US Bancorp’s Stock Slides on Profit Shortfall
The expansion plans of US Bancorp--the Minneapolis-based bank with an eye toward growth in California--suffered a setback Monday when the company announced it would miss earnings targets, causing its stock to plummet 27%.
The profit warning from the nation’s 12th-largest bank also depressed major bank stocks in general, reflecting investors’ doubts about the growth potential of the leaders in the rapidly consolidating industry.
US Bancorp blamed rising interest rates and weaker revenue--particularly from its consumer loan business--for an unexpected slowdown in fourth-quarter profit that is expected to drag into 2000.
It was a surprising stumble for US Bancorp Chief Executive John F. Grundhofer, who is generally admired by investors for his rigorous cost-cutting and devotion to the bottom line.
On Monday, Wall Street pummeled the company’s stock, sending it down $9.50 to a multiyear low of $25.63 in heavy New York Stock Exchange trading.
The stock’s slump will temporarily dampen US Bancorp’s expansion plans in California, where the company has been piecing together a statewide branch network.
“It’s difficult to make deals when your stock price is trading at a depressed multiple,” said Michael Plodwick, analyst at Lehman Bros. in New York. Analysts predicted US Bancorp would be forced to focus on managing existing operations before expanding further.
Grundhofer said Monday that his appetite for growth in California is undiminished, though he conceded that new purchases might have to wait until the stock price recovers.
“The stock price today doesn’t put us in the market for any [acquisitions],” Grundhofer said. The bank is not negotiating to buy any California banks, he added.
Grundhofer, a native of Glendale, has long sought to build a California franchise, making unsuccessful bids in past years for First Interstate Bank and Wells Fargo Bank, his former employer.
Unable to attract a large partner, Grundhofer turned his sights this year to smaller players, including Newport Beach-based Western Bancorp (which owns Santa Monica Bank and Southern California Bank) and San Diego-based Bank of Commerce. Today, US Bancorp has 129 branches in California.
Among Monday’s biggest losers were former Western Bancorp shareholders, who have watched the value of their new US Bancorp shares drop nearly a third since the $950-million stock deal closed Nov. 15.
In an interview, Grundhofer said that US Bancorp executives did not learn about the bank’s recent problems until last week, after the Western deal had closed.
With Monday’s announcement, US Bancorp joins a growing list of big banks that have disappointed Wall Street in recent months. Following numerous mergers in 1998, several institutions began to experience indigestion this year as they struggled to integrate operations.
In addition, three interest rate hikes this year by the Federal Reserve have temporarily squeezed the profitability of many banks.
Charlotte, N.C.-based First Union, the nation’s sixth-largest bank, has cut its earnings estimates twice this year following its $20-billion purchase last year of CoreStates Financial. Bank One Corp., the No. 5 bank, has seen its stock drop by about 40% since the summer because of a slowdown in its credit card unit, First USA.
“These mega-mergers are starting to spring some leaks,” said Jay Tejera, analyst at Ragen MacKenzie in Seattle. “The industry has bitten off a mouthful with these transactions.”
Reflecting Wall Street’s skittishness, investors on Monday hammered shares of such major banks as Bank of America, down $2.09 to $55.34; PNC, down $4.13 to $51.06; Fleet Boston, off $2.55 to $36.34; and Comerica, off $3.63 to $50.81.
But some analysts predict the industry’s prospects could improve next year because of recent federal deregulation that will enable banks to more easily enter other businesses, such as securities and insurance. That could mean a new wave of consolidation, particularly after concerns over year 2000 computer glitches fade away.
In a Monday conference call, US Bancorp estimated fourth-quarter earnings per share of between 52 cents and 54 cents compared with the 59 cents analysts had expected.
Next year, the bank estimated its earnings would be in the $2.30-$2.35 range, below the analysts’ consensus of $2.45 a share.
The bank, which has nearly $80 billion in assets, cited higher expenses and lower-than-expected growth in consumer lending, including credit cards and home-equity loans. Profitability in the bank’s retail business is flat this year and expected to grow by only 3%-5% in 2000, Grundhofer said.
To boost that performance and lure back customers, US Bancorp said it will spend an extra $50 million next year on tellers, branches and technology. It also plans to improve profits by beefing up its units targeting wealthy clients and small businesses.
Analysts questioned whether the new investments were a sign that Grundhofer had cut costs and jobs too deeply after the 1997 merger between US Bancorp and First Bank Systems. Grundhofer, dubbed “Jack the Ripper” for his aggressive job-cutting at First Bank in the early 1990s, slashed 4,000 jobs after the $9.9-billion merger.
Grundhofer said Monday some of the cuts may have gone too far. “We may have not replaced as many jobs as we should have,” he said. But he stressed that much of the $50 million in new spending is tied to the cost of developing new technology, such as online banking, and the need to upgrade branches.
