Richard Davis, the chief executive of U.S. Bancorp (USB), could be running with the bulls come summer.
Loan growth in the first half of this year will be steady, but borrowing by businesses and consumers may gain momentum in the second half, the head of the Minneapolis bank predicts.
Davis' expectations are grounded in anecdotes rather than data, as deposits remain high and line-of-credit use remains low. Excess cash and unused lines are normally antithetical to loan demand, but Davis says he senses a renewal of animal spirits among clients.
"The sentiment is stronger than it's been in all these last Januaries," Davis said in a conference call with analysts on Wednesday. "People are much more willing to talk about future investments."
It's no shocker that bank CEOs would try to drum up confidence after a protracted downturn and slow recovery. The general tone in fourth-quarter conference calls this month has been cautiously optimistic. Brian Moynihan at Bank of America (BAC) was more upbeat than at any time in the past five years, while John Stumpf of Wells Fargo (WFC) said there is "more activity" but it's no "watershed moment."
What makes Davis' remarks stand out is his pessimistic reputation. The CEO of the $364 billion-asset U.S. Bancorp is considered the bear of the big-bank bunch. Further, given his company's sterling performance during the last few years, analysts say his comments tend to carry more weight.
"It was more optimism than I had heard from Richard in years, and at this stage he is the voice of reason in the industry," says Chris Mutascio, an analyst at Keefe, Bruyette & Woods. "U.S. Bank's outlook tends to be viewed as a bit more gospel than what I hear from others, and that's because in the last three to five years, they've been a bit more right than wrong in pointing out the false starts."
In describing Davis' typical caution, several analysts referenced the discussion of the company's fourth-quarter 2011 results. The company reported loan growth of 2.4% from the third quarter that year, but Davis warned that it was a high-water mark where activity was boosted by tax laws that were changing at the beginning of 2012. Davis was right; U.S. Bancorp's loan growth has averaged between 1% and 1.5% in each linked quarter since then.
In the fourth quarter of 2013, U.S. Bancorp increased loans 1.5% from the third quarter. Commercial loans grew 1.3%, while commercial real estate loans increased 2.1%. Commitments in commercial and CRE increased 2.7% while utilization was 23%, down from 24% in the third quarter.
The use of credit lines is typically a sign that loan growth is coming, and Andrew Cecere, vice chairman and chief financial officer of U.S. Bancorp, said in an interview that utilization should be more than 30% in a recovering market.
"We are still growing commitments. It is really an interesting phenomenon. Borrowers are paying to gain the commitment they just aren't using it," Cecere says. "That's why we believe there is a pent-up demand to use those lines."
Given the low utilization levels, as well as 1.8% increase in deposits, Mike Mayo, an analyst at CLSA, asked Davis about his "conviction level that loan growth is coming back."
Davis admitted that his forecast hadn't shown up on the books yet.
"It is not on the balance sheet," Davis said. "It is purely sentiment and perhaps it's a lot of just pent-up, long-overdue demand to get things moving. But sentiment is always the leading indicator, right?"
The data this spring will be pivotal in determining how the rest of the year will play out, he said.
In the event that loan growth doesn't pick up, Davis says the company is still committed to increasing loans 6% annually, on par with what it has produced the last few years.
Paul Miller, an analyst at FBR Capital Markets, echoed other analysts in saying the comments were unusual from the typically bearish Davis.
"We've heard this type of language before we just haven't heard it from Richard Davis," Miller says. "The issue is that you don't see it in any of the numbers yet. But at some point all these bulls will be right. I just don't know if it will be this year or not."