Q4 2024 Earnings Summary
- U.S. Bancorp is experiencing strong growth in its tech-led merchant processing services, which now constitute about one-third of its merchant business and are expected to significantly contribute to future growth. Investments in this area, including acquisitions like talech and Salucro, are enhancing the company's value proposition, driving revenue and sales volume growth.
- The company is achieving positive operating leverage, with management confident in delivering at least 200 basis points of positive operating leverage for the full year 2025. This success is driven by top-line revenue growth and expense discipline, with potential to exceed the target if market conditions, such as the yield curve, are favorable.
- There is strong growth in commercial products revenue, driven by activities like client-related derivatives, loan syndications, and bond underwriting. New products accounted for about 20% of growth, and the focus on interconnectedness and private credit verticals supports high expectations for continued strong performance in this business line.
- U.S. Bancorp's merchant acquiring business is experiencing margin compression, with a 70 basis point contraction in merchant acquiring yield year-over-year in the fourth quarter. Management acknowledged they were "disappointed in the merchant results for this quarter", and this margin pressure may persist due to growth in high-volume, low-margin businesses.
- The bank anticipates only modest loan and deposit growth for 2025, and while there's positivity and momentum in pipelines, it has "not yet translated into elevated loan growth". This could hinder revenue growth and reflects potential challenges in driving lending activities.
- There is market skepticism regarding U.S. Bancorp's ability to achieve or exceed their guidance of at least 200 basis points of positive operating leverage, especially after a prolonged period without such leverage. Analysts note that "people are questioning this" and "the stock is down", indicating concerns about the company's capacity to deliver on its targets.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Total revenue growth | FY 2025 | no prior guidance | 3% to 5% | no prior guidance |
Positive operating leverage | FY 2025 | no prior guidance | Exceed 200 bps, excluding impact of security gains/losses | no prior guidance |
Net interest income | Q1 2025 | no prior guidance | Relatively stable vs. Q4 2024; down ~$40M on fewer days | no prior guidance |
Noninterest expense | Q1 2025 | no prior guidance | ~$4.2B | no prior guidance |
Positive operating leverage | Q1 2025 | no prior guidance | Expected to exceed 200 bps year-over-year | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Positive operating leverage targets (200 bps) | Q3 2024: Street targeting 150–200 bps, company confident in positive leverage but no specific commitment. Q2 2024: Estimates of ~300 bps for 2025. Q1 2024: No mentions. | Achieved 190 bps of positive operating leverage, expressing confidence in reaching ≥200 bps in 2025. | Consistent focus, with evolving numerical guidance. |
Margin compression in merchant acquiring | Q3 2024: No mention. Q2 2024: No mention. Q1 2024: No mention. | Noted 70 bps contraction in yield, driven by high-volume, low-margin clients. | Newly discussed in Q4 2024. |
Net interest income headwinds vs tailwinds | Q3 2024: Portfolio remixing, partial restructuring, and modest loan growth. Q2 2024: Turned from headwind to tailwind; stabilized deposit pricing. Q1 2024: Pressured by deposit mix shift but expected improvement in H2 2024. | Cited fixed asset repricing and deposit stabilization as tailwinds; rate volatility and liquidity changes as headwinds. | Recurring, with improving sentiment in H2 2024–2025. |
Fee income diversification (payments, commercial products) | Q3 2024: Emphasized “beautifully diversified” fee mix, commercial product strength. Q2 2024: Key drivers in merchant processing, trust, and investment management. Q1 2024: 7.7% increase in noninterest income, diversified across payments/commercial. | Highlighted growth in tech-led merchant processing and commercial products. Fee income was over 40% of net revenue; commercial fees had double-digit YoY growth. | Consistent driver of revenue, sustained emphasis on diverse fee streams. |
Loan and deposit growth trends | Q3 2024: Slightly lower commercial balances, deposit discipline. Q2 2024: Corporate loan growth offset by lower CRE, stable consumer deposits. Q1 2024: Stable deposits, slower loan demand. | Modest growth, with hopes of pickup in H2 2025. Deposits up 0.7% QoQ, focusing on relationship-based deposits. | Consistent mention, cautious outlook but modest optimism. |
Regulatory capital requirements (Category 2, Basel III) | Q3 2024: Not constrained by Cat II threshold, accreting capital at 20–25 bps per quarter. Q2 2024: Preparing for Basel III endgame, strong CET1 ratio. Q1 2024: Basel III endgame and CCAR critical, pausing buybacks. | Expects Cat II by ~2027; targeting ~10% capital levels, balancing share buybacks. | Ongoing planning around Cat II thresholds. |
Securities portfolio rebalancing and net losses | Q3 2024: ~$119M net losses in a portfolio restructure. Q2 2024: $36M in losses on sales. Q1 2024: Focused on hedging activities and AOCI impacts. | Mention of slightly higher portfolio balance and “excluding security losses” references; no detailed new net losses disclosed. | Consistent discussion; less emphasis on new losses in Q4. |
Changes in credit quality and rising net charge-offs | Q3 2024: NCO ratio rose to 0.60% (up 2 bps), NPA ratio 0.49%. Q2 2024: NCO 0.58%, manageable CRE office risk. Q1 2024: NCO 0.53%, slight increase driven by credit cards. | Net charge-off ratio at 0.60%; stable QoQ. Nonperforming assets at 0.48% vs. 0.49% prior quarter. | Stable but slightly elevated YoY. |
Operational efficiency and expense discipline | Q3 2024: Achieved modest positive leverage; efficiency ratio ~60.2%. Q2 2024: Expenses at $16.8B or lower. Q1 2024: Reduced full-year expense guidance, focusing on operational efficiency. | Maintained flat expense base for five quarters; targeting expense levers via real-estate optimization, procurement, automation. Achieved 190 bps positive leverage. | Continued discipline, reinforcing >200 bps leverage target. |
Acquisitions in tech-led merchant processing (talech, Salucro) | Q3 2024: No mention. Q2 2024: No mention. Q1 2024: No mention. | Mentioned as growth drivers in tech-led segment, ~one-third of total merchant business. | Newly referenced in Q4 2024. |
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Net Interest Income Guidance
Q: What's behind your NII guidance and assumptions?
A: U.S. Bank expects net interest income to grow, driven by modest loan and deposit growth , a better asset mix, deposit normalization, and fixed asset repricing. They've embedded assumptions of two rate cuts in May and September and anticipate the long end of the curve to remain at current levels around 4.65%. They are neutral to Fed moves on the short end but a steeper yield curve would be beneficial. -
Operating Leverage Target
Q: Can you achieve over 200bps positive operating leverage?
A: U.S. Bank is confident in delivering at least 200 basis points of positive operating leverage in 2025. They have flexibility in expenses, managing costs efficiently with flat expenses for the past five quarters. Regardless of the revenue environment, they are committed to this operating leverage target. -
Payments Business Strategy
Q: What's your plan for the payments business amid pressures?
A: The payments franchise is a strategic asset. They've reorganized to accelerate execution, focusing on interconnectedness with consumer and institutional franchises. Investments in tech-led growth and new leadership aim to drive growth. They expect mid-single-digit growth in payments fees , despite challenges in merchant acquiring yields. -
Capital Allocation and Buybacks
Q: What's the approach to share repurchases?
A: They've authorized a $5 billion share repurchase, starting with $100 million this quarter. The pacing of buybacks balances growing capital to meet Category II requirements (targeting a 10% capital level) and modest loan growth. They will proceed cautiously, considering these factors. -
Loan and Deposit Growth Outlook
Q: What's the expectation for loan and deposit growth?
A: U.S. Bank forecasts modest loan and deposit growth for the full year. While client sentiment is positive, elevated loan growth hasn't yet materialized; improvement may come in the back half of the year. Deposit growth is expected to be modest and consistent with the industry. -
Net Interest Margin Trajectory
Q: How will NIM evolve throughout the year?
A: Net interest margin is expected to increase, following net interest income growth. Factors influencing NIM include loan growth, deposit management, and the shape of the yield curve. While they don't manage NIM specifically, they anticipate an improvement over time. -
Payments Business Performance
Q: Are you considering divesting the payments business?
A: No; they view the payments business as critical for interconnected banking services. Despite industry challenges and margin pressures, the business delivers high returns and is integral to client relationships. They are focusing on tech-led segments and deepening partnerships. -
Merchant Acquiring Yield Compression
Q: Why did merchant acquiring yields decline?
A: The yield contraction is due to growth in high-volume, lower-margin clients, which affects the yield despite strong sales. Their tech-led segment, making up about one-third of the business, continues to show strong margins and growth. -
Deposits Competition and Pricing
Q: What are you seeing in deposit competition and pricing?
A: Deposit competition varies; retail competitiveness is moderating with recent rate cuts, while the institutional side remains standard but affected by quantitative tightening. They expect deposit costs to stabilize and deposits to grow modestly, supported by new products. -
Commercial Products Revenue Trends
Q: What's driving commercial products revenue?
A: Strong growth is seen in client-related derivatives, loan syndication, bond underwriting, and new products, contributing to robust performance. New products accounted for about 20% of their growth, and they expect continued momentum. -
Capital Markets and M&A Outlook
Q: Are you considering bank M&A in the near term?
A: Large bank M&A is not a priority due to factors like purchase accounting marks, regulatory approval processes, and current bank valuations. They are focused on organic growth opportunities across all business lines. -
Fixed Asset Repricing
Q: What's the cadence of fixed asset repricing?
A: Fixed asset repricing is consistent throughout the year, with $5–7 billion on average repricing per quarter, contributing to net interest income growth. -
Interest Rate Risk Positioning
Q: How would changes in rate cuts affect projections?
A: They are neutral to Fed moves on the short end, so changes in rate cuts would have minimal impact on net interest income. However, the shape of the yield curve matters; a steeper curve benefits NII, while an inverted curve could pressure it. -
Hedging Program Impact
Q: Can you discuss your hedging exposure?
A: Their hedging program is working as intended; pay-fixed swaps protect capital when rates rise, creating some NII drag, while receive-fixed swaps offset by increasing rates on assets, keeping income relatively neutral. -
Commercial Loan Demand
Q: Are you seeing a pickup in lending demand?
A: Although client sentiment is positive and pipelines are strong, elevated loan growth hasn't materialized yet; they hope for improvement in the back half of the year. -
Deposit Beta Expectations
Q: What's the through-the-cycle deposit beta?
A: They expect cumulative deposit betas to reach mid- to high 40s in Q1 and around 50% through the cycle. The beta was 38% through the fourth quarter. -
Investment Focus Areas
Q: Where are you investing for growth?
A: They are investing across all business lines, including payments, trust and investment management, commercial products, and retail banking. Emphasis is on interconnectedness and capitalizing on organic growth opportunities. -
Period-End Deposit Decline
Q: Why did period-end deposits decline?
A: Period-end deposits can fluctuate due to seasonality and large quarter-end movements; average balances are a better indicator. First-quarter deposits may seasonally decline, particularly in institutional and wholesale segments. -
Expense Management Levers
Q: What levers do you have for expense management?
A: They are optimizing real estate, procurement, centralizing processes, automating tasks, and leveraging digital investments to manage expenses. These efforts support their positive operating leverage goals. -
Net Interest Margin Management
Q: How do you manage NIM?
A: They don't specifically manage NIM but expect it to improve alongside net interest income. Factors include loan growth, deposit management, and the yield curve shape.