Interest rates near zero make it difficult for banks to grow revenue
By Ken Sweet
AP Business Writer
NEW YORK (AP) — Richard Davis, the chief executive of regional banking giant U.S. Bank, took his job at a terrible time: late 2006, just months before the housing bubble began to pop, which quickly led to the financial crisis and the Great Recession.
While U.S. Bank weathered the financial crisis better than most large banks and even remained profitable, the aftermath of the financial crisis has also been rough, especially for banks that focus on retail consumers. Among the biggest difficulties: Interest rates have been near zero, which makes it difficult for a bank to grow revenue.
Davis has avoided mass layoffs or closing lots of branches like some of his bigger competitors, but he has said previously that the bank might have to cut costs if interest rates remain low.
Now interest rates are rising once again, and while it’s happening more slowly than once expected, Davis is optimistic. The bank, the fifth largest in the country by assets and based in Minneapolis, recently rolled out the largest marketing campaign in its history and stole a major credit card deal from American Express.
Davis recently spoke with The Associated Press about his take on the economy, the Federal Reserve’s decision to raise interest rates, and what worries him.
This interview has been edited for length and clarity.
Q: Do you think the U.S. economy is ready for higher interest rates?
A: I’m definitely positive about the Fed’s decision to move, but much less for the math of than for the symbolism and sentiment it represents. The impact of 25 basis points on the economy almost meaningless. It’s not going
to change anyone’s behavior, it’s not going to change our financial performance, but it is a piercing of the veil.
It suggests that the people who are supposed to be smart about this believe that the economy is moving forward that it can handle the beginning of interest rate increases.
Q: Some banks began charging more for loans as soon as the Fed acted. Why haven’t they also offered better savings rates to customers?
A: The value of deposits right now is not high, so if I paid you more for deposits to incentivize you to bring your money here I can’t do anything with it anyway, because I can’t make the loan I want to make. If a bank decides to go ahead and start using those deposits to make loans, they’re going to have into riskier loans to get higher rewards, going into mid-prime or sub-prime loans. It might be a good idea if they really know what they’re doing, but as you recall, it’s exactly what got people in trouble last time. Banks started to get greedy and get outside the bounds of good discipline.
We aren’t going incentivize new deposits, but at the same time we won’t lose them, so if there were a pricing war, we’d probably respond to that so that we wouldn’t lose our customers. Deposits are nice to have, but not as critical as they will be one day.
Q: Banks have been closing branches or turning them into sales centers for other financial products. Is this a good idea?
A: Broadly, banks are struggling to make new revenue, so the best thing to do is to cut costs. I promise you the best way to cut costs is to cut branches. They’re expensive to maintain and over half of the cost is the people working inside them.
But you better be right if you decide to close a branch. The minute you close it, every other bank will come into the area. You can’t double back on your decision and say, “My bad, let me put that branch back.” It’s closed.
We’ve been a bit a bit of an outlier by holding onto all of our branches, believing that those deposits will have much more value as rates move up and as loans start to get made. If I’m wrong, I have an option to catch up, as opposed to closing a branch and regretting it.
Q: How do you plan to grow U.S. Bank?
A: My favorite areas of opportunity for us are payment (processing) and corporate trust businesses. I like them both because neither of them take a lot of capital. A bank’s balance sheet has a lot of capital requirements, but payments and trusts are really fee businesses. They don’t require a lot of capital, there’s not a lot of leverage, and the regulatory issues are different. They’re not centered around things like the Fed’s stress tests, liquidity and capital.
Q: What worries you?
A: I worry almost entirely about the American economy and whether or not it’s making its slow but steady progress forward, and I do believe we are. It’s not without its setbacks, its fragility and the fact that anything could change at any time. I worry that the economic, political issues can impact people’s incentive to consume and their optimism to go down. That’s what worries me.
