Richard Davis is on the shortlist of the best bankers in the United States. One could even argue that the CEO of US Bancorp (USB -0.55%) currently tops the list, given that the Minneapolis-based bank has outperformed all of its big bank rivals since its formative merger 16 years ago.
This is why I've made a habit of listening to US Bancorp's quarterly conference calls. What follows are the five most interesting points covered by Davis when the $422 billion bank reported fourth-quarter earnings two weeks ago.
1. Record profits
One of the things I appreciate most about Davis and US Bancorp is that you can trust what they say. When Davis writes something in his letter to shareholders, or the bank announces a goal in its annual report, it typically comes to fruition.
Davis has talked repeatedly over the last few years about US Bancorp's momentum coming out of the financial crisis. "We are aligned to make the most of an economic recovery and we have positioned the bank to emerge as an even stronger competitor," he wrote six years ago.
This has since materialized. US Bancorp leads the industry in profitability. It earned $5.9 billion last year. That equates to a 1.44% return on average assets and a 14% return on average common equity. Even Wells Fargo (WFC 0.17%), an elite bank in its own right, lags behind. The California megabank earned 1.32% on its assets last year and 12.7% on its equity.
US Bancorp's performance has been nothing short of extraordinary over the last decade and a half. And there's no reason to think this will change so long as Davis and his team remain at the controls.
2. Balancing expenses and investment
Banking is like ballet. It's a delicate dance between managing expenses, credit risk, and revenue generation. Letting one get out of proportion to the others will lead not only to poor performance through a complete credit cycle, it can also turn existential. This is why more than 17,000 banks have failed in the United States over the past century and a half.
US Bancorp appreciates this better than almost all of its peers. It's one of the most efficient banks in the industry, with an efficiency ratio last year of 53.8%. But unlike other banks, it doesn't allow its focus on efficiency to come at the expense of responsible revenue growth.
This is another theme that comes up regularly in Davis' annual shareholder letters. And he brought it up on the latest call. "While prudent expense management remains a priority for our company, we also continue to focus on revenue growth and innovation, which means investing in those businesses and products that will provide strong returns," said Davis.
Three areas that US Bancorp often cites as examples of this are compliance, innovation, and its lucrative payments business. Avoiding investments in these areas is akin to eating the seed corn. It's a mistake that others in the industry are committing, but Davis has made it clear that his bank won't follow suit.
3. Exposure to macroeconomic issues
Everyone is scared about China's stock market. And its economy. And oil prices. And ISIS. And the migrant crisis in Europe. And probably a lot other things too. But US Bancorp's domestic orientation means it's less exposed to these issues than banks that take deposits and lend money around the world.
"We are a classic American bank," explained Davis.
We primarily do business in the domestic United States, and we're very much a consumer small business payments kind of a company. So despite what's going on in the backdrop around the world with the China reevaluation and what's happening in oil in some of those areas, which we're not immune to, by all intents and purposes, we're not seeing the majority of that on our books or by our customers.
US Bancorp's portfolio of energy loans makes up only 1.2% of its total loan portfolio. That's not insignificant, but the bank is building reserves that can be used to absorb losses from the portfolio, and it's doing so with oil trading at $30 a barrel. It also "stress tests the heck out of those things," said Davis.
I would normally take a bank CEO's comments about credit quality with a grain of salt. But I've read Davis' shareholder letters, and his assertions have always struck me as honest and transparent and, most importantly, they've been affirmed by the bank's performance. He's built up a treasure trove of trust, in other words, that earns him and his bank credibility.
4. Appetite for acquisitions
One of the gravest mistakes that a bank can make is to grow through imprudent acquisitions. If you have any doubt about this, I encourage you to call Bank of America. Its 2008 acquisition of Countrywide Financial has probably cost it two decades' worth of earnings if not more when you factor in opportunity cost.
US Bancorp is committed to avoiding this mistake. Its prudent and disciplined approach to acquisitions is part of the bank's DNA. As Davis' predecessor, Jerry Grundhofer, explained 16 years ago when announcing the merger that spawned the US Bancorp we know today:
Very seldom do two companies that are performing at the high levels of Firstar and US Bancorp converge at the right time to transform their future. The combination of Firstar and US Bancorp will create the nation's 8th largest banking company, which will be strong, nimble and focused on doing the right things, the right way. It is a pre-eminent American franchise.
Grundhofer later articulated the bank's acquisition strategy in his 2004 shareholder letter:
We are very disciplined in our acquisitions, focusing only on those which will enhance revenue growth, create operating scale, build a more profitable business line or strengthen a critical competitive advantage.
Davis picked up this torch and has carried it ever since. In response to an analyst's question about possible additions to its capital markets business, Davis responded by saying:
We'll take the hit from you guys for not having that acquisition but we'll take the benefit years later or months later when we don't have a problem. So what I'd say, our conservatism is every bit exactly what it was before and during the downturn and we're not tempted by anything right now that would otherwise cause us to change that thinking. And that could disappoint a few people but it's always the steady who kind of wins the race.
US Bancorp is always open to well-priced acquisitions that will make it more innovative or add to its crown-jewel payments business, Davis explained. But he's uninterested in exposing his bank to the same type of claims that Bank of America inherited from Countrywide. The statute on those should run by next year, which should be right around the time that US Bancorp will be cleared by regulators to make acquisitions anyhow.
5. CPR framework
The last of Davis' comments that I found particularly notable was also his least original. For the 10 years that he's led US Bancorp, Davis has returned time and again to his mantra of consistent, predictable, and repeatable financial results. That's how he concluded the bank's fourth-quarter call.
"We remain focused on delivering consistent, predictable and repeatable financial results for the benefit of our customers, our employees, our communities and our shareholders," Davis said before signing off.
This should be music to the ears of long-term shareholders. And the melody is enhanced when you consider that Davis has proven through the years to mean what he says.