Q3 2024 Earnings Summary
- USB is experiencing positive net interest margin (NIM) momentum, with expectations of continued expansion towards a 3% NIM, which is embedded in their medium-term guidance.
- USB is focusing on organic growth opportunities, leveraging strong digital capabilities and partnerships to expand services nationally in a capital-light way, and is investing in high-growth areas within its current footprint.
- USB has strong growth in its credit card business, with 8% year-over-year loan growth, contributing to net interest income, and is delivering on strategic initiatives with positive operating leverage expected to expand into 2025.
- Leadership uncertainty in the payments division: U.S. Bancorp is actively searching for new leadership for its payments division, indicating potential instability in a key business area. There is a perception that they have underperformed in payments and could do more to capitalize on revenue opportunities.
- Challenges in executing digital expansion strategy: Analysts expressed skepticism about the effectiveness of expanding into new markets through digital partnerships like State Farm, noting that similar strategies have historically underperformed without a strong physical branch presence.
- Lagging in AI implementation: The company admits that in terms of generative AI, they are in the “early innings”, suggesting they may be behind competitors in leveraging advanced AI technologies for business growth.
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Net Interest Income Exceeds Expectations
Q: What drove the better-than-expected NII?
A: Management attributed the strong NII to continued strength in the credit card portfolio, which grew 8% year-over-year, fixed asset repricing, and the unexpected 50 basis point Fed rate cut that allowed for deposit pricing adjustments. -
Fee Income Growth Drivers
Q: What will drive fee income growth in Q4?
A: Core businesses are performing well, with strong growth in trust services (6%), commercial products (12%), and mortgage (8%). They expect payments revenue to improve, supporting mid-single-digit fee growth despite headwinds from exiting the ATM business. -
Securities Repositioning Actions
Q: What did you restructure in the securities portfolio?
A: They sold about $10 billion in securities, realizing $119 million in losses, with an expected payback of about two years. The repositioning aimed to improve liquidity and replace lower-yielding seasoned securities. No further actions are currently planned. -
Operating Leverage Outlook
Q: What's the expected operating leverage into 2025?
A: Management reported positive operating leverage of 30 basis points in Q3 and expects over 1% in Q4. They anticipate expansion into 2025, building upon this momentum, with more guidance to come. -
Expense Guidance Adjustments
Q: Is there any significance to the precise $16.8B expense guidance?
A: Management is being more precise with the expense guidance, citing a good line of sight into the expense base and stronger NII. The expenses are coupled with NII, and they feel $16.8 billion is appropriate for this quarter. -
Impact of Rate Cuts on NIM
Q: Will NIM expand as rates are cut?
A: Rate cuts are positive, as they can quickly lower rates on institutional deposits. The deposit beta for the recent cut is around 30%, expected to increase to just above 50% over time, aiding NIM expansion. -
Further Details on Securities Actions
Q: Can you detail the yields on securities sold and bought?
A: They aimed to improve liquidity and reposition lower-yielding seasoned securities but did not provide specific yields. The increase to a 50% terminal deposit beta will be gradual as retail pricing adjusts. -
Investor Concerns Post-Investor Day
Q: How do you address investor concerns after Investor Day?
A: Management emphasizes executing on strategy with positive operating leverage, focusing on organic growth rather than M&A, and plans to initiate modest buybacks shortly, building upon them as there's more clarity on Basel III. -
M&A and Southeast Expansion
Q: Are you interested in buying a bank in the Southeast?
A: No, M&A is not a priority given current uncertainties. The focus is on organic growth opportunities and leveraging partnerships and digital capabilities for Southeast expansion.