US Bancorp (USB) CEO Richard Davis wasn’t all that optimistic about the U.S. economy in the conference call after his company reported second quarter earnings on July 21. Demand for credit from businesses continues to fall and unemployment may climb to 10% later in 2010 from the current 9.5%.
No, Davis sure didn’t sound like the head of a bank that had just reported a 63% increase in second quarter profit from the second quarter of 2009. Earnings of 50 cents a share beat Wall Street estimates by 12 cents a share. Revenue climbed 115% from the second quarter of 2009, beating the consensus revenue estimate of $4.35 billion by $270 million.
The bank’s Tier 1 capital ratio climbed to 10.1% from 9.9% at the end of the first quarter of 2010.
So why so gloomy?
Perhaps because the bank hasn’t yet turned the corner on bad loans—the bank put $1.14 billion into its loan loss reserves in the quarter—or maybe because commercial lending dropped 14% on weak demand.
There was plenty of good news in the quarter, though. Net interest income grew by 14.5% as the net interest margin, the difference between what the bank pays for the money it lends out and what it charges for loans, climbed to 3.9% from 3.6%. Thanks to the bank’s purchase of $35 billion in assets from failed banks and savings and loans, total loans grew by 4%. Fee income climbed by 2.7%. CEO Davis said that he thought that bad loans would start to decline in the third quarter.
But not enough good news for the bank to begin raising its dividend. The bank cut its quarterly dividend to 5 cents a share in March 2009 during the financial crisis. The bank wants to see more evidence of a “sustainable economic recovery” before increasing the dividend.
As of July 22, I’m keeping my target price at $31 a share but extending the timeline to June 2011 from September 2010.
I keep hearing that business is sitting on lots of cash, and at the same time utilized production capacity is running significantly below existing plant capacity. Why would a company borrow money? Companies are probably waiting for demand to pick up and use up plant capacity before adding to it. Any spending will be on fine tuning and increasing efficiencies. Like buying new computer hardware and software…
I think you may be right, bsdgv.
Companies not wanting to take on the burden of more and more debt is very good news.
> maybe because commercial lending dropped 14% on weak demand.
I think this is the main reason why the CEO is so pessimistic.
Maybe there is demand but not credit-worthy enough to do business with.
We may be witnessing why Buffett likes the company so much, and is a major stockholder…the CEO tells it like he sees it. Yes, other banks have reduced loan loss reserves…that is a management call, but does it reflect reality?