U.S. Bancorp's second-quarter profit nearly quadrupled and its CEO said the amount of bad loans should shrink in the next quarter, as defaults by consumers and businesses level off.
Several measures of the bank's credit quality improved compared with the first quarter, although they were worse than a year earlier.
Richard K. Davis, U.S. Bancorp's chairman and CEO, said credit quality measures have reached an "inflection point" and should generally stop getting worse. Loans on which people have stopped making payments, and loans written off by the bank, should both decrease in the current quarter, he said on a conference call Wednesday.
U.S. Bancorp set aside $317 million for credit card losses in the quarter, $5 million more than in the first quarter. "Losses on the credit card portfolio are expected to stabilize, but remain higher than historical levels as long as unemployment remains high," Davis said.
U.S. Bancorp charged off $1.11 billion in bad loans during the second quarter. That was 20 percent more than the same period last year, but down slightly from the first quarter. It reported $3.73 billion in nonperforming assets, up 12 percent from the same period last year, but down from almost $4 billion in the first quarter.
The bank's profit surged to $862 million, or 45 cents per share, including a gain of 5 cents per share linked to preferred dividends. A year earlier it earned $221 million, or 12 cents per share. Revenue rose almost 9 percent to $4.52 billion on strong growth in interest income and fee revenue.
The results easily beat the expectation of analysts polled by Thomson Reuters, for earnings of 38 cents per share and revenue of $4.35 billion.
New restriction on overdraft fees plus the new financial overhaul expected to be signed by President Barack Obama on Wednesday have sent banks scrambling to figure out the impact. The restrictions on overdraft fees begin Aug. 15 for existing customers who withdraw too much by debit cards or ATMs.
At one point U.S. Bancorp had expected just 10 percent of customers to allow it to pay out overdrafts — and charge overdraft fees — although that number is coming in slightly higher because U.S. Bank has reduced the fees, Davis said.
Fees from overdraft charges fell by $51 million compared with a year earlier, to $199 million for the quarter, because fewer people overdrew their account and, if they did, paid smaller fees.
The new financial overhaul law will lower revenue and increase expenses and capital requirements but the changes should be manageable, Davis said. Some of the impact isn't known yet because details of the new rules will be written by regulators in the months ahead. Banks lobbied Congress furiously to shape the overhaul in a way that would help them; the same thing is expected to happen with regulators who will craft the specific rules.
Davis said he expects 201 new rules to be written — and he's glad it's being done by regulators rather than Congress, "because regulators have a more balanced and a more measured view of how things operate."
One of the new rules will govern how much banks can charge for processing debit card transactions — that's currently worth $500 million a year in revenue for U.S. Bancorp.
Chief Financial Officer Andy Cecere said the bank may reduce or eliminate rewards on debit cards if they become less profitable.
Shares of the Minneapolis-based bank rose 16 cents to $23.31 in afternoon trading.
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