Fee momentum timely for U.S. Bancorp

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U.S. Bancorp had a strong fee income story to tell in its latest quarterly results, and it says it can count on that part of its business to help it weather interest rate cuts.

Executives at the Minneapolis company say they expect two Federal Reserve rate reductions this year that could eat into net interest income. But they also say that its corporate payments, merchant processing and other fee-based services — which grew in the second quarter — have legs and could help it ease pressures from tightening margins.

“In this environment with the yield curve where it is and the outlook for two rate cuts, having that momentum on the fee side of the equation is going to be really helpful,” Chief Financial Officer Terry Dolan said in an interview after U.S. Bancorp released its second-quarter report. “We saw it in payments, we saw it in trust and investment, and it was particularly beneficial in mortgage banking.”

Executives said Wednesday that they anticipate fee income to grow in the mid single digits on a year-over-year basis in the third quarter after rising 3.1% to $2.5 billion in the second quarter. Speaking with American Banker, Dolan detailed some of the factors he expects to drive fee income, including seasonally higher consumer spending, household growth and the company's digital investments in its consumer and corporate banking platforms.

U.S. Bancorp did slightly better on fee income than some other banks that reported earnings Wednesday. PNC Financial Services Group in Pittsburgh reported noninterest income growth of 2% to $1.9 billion. Bank of America's noninterest income grew by 1.6% to $10.9 billion, boosted primarily by trading-account-related income.

The $481.7 billion-asset U.S. Bancorp reported increases across a broad range of fee-income businesses. Card revenue grew 4% to $365 million, corporate payments revenue rose 5.7% to $167 million, merchant processing services increased 4.4% to $404 million, and trust and investment management fees rose 3.5% to $415 million.

Deposit service charges fell 16.8% to $227 million because the company sold its third-party ATM servicing business in the fourth quarter last year. On the flip side, however, Dolan said the transaction also resulted in roughly $20 million in other income in the first and second quarters, though he noted that will fall off in future quarters.

Dolan said he expects that U.S. Bancorp will be able to increase deposit service charges by adding customers and building up consumer deposit balances.

Dolan said he expects certain seasonal factors, like back-to-school and holiday shopping, to boost card revenue later in the year, although he also said the bank anticipates yearly growth in card revenue irrespective of seasonality.

He said that much of the bank’s fee-income growth this quarter has resulted from ongoing digital investments. For example, the bank has more than doubled the size of its technology infrastructure — including people, developers and spending — in its merchant processing business over the past few years, he said.

Likewise, he expects digital investments in its corporate payments business to pay off in a big way when corporate clients begin to adopt digital payments in greater numbers. Corporate clients have not yet adopted digital payments to the degree that retail consumers have, but Dolan expects that to change when companies start to realize digital payments are efficient enough to justify the cost.

“On the corporate side, digital adoption is still in the early stages,” he said. “Well over 50% of all transactions are still paper-based, but we’re getting to the point where digital adoption is going to accelerate as well.”

Mortgage banking is another business that should benefit from the digital investments U.S. Bancorp has been making, Dolan said. Second-quarter mortgage banking revenue actually declined slightly from a year earlier, but it rose 11.8% from the prior quarter to $189 million.

Currently, more than 80% of U.S. Bancorp’s mortgage applications are done online, which Dolan described as “a huge difference from two years ago.” He added that roughly 42% of credit card applications and 34% of overall consumer loans are done online, too.

He added that "digital adoption is important, and it’s important for us to continue to make those investments regardless of what sort of environment we’re in.”

Overall, U.S. Bancorp's net income rose by 4% to $1.8 billion in the second quarter. Net revenue increased 3.2% to $5.8 billion. Net interest income rose 3.2% to $3.3 billion, while the net interest margin narrowed 3 basis points to 3.13%.

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