In safe hands

By Ben Thompson

Trust isn’t necessarily the first word that springs to mind when discussing the nation’s banking fraternity, especially given the events of the past few years and public perceptions of bankers as corporate fat cats. But US Bank’s Richard Davis has been plotting a steady course through the recession that has both customers and investors purring.

If banking were a popularity contest, Richard Davis would be feeling plenty of love right now. The Chairman, President and CEO of US Bancorp was recently voted No. 2 on a TheStreet.com list of the 10 bank CEOs that analysts and other industry insiders like the most, which described him as "one of the most strategically focused CEOs" in the business. The Minneapolis-based US Bancorp has certainly weathered the recession better than most under the quietly spoken Davis: it earned $2.3 billion in the first nine months of 2010, up 41 percent from a year before, while Wall Street has been wowed by the fact that Davis has US Bank stock trading around $27 per share - nearly back to pre-recession levels. In 2009, the firm was named the best bank in the US by Euromoney magazine for its performance throughout the downturn, and Davis is generally seen as a safe pair of hands with a useable balance sheet - perfect qualities for these troubled times.

Indeed, in an industry that in recent years has been characterized by freewheeling speculation and spectacular falls from grace, the few banks that eschewed such unnecessary risks are now seen as paragons of virtue. Foreclosure activity, subprime lending, making loans with asset-based lending to customers who were counting on property values rising rather than cash flow: the long list of things that US Bank could've done but didn't in the last few years largely explains why America's fifth largest lender has emerged from the financial crisis with its reputation (not to mention its assets) intact. And as the firm's unassuming yet candid chief executive explains in a recent interview, that focus on sound financials has allowed it to capitalize on the recent recession better than many of its competitors.

"We didn't do a lot of the things a few years ago that we would've made a lot of money doing, and therefore we don't have the consequence today of either trying to replace it and not being able to, or having to pay for it because we made mistakes," he says. "My point isn't: 'look how smart we were'; we were luckier than we were smart, it was the hand we were dealt. But since the recession started, we actually have been spending and investing and acquiring and growing through this whole three-year period. We've been able to reset our foundation and reset our trajectory coming out of the recession. Instead of locking down, we said 'Let's actually go do something when it seems least likely to do it'. I liken the recession to a headwind. It's hard to walk into a headwind but if you're going to fly, you actually look for the headwind because you intend to use it."

It's a key part of Davis' strategy for US Bank: turning the company from a walker into a flyer. "We're not afraid to talk about it or leverage it, because our shareholders deserve it," he insists. "They were with us three or four years ago when people were asking 'Why aren't you growing like everyone else, why aren't you making all these loans?' We just said, 'We don't know how they're doing this, we're just doing it our own old-fashioned way'. So we've actually become more aggressive in a period of time when others aren't. And I think that should serve us quite well." 

A changing landscape

Indeed, just because US Bank is retaining a focus on its traditional values - financial security, prudent investment, reasonable returns - it doesn't mean the organization is not responding to the changing financial landscape. And it will need to: according to Davis, attitudes to credit, risk and personal financial security have been irrevocably altered by the crisis. "We are looking at things that we didn't look at before, because we're looking at situations we've never seen before," he stresses.

One such trend is the almost unprecedented levels of public saving banks are currently witnessing. "As a bank, we have an insight based on people's willingness to borrow and willingness to save. And we're seeing unprecedented savings levels, where people are holding onto money. I think it's because they are afraid not to have the money in case they need it - it's a defensive posture. Mohamed El-Erian from PIMCO calls it 'self-insurance'. His perspective is that it will force us into a double dip - he's quite negative about it. The point is that it's a significant measure - we've never seen such levels of cash before."

The amount of people not taking advantage of existing lines of credit is also growing. For example, Davis explains that two years ago just 37 percent of customers didn't use their credit lines, but that now that figure stands at 42 percent. "People who have access to credit are choosing not to use it; the corollary to that is they are putting more cash on the balance sheet and they're not stretching it or trying to do anything they haven't done before. They're simply hoarding cash."

Such a scenario will not only prove challenging for financial institutions as an increasing number of consumers resist the urge to sign-up for new financial products, but could also provide a threat to the economic recovery itself. Davis likens it to the years following the Great Depression, when an entire generation of consumers was left mentally scarred by the prospect of financial ruin. "I was raised by parents who were Depression-era children: we didn't use anything that we didn't need and we saved everything we had," he explains. "My parents were victims of that moment in time that says 'I'm just never going to be caught unaware again'. In the same way, for the younger people who went through this current recession, it will forever have an impact on the way they behave, the way they incur debt, the way they spend, the way they save. It will be a permanent change. And generally things are going to be painfully slow."

It's a problem exacerbated by current attitudes to efficiency amongst the business community, he adds. "Businesses, both small and large, have started to test themselves on just how productive and efficient they can be, how far can they go without adding one more person, one more plant, or one more PC. They realized about a year ago: 'Wow, we're still thriving and we're amazingly more efficient', and now they're banking on it and putting it into their new operating models. They'll save longer, they'll incur less debt and they'll be more efficient. We're seeing that behavior across the board."

The age of austerity

Indeed, Davis believes we are entering what he calls an austerity decade. "Around the globe we will reset what we do, how much we spend, how much we use and what we expect," he says. "And it's going to slow everything down."

And while he insists the future is not all doom and gloom, suggesting that "probably 85 percent of the world will be largely unaffected by what happens", he is realistic enough to acknowledge that those "on the edges" will be affected greatly. For one thing, access to financial services for those already struggling will be greatly reduced. "We're going to make it very, very difficult for people on the marginal financial edges to get banking services; that's not a threat, it's an absolute fact," he warns. "Credit cards and checking accounts will all be less available. So if you're in the mainstream, you'll feel a little difference, and the slowing economy will be troublesome, but you aren't out of a job and you're not without viability. But if you are on the edges, it's like bobbing your head above the water. If you're well above the water, you can handle a wave. But if you're gasping for your last breath and a big wave comes by, you are pretty much gone. So I think it's going to move the margin line way up, and leave a lot of people unbanked and unemployed.

"The new cost of doing business means I can't afford to have a marginal customer who will either create a fraud loss or a charge-off loss for me if I can't find a way to create an insurance policy against having a charge for that," he continues. "So I just won't. My shareholders didn't ask me to subsidize anybody and so that will be part of the exaggeration of the divide between the haves and have-nots."

And while that's bad news for those already on the edge, what it will mean for organizations such as US Bancorp is the emergence of a key strategic opportunity: what Davis calls '"flight-to-quality", as more customers look to bank with institutions that offer a safe haven for their hard-earned investments. "Every time there's a story written about the banks that did well and are going to do well, we keep showing up, locking in our position in the eyes of consumers and businesses as a safer place to either put your money or to get your money," he explains.

Such factors become more important in tough times - much more so than innovative bells and whistles around new product offerings. In fact, Davis believes that in an industry as traditionally conservative as financial services, new product innovation can often be seen as clutter. "This industry isn't that innovative by definition: it's been around hundreds of years, and it hasn't particularly changed what it does," he insists. "It's a gatherer of deposits for safekeeping and a lender of monies to those who look like they could pay it back. We make leverage of 1-to-7 on that deal - end of story. All the other stuff is just making it noisy."

What has changed, however, is the channels themselves. "It's not just about traditional branches anymore. It's about branches in grocery stores, in airports or in universities. We have the largest number of non-traditional branches of any bank in America - around 840. We'll see if that pays off or not. We thought years ago that a branch in the corner next to the mall was no longer as appropriate as having a branch where you work or where you're going to be all the time. We'll see."

And the next step beyond the non-traditional branch is mobile banking and the advent of transaction-based activities, including banking on the move - something US bank has been investing heavily in. "Five years ago we would not have been investing but waiting for others to do it first before being a quick follower. So I've actually changed the company, taking it into the first group of adopters - not bleeding-edge, but no longer waiting for others. So we're more involved now in that, but innovation isn't going to save banking, it's going to be a defensive act every step of the way. It's not going to change - I'm not going to get 20 million more customers because I'm the first with something, but I might lose customers if I'm third or fourth."

Investing in people

For Davis, then, it's all about taking calculated risks - which of course, is essentially what financial services is all about. "I come to work every day to make sure that whoever invests in this company gets their return, and a better one than they could anywhere else. That's what I live for: the shareholder," he says. However, he is at pains to point out that shareholders can only achieve true value if the company engages other key stakeholders effectively.

"We have four constituencies: employees, customers, shareholders and communities," he explains. "We never were an employee-focused company, but in this recession we decided to invest in that. Now I start everything with the employees to ensure that they are engaged, feel positive about what they do, that quality work comes through and their pride comes through, and the shareholder becomes the beneficiary if we do these other things right."

For instance, five years ago at the height of the boom when US Bank was refusing loans that its competitors were saying 'yes' to, Davis says he could understand why employees (who got paid on the basis of whether those loans got sold or not) might have questioned why they worked for the company rather than its rivals; he sees the fact that a lot of them didn't leave, however, as proof that many of them knew the more stringent provisos in place at US Bank were actually a smarter way to do business.

"I think the employees are here because they decided on it intentionally," he explains. "They want to be part of this company, doing this mission, doing it this way. My value proposition for the employees is no longer 'it's not better somewhere else', it's 'this is the place you want to be part of'. So our value proposition has changed: it is not about the shareholders at all costs. It's employees who will affect customers, which will change the community view, all of which will feed the shareholder."

It is that idea of community - of employees, customers, shareholders and local partners all coming together to make things happen - that really drives Davis' outlook. As co-chair of the Twin Cities' United Way effort, he is intensely aware of the difference an active and engaged community can make, as well as the important role banks have to play with those communities. "We have always been a community partner," he concludes. "That's what banks are - the place you go to get things done. Of course, as CEOs we'll always have responsibilities to our shareholders, but if we can get there by being good community stewards - I'll call it social partners - I think there's room for that. A bank is a safe haven when you don't have a place to put your money, a place to go when you have a dream you need to accomplish and you can prove you've got the wherewithal to do it, and a collection of people who independently have a mission greater than funding and collecting deposits because they're changing the world a little bit. And for me that value proposition didn't change; it just got crystallized by the downturn."

This article is based on an interview given for PwC's 14th Annual Growth Survey. For the full interview, please visit: www.pwc.com/gx/en/ceo-survey

AT A GLANCE

Minneapolis-based US Bancorp, with $308 billion in assets, is the parent company of US Bank National Association, the fifth-largest commercial bank in the United States. The company operates 3069 banking offices, 5310 ATMs in 25 states, and provides a comprehensive line of banking, brokerage, insurance, investment, mortgage, trust and payment services products to consumers, businesses and institutions.