U.S. Bancorp Says Pressure From Low Rates Looks to Ease--Update

By Rachel Louise Ensign And Lisa Beilfuss 

U.S. Bancorp said its profit and revenue fell in the second quarter as a key measure of lending profitability narrowed. But the bank signaled that pressure from low rates may finally be stabilizing.

The bank posted earnings of $1.48 billion, down from $1.5 billion in the prior-year period. On a per-share basis, earnings rose to 80 cents from 78 cents.

Revenue at the Minneapolis-based company--the fifth-largest U.S. commercial bank by assets--fell 2.8% to $5 billion. Analysts had expected 80 cents a share in earnings and $5 billion in revenue, according to Thomson Reuters. Shares rose about 3.4% in afternoon trading.

Net interest margin, an important measure of lending profitability, slipped to 3.03% from 3.27% a year earlier and 3.08% in the prior quarter. Net interest margin measures how much a bank earns from the difference between what it pays out on deposits and what it receives on loans and investments.

But bank executives said that the NIM metric will remain stable next quarter instead of continuing to drop. The metric is eventually expected to rise once the Federal Reserve starts to increase interest rates. "There's been a lot of quarters since we have been able to say we'd have a stable NIM. We are very, very happy to report that," Chief Financial Officer Kathy Rogers said in an interview.

Like other regional banks, U.S. Bank has been pinched by low interest rates and is eagerly awaiting rate increases from the Federal Reserve. Chief Executive Richard Davis last quarter compared the bank's situation waiting for interest rates to rise to the last few grueling moments of a gym-class test, hanging on a bar for 90 seconds.

Mr. Davis said in May that if rates don't rise as expected, the bank would have to cut expenses and potentially trim staff. During the June period, noninterest expense fell 2.6% to $2.68 billion, due in part to a legal settlement in the year-earlier quarter. The lender's efficiency ratio, which measures costs as a percentage of revenue, was little changed at 53.2%.

The bank's average total loans grew by 2.5%, driven by an 11% rise in commercial lending that brought that business to about $83.25 billion in loans. The mortgage business faced some headwinds: Residential mortgages dropped 1.4% to $51.11 billion in the quarter and lower mortgage banking revenue played a role in noninterest income dropping 7% to $2.3 billion.

Mr. Davis also said that the bank was doing due diligence on a part of the financial business that General Electric Co. has put up for sale. A bevy of lenders, funds and banks have been eyeing different assets at GE to see how they would fit with their businesses.

Write to Rachel Louise Ensign at [e-mail] and Lisa Beilfuss at [e-mail]