If you invest in bank stocks, then you need to know Richard Davis. He's the chairman, CEO, and president of US Bancorp, and he knows a thing or two about running one of the nation's most successful banks.
At the beginning of September, he gave a presentation to analysts at the Barclays Global Financial Services Conference. What follows are seven things he wanted analysts and investors to know about the Minneapolis-based bank.
1. US Bancorp is very successful
Here's a chart from Davis' presentation showing that US Bancorp leads its peer group in return on assets, return on equity, and the efficiency ratio:
2. Controlling expenses is a top priority
US Bancorp is one of the best banks in the country when it comes to the critical task of controlling expenses. Its 53.1% efficiency ratio in the second quarter outperformed its next closest competitor in this regard, Wells Fargo, by more than 400 basis points.
But despite this success, Davis remains focused (some might even say obsessed) on continuing to keep costs low:
We've talked a lot about the impression that's made when we have companies that bring in outside parties, put in some expense control measures, come up with new programs, and cost-cutting and all kinds of things. We just don't do that in front of you. We just do it every day, and every 90 days we're measuring our efficiency, and I mean that in every sense of the word.
3. US Bancorp is preparing for better times ahead
More from Davis:
I've been CEO for about eight years and most of those eight years have been in and during this recession. And as we're starting to think about the recovery, kind of as you think about where the puck's going to be, we're spending a lot of our energy thinking about improving times. We stress test the bank all the time, but we also think about the opportunities before us and we're trying to prepare the bank for a really good moment when we think things take off. Fees and corporate trusts particularly take off big with a higher, I think, slope of the curve than some of the balance sheet items.
4. It likes its diversified business model
And more still:
We want to be a 50-50 kind of a bank, where half of what we make comes from the balance sheet and the other half comes from the fee businesses.
We don't have a desire to be too much of anything. We don't want to buy a payments company and all of a sudden be a payments bank with two branches hinged on. We're not going to buy a big trust company and end up having a big trust company with a few payments company projects. And we don't want to be just a big branch network with a couple of other things. We want to be well diversified in the way we show you here.
5. Credit quality is great, but uninteresting right now
In the aftermath of the financial crisis, credit quality was at the center of every banking discussion, and for good reason, as it inflicted tens of billions of dollars of damage on the balance sheets of the nation's largest lenders.
But a lion's share of the bad loans has now been charged off, and banks have been predictably cautious about the quality of loans they've added to their books in the meantime. As a result, according to Davis, credit quality just isn't a big issue right now:
Credit quality, whatever. Right? I mean, credit quality is not going to be interesting to you guys for five years. It's good to continue to be steady to where it is. In our case, credit quality is very steady. Each quarter has been about the same. This quarter it will be a little bit better than the last quarter, but it can be pretty much flat, and for all intents and purposes, not a lot is changing.
6. On the legal and regulatory environment ...
Since the passage of the 2010 Dodd-Frank Act, federal banking regulators have been scrambling to write the prescribed rules and regulations intended to make the financial system safer. But while this has led to considerable uncertainty among the banks, Davis thinks this period is coming to an end:
I think that if I were to depict the regulatory environment as a baseball game, I'd say we're in the seventh inning, maybe even the eighth. I don't feel like there's a lot of unknowns now. I pretty much know what each agency wants, and I know what their issues are.
By contrast, on the legal front, Davis thinks the industry is still in the early innings, as more and more cases leveled against the banks continue to come to the fore:
If I had to take litigation I'd put it back in the third or fourth inning just because I don't know what else is out there. ... I think I'd be more concerned about a city attorney somewhere, or an attorney general somewhere who wants to reach back to a core of loans back in 2010 or certain time periods and wants to check for dotted I's and crossed T's, and therefore I don't know what's going to come from that.
7. On mobile banking ...
Much has been made about Apple's entrance into the world of mobile banking. But as Davis sees it, that isn't a bad thing from the perspective of a large payment processor like US Bancorp:
It doesn't matter if you're using your phone or if you're using a wand or if you're using your card or if you're using your Internet. You still need a merchant to transact the money, and you need a bank to move those items between the two. ... [A] bank like ours gets paid most often on the number of transactions, and so when things move across the ATMs, it can be mobile banking, it could be just traditional cards, but every time things get moved and transacted we get a part of that as a merchant acquirer.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple, Bank of America, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.