in retail banking will actually contribute to a shortfall in earnings for the coming year, but they characterized the pain as necessary for growth.

In some ways, Minneapolis-based U.S. Bancorp had laid the groundwork for Monday's profit warning when it reorganized its management team for a bigger focus on customer service last August. At that time it created a post, head of branch channel, charged with ensuring that branch visitors have a positive experience.

In an interview last week at U.S. Bancorp's headquarters, Peter E. Raskind, the executive vice president tapped to fill the new post, said a shift in the type of customers that visit branches - coupled with service problems - had prompted a major overhaul of this distribution channel.

"We do foresee a secular decline in the use of branches by the consumers but no decline in the use of branches by businesses," he said, noting that 30% of transactions in branches are done by businesses. "Because most banks have difficulties dealing with the business customer's experience in the branch, we saw an opportunity."

Mr. Raskind acknowledged that customer service problems also were partly responsible for the new service-oriented push. The integration after the 1997 merger of First Bank System of Minneapolis and the former U.S. Bancorp of Portland, Ore., prompted customer complaints.

"The service we were delivering from our branch network and elsewhere was not what we would have liked," he said. "That clearly played a role in our thinking."

As part of the overhaul, U.S. Bancorp plans to give branch managers more decision-making authority, train tellers to handle business customers more adroitly, and make customer service as important as salesmanship. The company also has sunk millions of dollars into developing technology for tellers that will speed up transactions and reduce errors. The system will be tested next summer in an as-yet-undetermined group of branches, Mr. Raskind said.

"The customer's view of the entire bank is heavily colored by their human experience in the branch," Mr. Raskind said. "That is why we are so focused on this."

The $79.5 billion-asset company on Monday said its fourth-quarter earnings would probably be 52 to 54 cents per share, as much as seven cents below analysts' consensus. For 2000, earnings per share would range from $2.30 to $2.35 a share, the company said, compared with Wall Street's estimate of $2.45.

In a conference call Monday, U.S. Bancorp chairman and chief executive John F. Grundhofer said his company is making significant investments in sales and service training and in technology to "support future revenue growth." However, consumer loan growth is sluggish, and lower-than-expected deposit growth required the company to turn to higher-priced funding sources.

Both factors left the company unable to make up for the cost of the growth initiatives, he said.

"I'm convinced that we are on the right path … but the road is not always smooth," Mr. Grundhofer said.

Investors reacted to the news with a significant selloff of U.S. Bancorp's shares, driving the stock price down 28%.

Mr. Grundhofer predicted that, because of the continuing investments, earnings per share growth will be held at 8% to 11% through 2000 and then climb to a 12% to 15% range in 2001, when the return on investments in its consumer bank is "fully realized."

Analysts were split on whether the growth initiative investments would pay off as handsomely as U.S. Bancorp predicted. Nancy A. Bush, an analyst at Ryan, Beck & Co., said that the Mr. Grundhofer was being overly optimistic.

"If we've heard anything from the industry in the last 12 months, it's that you can't grow earnings consistently above the natural growth rate of the industry," Ms. Bush said. "They shouldn't make promises they can't keep."

Others, however, said the investments could lay a crucial foundation to help U.S. Bancorp remain one of the more competitive banking companies in the nation.

"There is an encouraging aspect to this," said Joseph Duwan, an analyst at Keefe Bruyette & Woods Inc. in New York. "It is a recognition that investments must be made and that there is the possibility for more growth within this critically important business."

A major chunk of the investment comprises a multimillion-dollar revamping - dubbed "lobby 2000" - of the company's 1,000 branches.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.