Three months after being named the successor to former U.S. Bancorp CEO Richard Davis, longtime deputy Andy Cecere stepped into the driver’s seat Wednesday.
A call with analysts was Cecere's debut of sorts as the Minneapolis company's new face after he was officially promoted at the annual shareholders’ meeting a day earlier. Rather than laying out a bold new vision, he emphasized that the business model that produced industry-leading returns under Davis will stay in place for the time being.
“As I transition into my new role, you should not expect major changes in the strategic direction of this company,” Cecere said on the call to discuss quarterly financial results. “You should expect an ongoing focus on innovation, continuous improvement in our customers and employees.”
Still, while the broader corporate strategy will remain steady, Cecere’s reputation as big-bank CEO initially will be shaped by how he responds to the immediate challenges in front of him.
In some ways, Cecere takes over the top role at the $449 billion-asset company at an inopportune time, in the midst of an industrywide commercial loan slowdown. During the call, analysts pressed the U.S. Bancorp management team about its outlook for loan demand in the coming year.
Business lending has been “sluggish” in recent months, despite the recent surge in business optimism, Cecere said, confirming what some of his peers have said in recent days. U.S. Bancorp's total loans grew 4% from a year earlier, to $273 billion, though commercial loans dipped slightly from the previous quarter.
U.S. Bancorp had previously expected loan growth for 2017 to reach as high as 8% but, given the deceleration in business lending, that target may now be out of reach.
“As we look at where the first quarter has occurred, that’s going to be hard to achieve,” Chief Financial Officer Terry Dolan said. “We think it’s going to be in the mid single digits for the year.”
Expenses are another area of focus. U.S. Bancorp's management team for years has earned a reputation as sticklers for cost control, managing to keep its efficiency ratio low — in the covetable low 50% range — even as interest rates hovered around historic lows and margins steadily narrowed.
But the ratio has begun to edge upward — rising to 55.6%, from 54.6% a year earlier — as the company has beefed up spending to comply with an anti-money-laundering consent order.
“Our efficiency ratio remains best in class, but it’s higher than we would like it to be,” Cecere said. The ratio will likely plateau during the second quarter and decline later in the year, due to expectations for stronger revenue growth and reduced compliance costs.
Additionally, U.S. Bancorp’s auto business has also begun to raise eyebrows. While the company has steered clear of the subprime market, focusing mostly on customers with FICO scores of around 770, it has distinguished itself by focusing on auto leasing.
The company’s leasing book grew 25%, to $6.5 million, thanks in part to record growth in the auto industry.
As many of those lease terms begin to expire, however, a surge in off-lease vehicles could put pressure on used-car prices.
Meanwhile, "as some of the manufacturers have been trying to push product, they have been very aggressive with respect to new-car-reward programs or rebate programs,” Dolan said during an interview following the call.
The rise in rebate programs has put “downward pressure” on the value of used cars, Dolan said.
During the fourth quarter, U.S. Bancorp saw declines in the gains on lease residuals — the price a car can sell for when its lease term ends — but the market has shown some signs of rebounding thanks to seasonal factors and some dealers' pullback on new-car rewards, according to Dolan.
On the call, Cecere sounded optimistic about the business.
“Our leasing group is doing a great job, [and] they are taking share,” Cecere said. “I think that continues to be an area of opportunity for us.”