U.S. Bancorp Tumbles After Earnings Warning

The Minneapolis-based bank is down 28% after forecasting that its fourth-quarter earnings will fall short of analysts' expectations by at least 8%.
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Updated from 10:32 a.m. EST

U.S. Bancorp

(USB) - Get Report

surprised Wall Street Monday, forecasting that its fourth-quarter earnings will fall short of analysts' expectations by at least 8%.

The company's stock was down a whopping 28% in midday trading, falling 9 15/16 to 25 3/16. (The stock settled down 9 3/4, or 28%, to 25 3/8.)

Bancorp projected earnings of 52 to 54 cents a diluted share, short of the 59 cents currently projected by Wall Street analysts. In the year-ago quarter, the company met Wall Street's expectation of 52 cents a diluted share.

U.S. Bancorp has fallen short of earnings expectations only once in the past year, by less than 2%.

Slow revenue growth will hurt next year's earnings also, the bank said. For 2000, earnings will be between $2.30 and $2.35. Wall Street was expecting $2.45 next year, according to a poll of analysts conducted by

First Call/Thomson Financial

.

The Minneapolis-based bank's projection of its fourth-quarter earnings excluded merger-related charges.

Company officials said low revenues and recent expenses are equally to blame for the warning.

For the first time in 11 years, the company's efficiency ratio -- revenue growth compared to expense growth -- did not improve.

"That, for them is a watershed event," said Carla D'Arista, analyst for

Friedman, Billings, Ramsey

. "We're sort of realizing that it costs money to make money."

The company has been forced to compete online with entities like

Charles Schwab

(SCH)

and

Wit Capital

(WITC)

, which would never have been considered competitors until recently, she said.

D'Arista plans to lower her rating to accumulate, expecting the stock to stay below 30 for several months. The successful third quarter made Monday's news all the more surprising, and Wall Street will be skeptical about projections for next year, she said. Her firm hasn't done underwriting for the company.

Merrill Lynch

also lowered its rating to neutral/buy from accumulate/buy.

In a conference call with Wall Street analysts, company officials said the bank has made substantial investments in Internet and business-to-business banking, planning to move away from traditional banking.

But pressed by analysts, officials said they were also spending money to resolve tellers' "training issues."

Bank chairman John Grundhofer said that many of the branches the company acquired in the past year need more work than expected to change "from a high-touch manual environment to something that could compete in 2000."

"I think we could have run the branch network better than we did," Grundhofer said. "Perhaps it was ego or whatever, but we underestimated the task."

Bancorp has been expanding its presence, especially in California, by buying smaller companies. The stock's drop will strain that strategy, officials said. They added that the company doesn't plan to divest anything other than two office towers it is already selling.

Officials said the bank will likely use any capital it doesn't need to invest to buy back stock. Asked whether the low stock price raises concern about a possible takeover attempt, Grundhofer said: "We think that with these actions we can do the right thing for the shareholders long term."

The company operates more than 1,000 banking offices in the Midwest and West, offering retail, commercial and investment banking. It also provides brokerage service through

U.S. Bancorp Piper Jaffray

.