A tough fourth quarter seemed to foreshadow challenges in the year ahead for U.S. Bancorp, and executives said Wednesday that the Minneapolis company will need to lean on fee income to offset margin pressure in 2020.
Though the Federal Reserve has paused lowering interest rates for now, Chief Financial Officer Terry Dolan said he expects net interest income, which fell in the fourth quarter from a year earlier, will continue declining “at least for a while.”
That’s putting pressure on the nation’s fifth-largest bank to generate more revenue from mortgage banking, merchant processing, credit cards, treasury management and other services from which it collects fees, Dolan said in a phone interview with American Banker Wednesday.
“For us, one of the positive things is that we have a pretty good business mix … between balance sheet and fee income,” he said.
A number of discrete items ate into U.S. Bancorp’s bottom line in the fourth quarter. Though the bank saw growth in loans and deposits, flatter interest rates squeezed its net interest margin, and restructuring charges and technology spending drove up expenses.
Fourth quarter net income fell 20% to $1.5 billion from the year-ago period. Earnings per share of 90 cents missed analysts’ mean estimate of $1.08 according to FactSet Research Systems. Total net revenue decreased 2.8% to $5.7 billion.
Net interest income fell 3% to $3.2 billion, and the net interest margin narrowed 23 basis points to 2.92%.
Average loans climbed almost 4% year over year, to $294 billion, driven largely by an 8.4% increase in residential mortgages and a 7.6% jump credit cards loans. Commercial real estate loans declined slightly, while commercial and industrial increased 3.4% to $104 billion.
Average deposits grew 6.6% to $356.4 billion.
Noninterest income declined 2.5% to $2.4 billion. Corporate payments revenue fell 3% to $158 million, in part because corporate clients held off on discretionary spending over fears of a recession and nervousness about tariffs. Treasury management fees fell 2% to $140 million.
Expenses rose 3.7% to $3.4 billion largely due to $200 million in restructuring charges that included severance for employees the bank chose to let go. Spending on technology and communications rose 14.6% to $291 million. Employee benefits rose 2.3% to $315 million, and compensation grew 1.8% to $1.6 billion, partially driven by higher compensation tied to increased production in its mortgage business.
Dolan said that that the $495 billion-asset company is counting on its investments in technology to drive growth in its fee-based businesses.
For example, it’s invested in real-time payments and treasury management capabilities that will help corporate clients better manage payables and receivables and has already seen a boost in merchant processing income from improvements it has made in the software that those clients use.
On the consumer side, investments in its digital mortgage application have already begun to pay off. As of November, about 86% of all mortgage applicants were using the digital tool, and overall mortgage production volume rose more than 92%. That helped to boost mortgage banking revenue nearly 43% to $244 million in the fourth quarter.
Maintaining that momentum could be another story, however.
“Last year was so robust for mortgage that it’s a little bit difficult to figure out what’s going to be the encore there,” said Scott Siefers, managing director at Piper Sandler.
U.S. Bancorp’s shares were down more than 3% late trading Wednesday.
