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    US Bancorp (USB)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$41.38Last close (Jan 16, 2024)
    Post-Earnings Price$41.35Open (Jan 17, 2024)
    Price Change
    $-0.03(-0.07%)

    What went well

    • Strong Growth in Fee-Based Businesses: U.S. Bancorp expects high single-digit revenue growth in merchant processing and corporate payments, driven by investments in technology and synergies from Union Bank. The company also anticipates growth in commercial products, trust and investment management fees, and wealth management services.
    • Integration of Payments and Business Banking: The company is leveraging its tech-led initiatives to integrate banking services with payments, providing comprehensive solutions to customers. This strategic focus is expected to drive positive operating leverage and reduce the efficiency ratio into the high 50s, enhancing profitability. ,
    • Industry-Leading Return on Tangible Common Equity: U.S. Bancorp achieved a 19% to 20% ROTCE in the fourth quarter and for the full year. The company expects to continue leading in ROTCE, generating capital for potential dividends and share buybacks once regulatory clarity is achieved. ,

    What went wrong

    • Net interest income is expected to be flat to slightly up in 2024, indicating limited growth potential due to ongoing deposit pricing pressures and competition. Deposit costs have a cumulative beta of 48.5%, and may increase further until the Fed cuts rates. [[8], [9], [15]]
    • Efficiency ratio has deteriorated to 61% in Q4 2023, up 300 basis points year-over-year, with management expecting improvement only in the second half of 2024 due to margin pressures, indicating ongoing profitability challenges. [[6]]
    • Exiting the ATM cash servicing business will reduce fee income by $30-35 million per quarter starting in Q1 2024, potentially impacting overall revenue growth. [[7]]

    Q&A Summary

    1. NII Outlook and Rate Sensitivity
      Q: What's the NII outlook for 2024?
      A: Management expects net interest income (NII) to be slightly up in 2024, consistent with the annualized fourth-quarter 2023 level of $4.14 billion. They project first-quarter NII between $4.0 billion and $4.1 billion , slightly lower due to seasonal factors but anticipate growth in the second half of the year. The NII outlook assumes four interest rate cuts starting in the second quarter , but they believe NII is relatively insensitive to the number of cuts, as they've worked to neutralize interest rate sensitivity.

    2. Capital Position and Basel III Impact
      Q: What's the outlook for CET1 ratio and capital return?
      A: The CET1 ratio stands at 9.9%. Fully loaded for unrealized losses on securities, it's about 7.7%. They expect to generate 20 to 25 basis points of capital per quarter through earnings. Management plans to build capital to meet future regulatory requirements, including Basel III endgame rules. Share buybacks are on hold until there's clarity on capital rules , but they aim to return excess capital to shareholders over time.

    3. Operating Leverage and Efficiency Ratio
      Q: When will positive operating leverage return?
      A: Positive operating leverage is expected in the second half of 2024. They've achieved $900 million in cost efficiencies from the Union Bank integration. The goal is to reduce the efficiency ratio into the high 50% range , down from the current 61% , by managing expenses and growing revenues.

    4. Fee Revenue Growth Expectations
      Q: What's the fee revenue growth outlook?
      A: They anticipate growth in fee revenues led by payments, expecting high single-digit growth in merchant processing and corporate payments. Card fees are expected to grow at mid-single digits. Core fee revenues are projected to increase by mid-single digits from an adjusted base of $10.8 billion in 2023.

    5. Credit Quality and Charge-Offs
      Q: How will charge-offs trend in 2024?
      A: Net charge-offs are expected to normalize, reaching about mid-50s basis points for the full year 2024. Credit card losses are approaching pre-pandemic levels but remain manageable due to a focus on prime and super-prime customers. Non-performing assets saw increases from idiosyncratic loans, but these are well-collateralized.

    6. Loan and Deposit Growth
      Q: What's expected for loan and deposit growth?
      A: Commercial loan growth is expected, driven by stronger pipelines and improved utilization. Deposit balances may be lower in the first quarter due to seasonal factors but should stabilize afterward. The migration from non-interest-bearing deposits is expected to abate, stabilizing the mix.

    7. Payments Strategy and Integration
      Q: How is the payments strategy evolving?
      A: The bank continues to invest in technology-led advancements and integrating payments with banking services. Tech-led initiatives now account for over 30% of merchant processing activities. They focus on providing comprehensive solutions that help businesses run more efficiently by combining payments and banking services.

    8. Competition from Private Credit
      Q: Is private credit affecting commercial lending?
      A: While they don't directly compete with private credit in their client base, they acknowledge that private credit could impact the broader lending environment, especially with potential capital rule changes. They maintain relationships with private credit firms through services like Corporate Trust and Global Fund Services.

    9. Union Bank Integration
      Q: Is the Union Bank integration complete?
      A: Yes, the Union Bank integration is fully complete, and all cost actions and structures are now reflected in the financials. They've achieved the planned efficiencies and are moving forward with combined operations.

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