U.S. Bancorp, which has been criticized for a lack of revenue growth, answered this week with an announcement of a potentially lucrative Defense Department contract.
The deal calls for U.S. Bancorp to track the Defense Department's freight payments electronically-a highly specialized service that grew out of the company's credit card processing business.
Analysts say it is a significant win for U.S. Bancorp. By developing products such as freight processing-still a somewhat unusual business for a bank-U.S. Bancorp is moving to become more of a revenue-generating machine.
"This business shows they're not just a cost-cutting company," said Joseph Duwan, an analyst at Keefe, Bruyette & Woods Inc. "They do invest in and build businesses, contrary to what some investors believe."
U.S. Bancorp has generally been viewed as a high-performing company, but some detractors have said it has benefited primarily by buying out bank competitors and aggressively cutting their costs.
Vice chairman Philip G. Heasley said he expects to sign up other freight-processing customers, including large retail and manufacturing companies, within three months. The Pentagon expends only about $1 billion of the $400 billion that U.S. companies spend per year on shipping.
"We expect to be a leader," Mr. Heasley said, thanks to U.S. Bancorp's technological expertise.
U.S. Bancorp executives said they have an edge over competitors because the company has developed a method of tracking and paying shipping bills electronically. Most companies offering this service have only paper-based products, Mr. Heasley said.
Unlike some of its peers, U.S. Bancorp, the 14th-largest banking company, with $76 billion of assets, has built its processing business rather than acquiring it. But like its competitors, it is hoping this high- growth fee business will bolster earnings, said Diana Yates, an analyst at A.G. Edwards & Sons in St. Louis.
"Banks want businesses that are not solely based on margins," Ms. Yates said. "They want a reliable, stable base of fees coming in."
Ms. Yates said U.S. Bancorp's "revenues stalled a little bit" last year and the market has punished its stock, though it has begun to rebound. Analysts have been reducing their 1999 earnings estimates. The shares closed at TK on Wednesday.
The Defense Department contract stemmed from an eight-year relationship U.S. Bancorp has had with government agencies, supplying them with purchasing cards. Last year the government split that exclusive contract with several companies, taking business away from U.S. Bancorp.
The partial loss of the business will cause a 5-cent-per-share reduction in 1999 earnings, U.S. Bancorp has said.
Though Mr. Heasley said the new business would probably not add significantly to earnings this year, it will "be much more material next year and years to come."
Payment processing accounted for 13% of U.S. Bancorp's $1.5 billion of earnings last year.
Mr. Heasley, a former Citibank executive, has been the architect of many operational and technological innovations at U.S. Bancorp, earning him the informal title "technology guru," Mr. Duwan said.
Mr. Heasley said the business is a little out of the ordinary.
"When we first went into corporate procurement, a lot of people thought we were nuts," Mr. Heasley said. "Now a lot of people are clamoring to get into the business."
"Psychologically, it's a step in the right direction," said Frank Barkocy, a senior analyst at Keefe Managers Inc. "They're taking other initiatives to balance growth."
Mr. Barkocy said some investors have been concerned that U.S. Bancorp would do a large bank deal to drive earnings-a move that would be dilutive.
Though Mr. Barkocy said the freight business appears to be fairly low- risk, other banking companies have had mixed results in processing.
Bank of New York has long made a successful business out of its securities processing business. However, National City Corp. agreed in February to sell its underperforming freight payment business and made arrangements to sell other pieces of its National Processing unit in a restructuring of that business.