U.S. Bancorp (NYSE:USB) is aggressively tackling expenses and growing non traditional bank revenues, according to a recent research report from Dick Bove of Rafferty Capital Markets. And what the bank is doing could “stimulate a bank war in the Midwest,” he said. “It may also lower returns in the near term eve though it is exactly the right strategy.”

U.S. Bancorp USB

Two pronged attempt to improve stock performance

Bove noted an aggressive cost cutting program being undertaken at the bank but, “the move to aggressively cut expenses is being driven, in my view, because the bank is having a great deal of difficulty in generating revenues,” he wrote in his research report. Revenues have been declining in five of the last six quarters, while the “bank is proud of its ability to maintain an industry low operating cost (efficiency) ratio. In the first quarter, it was 53.5% by my calculation.” U.S. Bancorp (NYSE:USB) has among the highest payout ratios in the industry.

U.S. Bancorp is addressing the issue by both reducing costs and expanding its potential business lines.

U.S. Bancorp (NYSE:USB) is “increasing risk,” doing more non-prime lending “and acting as a trustee for the recovering CLO and CDO business,” Bove noted. When speaking of US Bancorp, Bove says top management is “fighting to get business. If the business environment is not expanding he is going to get the revenues from his competitors. He is just not going to sit idle and wait for the earth to take a few more spins.” It’s this fight for business that might “stimulate a bank war in the Midwest.”

USSB cutting costs to varying levels depending on who does the talking

In regards to the aggressiveness of U.S. Bancorp (NYSE:USB)’s cost cutting, Bove received two different messages. Last Friday he contacted US Bancorp and was told the bank was not engaged in an across the board 5% cut in expenses.  This contrasts published reports.

Bove notes the following Saturday the Minneapolis Star Tribune published an e-mail from a bank spokesperson who indicated the bank was about to engage in across the board cost cutting.  “Each group in the bank was permitted to develop a unique manner in which to manage their expense line. And in the case of our technology and operations group, they chose to institute a salary reduction for all salaried employees in the division,” Garrison-Sprenger said. “Those employees may take an additional week away [without pay] sometime during the year.”

U.S. Bancorp (NYSE:USB) is working to increase the stock prices through two methods: reducing expenses and expanding revenue opportunity. The success of the program will drive the bank’s ability to compete in the years to come.