U.S. Bancorp — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Welcome to the U.S. Bancorp First Quarter 2024 Earnings Conference Call. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 8:00 a.m. Central Time.
Thank you, Rochelle, and good morning, everyone. Today, I'm joined by our Chairman, President and Chief Executive Officer; Andy Cecere; our Vice Chair and Chief Administration Officer, Terry Dolan; and Senior Executive Vice President and Chief Financial Officer, John Stern. Together with some initial prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation, our earnings release and supplemental analyst schedules are on our website at usbank.com.
Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on Slide 3. In the first quarter, we reported earnings per share of $0.78, which included $0.12 per share of notable items. Excluding notables, earnings per share totaled $0.90.
Thanks, Andy. On Slide 8, we provide an earnings summary. This quarter, we reported diluted earnings per share of $0.78 or $0.90 per share after adjusting for notable items, including the last of merger and integration costs of $155 million following our acquisition of Union Bank and $110 million related to an anticipated increase in the FDIC special assessment.
Thanks, John. We have been preparing for a wide range of economic scenarios for some time now, and we continue to deliver industry-leading returns despite the current industry stress. Our diverse business mix is allowing us to differentiate in a competitive market, and we are seeing the benefit of the investments we've made and continue to make in our digital capabilities, our technology modernization and our payments ecosystem.
[Operator Instructions] Your first question comes from the line of Scott Siefers with Piper Sandler.
Was hoping, either Andy or John, you could talk just in a little more detail about sort of the nuance in the tougher NII guide for the full year. So I guess, at an industry level, we've got a couple of dynamics at play, whether it's the challenging loan growth environment or of course the impact of higher for longer on deposit costs and betas. So maybe the main 1 or 2 kind of pressure points you saw.
Sure, Scott. Thanks for the question. So maybe just take a step back just to answer your question. In the -- in January, when we talked about our guidance, we looked at, and we expected our 2024 net interest income, to be in line with the annualized fourth quarter number given that was past MUB actions that we had taken throughout the course of the year. And so to your point, we're 1% to 3% lower than the new guidance -- with our new guidance here.
Thanks, John. And Scott, I'd just add that we continue to look for opportunities to improve efficiencies, particularly in this higher-for-longer rate environment. So we benefited from the $900 million of cost takeouts from the Union Bank transaction. And we continue to focus on additional efficiencies in areas like procurement and third-party spend, our workplace management and our properties and real estate.
Your next question comes from the line of Ebrahim Poonawala with Bank of America.
I guess maybe just following up on NII, John, if we could drill a little bit into it. One, the securities yield went down 1 basis point sequentially. Just could you remind us of the dynamic, both in terms of the security book and fixed rate asset repricing that we should be mindful of going forward?
Sure. So maybe I'll start with your first question on the securities yield. It was relatively flat or down 1 basis point, as you cited. This quarter was a little bit different. We had taken some hedging actions that actually offset some of the asset churn that we typically would see. And so I would view this as more of a temporary thing.
Got it. And I guess just separately around outlook for fee revenues. So your -- I think Andy addressed that in his prepared remarks, but give us a sense of any -- what areas you're seeing momentum on the fee revenue side. And whether there's any room for sort of upside surprise, if we get additional negative guide-downs on NII.
Yes, sure. So I mean, overall, we feel very -- we're pleased with the quarter 1 results. We saw good account growth. We're deepening relationships. We continue to see progress on Union and the growth opportunities that we see there. Consumer spending metrics, all the underlying metrics are strong, capital markets activities are strong. And that is supportive of our continued view on the single-digit growth on the fee aspect of things.
Your next question comes from the line of John McDonald with Autonomous Research.
We're wondering about how are you thinking about the outlook for net charge-offs and provision and just kind of the credit trends you saw this quarter. John, you mentioned there was the one idiosyncratic commercial. Other than that, kind of what are you seeing? And are you still kind of thinking about a mid-50s kind of net charge-off outlook for this year? That would be helpful.
Yes, John, this is Terry. Let me take that question. So when we end up looking at credit, again, credit generally is pretty strong. I think that we're continuing to see in nonperforming assets that, that will continue to tick up and did tick up in the first quarter. It's primarily related to commercial real estate office space.
Okay. Got it. And then for the overall company, kind of still kind of trending to that mid-50s perhaps on the charge-offs?
Yes. I would say mid-50s, maybe closer to the 60 basis points. And again, I think that it's going to be a little bit lumpy because of just timing of commercial real estate charge-offs that will occur through the year. But again, we feel like we've adequately reserved for it.
Got it. Okay. Great. And then, Andy, how are you thinking about the expense flex? You mentioned offsetting the NII. I guess, within reason, you're going to flex the expenses depending on the revenue environment plays out through the year?
Yes, John. So it is an environment that it's always important to look at efficiencies, and we're -- that's something we're very focused on. And it is in those areas we talked about, we'll continue to flex where we see opportunities. We've centralized operations. We have other opportunities in spend. It's a company-wide initiative, and we'll continue to focus on that.
Your next question comes from the line of Betsy Graseck with Morgan Stanley.
Welcome back, Betsy.
Welcome back, Betsy.
Thanks so much. So I had a follow-up on the comments around corporate behavior and the deposit shift from NIB. I want to understand two things. One is it should -- do you see your corporate deposits shifting from NIB to IB? Or is it more NIB to MMS?
Betsy, it's John. Thanks for that. So in terms of the behavior, I think what we're seeing is the trends are slowing. The rotation is going, maybe first to answer your question, more from NIB into more IB. And it's more of the -- it's the trade-off for the client.
Okay. So treasury services potentially could see a little pop up in growth as how you pay for services changes? Or is that an overreach?
It's possible. But again, the dynamic's pretty fluid is kind of how I would describe it.
Okay. And also folks are staying on your balance sheet as opposed to going off balance sheet into MMS?
That's right. Yes. A lot of this is defending clients and making sure we're there for them. Again, we view this as a temporary phenomenon. This is just a timing thing. It's really just -- the churn here is continuing. It's just being -- the pace of it is taking a little bit longer for it to stabilize than what we would have anticipated. And that's really what's going on here. We want to make sure we're here for the long run for our clients and serving them as we kind of transition through this rate environment.
Got it. Okay. That's super helpful. And then just kind of 30,000-foot question here. Just could you help us understand how you are currently thinking about the asset sensitivity of U.S. Bancorp at this stage? How should we think about what higher for longer means for you for the whole organization?
Yes, sure. So I think in terms of asset sensitivity from a risk management perspective, we are as neutral as you can be. We've taken a lot of different actions to make sure -- because we just don't know where the rate environment is. I mean, it was 7 cuts at the beginning of the year, the market had. Now it's closer to 0. So we just want to make sure we are prepared for different type of rate environments. And so I think as we think about the asset sensitivity, that is really how we're positioning ourselves.
So Betsy, as John said -- this is Andy. We've tried to narrow the corridor of volatility given the uncertainty in the outlook. And so we are about as neutral as we can be given all the puts and takes John talked about.
Your next question comes from the line of Ken Usdin of Jefferies.
If I could ask a couple of questions on the fee side. One, can we just talk a little bit through the payments businesses? It looks like the overall year-over-year growth rate was 4%. I think you're aspiring for upper single digits. It looks like corporate was down year-over-year and maybe the rate in merchant slowed a little bit. So can you just talk us through some of those dynamics and then how you'd expect that traject going forward?
Sure. Yes. I think -- thanks, Ken. I appreciate that. We can look at -- maybe I'll take them in order. Merchant was kind of in that 4% area, as you mentioned, on the fee side of things. On that side, this quarter, we saw travel being a little bit down, but the other underlying metrics really have strong growth. We saw our tech-led initiatives really continue to propel very nicely. We saw high single digit for virtually other -- all the other categories in that space. So we think that travel is just kind of a short-term nature thing here, and we're well positioned and continue to feel good about high single digits there.
Okay. Got it. And then just in terms of some of the other lines, corporate services and mortgage did a lot better. I think you mentioned DCM and corporate and better gain on sale. Just wondering, are those both sustainable? Or was there any pull-forward on both of those areas this quarter?
I think it is. I think the underlying strength maybe had a little bit of positivity here in the first quarter. But underlying all that, I think the gain on sale in the markets that we're playing is legitimate. Even though the market has been slower from an application standpoint, a production standpoint, it's still kind of double digit, almost 20% down from year-over-year. So there's just -- there's a lot of -- the volumes are lower, but the spreads are wider, and we anticipate that to continue going forward.
Okay. Great. And last cleanup one. Just the ATM business, it didn't look like service charges changed. Did that close at -- and I know it's not a net profit. I know it's neutral net profit, but can you just update us on that?
Yes. There was some of that in this quarter, and so they'll kind of fully run off here in the second quarter.
With an offsetting cost?
Yes.
Your next question comes from the line of Mike Mayo with Wells Fargo.
Another one on net interest income. Andy used the word temporary in your opening remarks when talking about either the decline or the worst guide. And I didn't know what you meant by temporary.
So what we're saying, Mike, is that this pressure that, as John described, we believe, is going to dissipate and has dissipated. It's just dissipating slower than we thought. And we expect a relatively stable into the second quarter and then growth in the back half of '24. So that's what I meant by temporary.
Do you have any expectations for 2025 and where the floor is for noninterest-bearing deposits? Or any other color?
So I would expect that '25 would continue the momentum that we see in the second half of '24. We're not going to give a '25 guide right now because it's so volatile in terms of what rates could be. But importantly, Mike, we see the second half of '24, even in a lower rate cut environment and higher for longer, to start to go up.
And I know I've asked this before, but it still applies, I think. So the big picture here is you got $900 million of savings from the Union Bank acquisition. So that's good for the expenses. The revenues you highlighted in your slide, business banking is up 1/3 over 3 years in terms of revenues. And relationships, you have mortgage, you have capital markets, you have payments. The revenues are working, the expenses are working. And then we look at the efficiency ratio for this quarter and the core number is like around 62% for a company that for so long had an efficiency ratio under 60%.
Yes, Mike, that's why we're pulling these expense levers and looking at continuing to create efficiency. So I feel very positive about our fee categories. We have a diversified set of businesses, a lot of businesses that other banks don't have, like payments and commercial products, fund services, corporate trust, that helps us drive fee revenue. That's the strength that we talked about, that 7.7%. There are some headwinds on margin for the industry and for ourselves. We'll get past those headwinds, and we'll continue to operate efficiently and look for expense levers to get that efficiency ratio downward, and that's an objective of ours.
Your next question comes from the line of John Pancari with Evercore.
On the deposit growth in the quarter, the surge in growth you saw at the end of period, can you maybe size up the impact that was more seasonal and more tied to the holiday dynamic and how much that could pull back?
John, thanks. Maybe to answer your second question first. It's more of the deposit mix and rate paid. It's not necessarily the loan side. I think actually on the loan side, we see -- even though loans are soft at this point, we do see decent momentum on the commercial side. We saw good period-end growth there. Spreads are good. The asset churn is positive all there. I think it's just -- again, it's back on the deposit side of things in the mix.
Okay. And then separately, on the expense efforts where you're taking a closer look, and you mentioned some of the areas, are those measures that you've taken fully reflected in that updated expense outlook of $16.8 billion for the year? Or could your efforts drive a somewhat lower number as you evaluate the opportunity?
So John, they're reflected in the efforts. That's why we brought it down to $200 million. And in the note, you'll see that's $16.8 billion at least. So we could pull additional levers as we continue to focus on this, but it is reflected in the guidance.
Your next question comes from the line of Vivek Juneja with JPMorgan.
Just want to probe, Andy, a comment that you expect net interest income to go up in the second half of '24. Could you talk a little bit about what you see as the drivers of that?
I'm going to let John start, and I'll add on.
Yes. The driver is really, Vivek, as we talked about the -- it comes down to the deposit side of things really first and foremost. And again, we're seeing the migration and rotation slow. It's just -- again, it's just taking some time. So eventually, as that goes, that will stabilize. And then you're going to have the asset -- continual asset churn on both loans as well as investment portfolio, things like that.
So as John said, it's the repricing of loans, the expectation of stabilization of the flow of deposits and the securities portfolio churn that we talked about.
And the hedge that you did, which you said was an anomaly this quarter, could you talk a little bit about that? Was that for -- that's not going to have an ongoing impact? Was that just something that you put on for capital protection? Or what was it?
Sure. Yes. So it really was more to get our asset sensitivity to be -- continue to be neutral. So those are actions that we took kind of as a onetime matter. So it's in the rate and go forward. That's why I kind of -- I called it as a temporary measure here in this quarter. Going forward, again, the driver here in investment portfolio is the $3 billion or so that's rolling off at lower yields and will be replaced at now current higher interest rates.
Got it. Because you already said you were neutral, so that's what I was trying to understand, what sort of change to make that you had to do to make it go to neutral.
Yes. Those are part of the actions that we take to get neutral. And those are the things that the team looks at on a frequent basis. We're actively managing that on a daily basis. We're looking at markets, we're taking actions, and this is just the result of that.
Okay. And is that what? Just received fixed swaps you added or terminated? Or what did you do?
Well, specifically, they were just -- they were pay-fixed swaps that we had terminated. They were shorter-dated in nature, but it reduced the yield because the pay-fixed carry was -- had been gone. But that just neutralized our interest rate sensitivity.
Your next question comes from the line of Gerard Cassidy with RBC Capital Markets.
John and Andy, can you share with us -- obviously, you had a nice move up and your CET1 ratio is now at 10%. And we all know the Basel III endgame is coming. Nobody knows for certain when that final proposal will be in place. But it seems like, for the category 2 and 3 banks, that the unrealized securities losses will be carried through regulatory capital, which is not the case today, of course.
Sure, Gerard. I'll start. First of all, just to give an update on the unrealized loss. So from a positive standpoint, part of the hedging and activities that we do that I just talked about in prior questions really help here because we had -- even though rates were up 30, 40 basis points throughout the quarter, our AOCI was fairly neutral. So the impact to the AOCI from the investment portfolio in pension right now is about 220 basis points versus the 10.0% that we have on common equity Tier 1.
Very good. And coming back to -- stepping back for a moment. Now the Union Bank, I assume is fully integrated. Obviously, that has been your focus since that acquisition. Can you share with us your thoughts about de novo expansion? You had that expand down in the Charlotte area. Is there more to come now that, again, the acquisition is behind you? What's your thoughts there as you look out over the next 12 to 24 months?
Yes, Gerard, we're focused on building our core customer base and deepening the relationships with the customers we have through those set of products and services that we offer. We have -- we do that through a number of mechanisms. One of them is through our branch system. One of them is through our relationship managers and working together. And that de novo effort is doing well. We also have partnerships with State Farm which increase our distribution base.
And Andy, just a quick follow-up on the deepening the customer relationship that you just identified. When it comes to your middle market commercial or your core commercial account, if they only have a loan relationship versus one of your preferred accounts that have multiple relationships, that deepening you just mentioned, what kind of profit differential would you estimate there is between a customer that only has a loan versus your customer that has multiple products?
It's significantly higher. The more relationships, the higher the return, the more revenue, certainly. So if they have a loan only versus a loan plus deposit, plus treasury management, plus commercial products, plus payments, it all adds up.
Yes. No, I agree.
[Operator Instructions] Your next question comes from Matt O'Connor with Deutsche Bank.
There's obviously a lot of puts and takes, like as you think about the net interest margin over time. But we've seen a number of banks put out kind of this medium-term NIM target. And wondering if you have any thoughts on what a more sustainable NIM is for you guys. You talked about the securities kind of cash flowing $3 billion. I don't know if there's any kind of underwater swaps that are chunky and roll off. But I guess the question is, what do you think about NIM kind of medium term versus where you are right now?
Yes. I'll start here. Matt, in terms of the net interest margin, it's going to obviously track net interest income over time, but it may bounce around. Some of the drivers of that, obviously, could be some of the things you just mentioned, the asset churn on the investment portfolio, the creep and -- on deposit costs and things like that. The cash levels and liquidity mix and things of that variety can also drive it as well. So we don't really have a call or a base of here's where our net interest margin. We're more focused on net interest income.
And then are there any -- again, the securities book, you're pretty clear on the cash flow there, and I think that's fairly long duration from a cash flow perspective. Any swaps that we should be mindful of that could go either way, looking out the next couple of years?
I'm sorry, Matt, I didn't...
Swaps. So again -- go ahead.
The swap activity that we have. Yes. So just as a -- our hedging -- while we're very active in our hedging activities, we -- there's really no fundamental change. We continue to focus on pay-fixed swaps that have -- that hedge the investment portfolio. Obviously, we took some off that impacted, but it's a temporary thing. We still have well over 30% -- or well over 1/3 actually, of our risk hedged on the securities book.
Your next question comes from the line of Saul Martinez with HSBC.
I guess another one on NII. Your guidance does assume modest reacceleration of NII in the back end. I think the second half NII is, at the midpoint, 2% higher than the first half. But what's embedded in -- can you be more specific about what's embedded in the through the cycle deposit beta assumption?
Sure, Saul. It's John. So on the beta side specifically, that has continued to slow. I think we're only up 1 or 2 points here this quarter, and was 3 the prior quarter. So it clearly has slowed. And as I mentioned, deposit rates in the commercial side are very flat. They have not changed. Retail bounces around a little bit, but we're going to be competitive and follow the market there, of course. But all in, it's -- if you're higher for longer, it's going to -- it may creep up 1 point here or 2, but we feel like the low 50s is probably the right place for it, for that to be as we kind of look forward.
Okay. And in terms of noninterest bearing, the total liability or total deposits, where does...
Yes. I think that -- I think -- yes, as I mentioned a little bit on the noninterest-bearing side, we're at about 17%. It's -- customers are being more efficient and things like that. It could go down a couple of points as we stay a little bit lower -- at this higher-for-longer type period.
Okay. Great. And I guess a follow-up on -- just a clarification on the deposits surge, your response to an earlier question on the deposit surge, Forgive me if I missed this, but the $15 billion to $20 billion surge, that's a normal surge in noninterest-bearing deposits? But I guess the question is, what's sort of the incremental to the normal surge? What was incremental this quarter to what you normally see? I'm just trying to get a base on which to forecast noninterest-bearing deposits going forward.
Sure. So in terms of the surge, the surge in absolute terms was like it was about $20 billion or so. It's probably $10 or so billion above and beyond what we typically see for this type of the quarter.
Your next question comes from Mike Mayo with Wells Fargo.
Just kind of still a cleanup on NII. Just in very simple terms, if you're neutral to rates, why the guide lower for NII? I just want to make sure I have that rate. Did something happen that you didn't expect? Or you weren't fully neutral before this quarter?
Yes. Sure. Mike, it's John. So the -- yes, we are neutral, to answer your question, to shocks to interest rates. I think what we're explaining is the behavioral aspect of it, which sometimes can be a little more challenging to judge at that point in time. And so again, it's a little bit -- the pace of rotation is a little bit. It's slowing down, just not as much as what we had anticipated. So again, rate shocks moving up and down, we continue to feel very good from a neutral standpoint. It's just that behavioral aspect that we've been talking about here.
And do you have a number for fixed asset repricing, say, through the end of next year? Because I think that's what's driving your higher guide for the second half of this year and into next year. So you've talked about $3 billion of securities. But by the end of next year, how much do you have in fixed assets that should reprice? Do you have like one grand number for that?
Well, I think the way I would think about it is about half of our loan book is fixed rate component. The other half is floating rate component and spreads are widening. So you can see some of the floating rate components perhaps improve over time. We're seeing decent growth in payments -- or excuse me, credit card. And so some of the mix is also working at play here. And so commercial loans are coming on. They're coming on at wider spreads. So that's kind of how I think about that from a big picture perspective.
And then last one, loan spreads. I mean for a while there, it looked like we're headed into the recession and loan spreads were not widening. Now it looks like we're not having a recession and you have tight spreads in the capital markets and loan spreads are widening. I just -- why are loan spreads widening now? I guess that would be an incremental positive.
Yes. So I think it's just different markets. So I think some of the drag you're seeing in the commercial volume side is capital markets. Spreads have been -- and the access has been very good. We saw that reflected in our fixed income capital market fees and things of that variety. And so -- but I think that has taken away volume to a certain extent. In other areas where access to capital markets isn't as pronounced, I would say there has been a decent opportunity for spreads there.
Your next question comes from the line of Ebrahim Poonawala with Bank of America.
John, just a quick follow-up to make sure we get this right. The surge deposits that came in, I think you mentioned you expect about $15 billion to leave. Am I -- is all of that going out of noninterest-bearing? So the $91 billion number, does that go into the mid-70s as we think about the second quarter?
Some of this is temporary. So the surge that happens, it can be a mix of both money market as well as NIB. It may surge the NIB for a brief period of time, but it's not going to be material to the quarter. So even though -- so the surge that we've been talking about can be a mix of both.
Mix of both. And so you do expect, just from a very -- dollar balance standpoint, NIB staying north of $80 billion. Is that fair?
Yes. I would expect, as we said, the rotation is continuing. So I wouldn't expect growth necessarily in DDA, but deposits overall, we do expect it to basically be stable.
And just a separate question. Given all these questions on NII, I think, would love to hear the degree of conservatism baked into your NII outlook. Because I guess the concern you're hearing is whether we see another downward guide 3 months from now. And yes, so in terms of what would go wrong in order for us to see another guide down on NII and for you to be surprised?
Yes, Ebrahim, I don't look at it as conservative or aggressive. It's just the range. It's just the range that we provided, just given the uncertainty that's just in the market given all the factors that we've talked about here today.
There are no further questions at this time. Mr. Andersen, I turn the call back over to you.
Thank you for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.
Thank you. This concludes today's conference call. You may now disconnect.