Non-interest expenses are important for net profitability
For banks, non-interest expenses are similar to operating costs for other companies. Interest expenses, also called interest paid on deposits, are costs that a bank must incur to carry out its prime job of lending. However, non-interest expenses can be controlled. Controlling non-interest expenses helps a bank have higher net profitability.
U.S. Bank recorded an increase in non-interest expenses
U.S. Bank’s (USB) non-interest expenses were $2,804 million in 4Q14. This was an increase of 4.5%—compared to 4Q13. The increase was driven three main factors.
- First, higher compensation expenses—due to the impact of merit increases, acquisitions, and higher staffing for risk and compliance services—led to an increase in non-interest expenses. Compensation expenses rose by 4.4%—compared to 4Q13.
- Second, higher marketing and business development expenses, due to charitable contributions, led to an increase in non-interest expenses. Marketing and business development expenses included charitable contributions of $35 million to improve the bank’s branding. The expenses rose by a substantial 25.2%—compared to 4Q13.
- Third, higher professional services expenses, also due to higher costs across a majority of business lines, led to an increase in non-interest expenses. These expenses rose by 11.9%—compared to 4Q13.
- Accruals for legal expenses also stood at a significant $53 million.
In contrast, the rise in non-interest expenses was partially offset by a reduction in employee benefits. A reduction in employee benefits was driven by lower pension costs.
U.S. Bank is a major part of the Financial Select Sector SPDR (XLF). It is the sixth largest holding of XLF. It accounts for 2.63% of the portfolio. Wells Fargo (WFC), JPMorgan Chase (JPM), and Bank of America (BAC) are bigger parts of XLF.