US Bancorp Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Gunjan and John, before I asked my question, on behalf of all of the bank analysts and the investment community, I really want to offer our sincere condolences about Terry's tragic death. Not only will he be missed by his family and all his colleagues at U.S. Bancorp, he'd be missed by everybody on this call and throughout the investment community. All of us will keep him and his family in our thoughts and prayers. On the question, John, can you go back to your comments about the yields in the portfolios, how you referenced that the earning asset yields came down for the quarter. And you pointed out, I think, on slide 12 in your comments that the impact of lower short-term rates more than offset the benefits of the repricing of fixed rate assets. What's the ideal interest rate environment for U.S. Bancorp in your view? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 16, 2025 / 1:00PM, USB.N - Q1 2025 US Bancorp Earnings Call

Question: Gerard Cassidy - RBC Capital Markets - Analyst : I appreciate that, John. And then as a follow-up, you talked about your capital levels, your CET1 ratios, especially including the AOCI at 8.8%, which, of course, is above your required level. And you're still being cautious on the buybacks. Historically, as you all know, you folks have traditionally given back 70% to 80% of annual earnings in buybacks and dividends. What kind of environment will we need to see for you guys to be comfortable to get back into that kind of 70% to 80% return of earnings to shareholders in buybacks and dividends?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Great. And Andy, good luck in retirement. I wish a lot of future success.

Question: Robert Siefers - Piper Sandler - Analyst : I guess, first of all, I'd echo Gerard's sentiments. Maybe, John, within the 3% to 5% full year revenue growth target, any change in sort of the expected balance between NII and fees? I know you talked previously about sort of mid-single-digit fee growth aspiration for the year. So I mean just within your response, if you could sort of speak to any updates on main fee drivers throughout the year with a particular emphasis on the payments momentum that you would see developing, if possible.

Question: Robert Siefers - Piper Sandler - Analyst : Okay. Great. And then maybe sort of a top level one. Can you sort of address what you're seeing just in terms of some of the consumer spending patterns. I mean, for your size, just given the payments business, you see sort of an outsized amount of spending. Just curious what changes, if any, you've seen since this all -- all this uncertainty really ramped up, and if there's been any change in particular since early April when things really began to hit it in a (inaudible)

Question: John McDonald - Truist Securities - Analyst : Gunjan, I wanted to ask you a little bit bigger picture on the payments business. You've acknowledged it's been a little bit disappointing relative to what you see as its potential. Did we collectively have too high expectations for payments for the last couple of years? Or is it a question of needing to get further along in this shift towards the tech-enabled in order to better align the business with the industry dynamics?

Question: John McDonald - Truist Securities - Analyst : Okay. Great. And then, John, a question on expenses. You can put this in the category of no good deed goes uncriticized. You've done a great job keeping quarterly expenses flat for a bunch of quarters in a row now. Can you just remind us why that still enables you to invest enough to play offense against some aggressive payments competitors and a bunch of offense-minded banks that are expanding throughout the country?

Question: Betsy Graseck - Morgan Stanley - Analyst : And I also thank you, Gerard, for saying that. And team, I will always remember Terry's big smile and warm embrace. And Andy, so all the best for you in your retirement, and I hope you enjoy every moment. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 16, 2025 / 1:00PM, USB.N - Q1 2025 US Bancorp Earnings Call Back to business. Gunjan, just a follow-up to the last question. When we think about the market here that you're trying to match the growth rate of, maybe you could give us a little bit of an understanding as to what market we're talking about. When I speak with investors on this topic, I hear many different thoughts on what the market is. Is it pure-play merchant acquirers? Is it other banks in the payments ecosystem, of which everybody is, obviously or leaders in that regard? It would just be helpful to understand what your definition of market end market growth rate is.

Question: Betsy Graseck - Morgan Stanley - Analyst : Okay. Great. And then just a follow-up is on lending in general, and I noticed your C&I lending was quite strong this quarter. Anything in payments there? And I did notice that your C&I lending commentary in the press release had to do with a majority of that coming from non-bank or non-depository financial institutions. So could you give us some color on that? And is payments a part of that and DFI?

Question: Michael Mayo - Wells Fargo - Analyst : As well, said by Gerard and Betsy on the tragedy. Gunjan, you're now CEO of U.S. Bancorp, I guess, as of yesterday. And you did highlight some changes in management to make it more simple, interconnected, focused on the five verticals. You said your number one priority is to restore investor confidence, where, as you can see by the stock price, it's not the valuation it once was, you said you want to have better expenses, organic growth. And payments being the way to better returns and always superior risk management. So hopefully, I summarized that okay. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 16, 2025 / 1:00PM, USB.N - Q1 2025 US Bancorp Earnings Call But -- and I said at Investor Day, like Andy, I love you, but unfortunately, I didn't love the stock price performance, and so restoring investor trust were getting that confidence back to the company, which should lead to the stock price. So Gunjan, I mean sometimes you have all-star teams or often you have all-star teams that lose -- teams. And so you can have a lot of good players, it just doesn't work out. So I'd say just, from a stock price standpoint, it hasn't worked out over the longer term. So Gunjan, stylistically, I know you're doing a lot of continuation, but what are you doing differently now versus Andy? I know you're next to each other and your partners and all that, but I don't know how you're different that might evolve U.S. Bancorp to better performance that would lead to a higher stock price and your number one goal, restoring investor confidence?

Question: Michael Mayo - Wells Fargo - Analyst : I appreciate that. When you look at the five verticals, it might be the first time you mentioned it. What are the five verticals? And you said that's most of revenues, and what's the opportunity to move the human bank franchise up to the U.S. Bancorp levels because it seems like those would be some organic growth opportunities?

Question: Michael Mayo - Wells Fargo - Analyst : And Union Bank, the potential to move that up to your level? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 16, 2025 / 1:00PM, USB.N - Q1 2025 US Bancorp Earnings Call

Question: Erika Najarian - UBS - Analyst : My first question is for John. I just wanted to unpack on slide 18, your comments of a medium-term net interest margin of 3% plus medium-term, representing 2026, 2027. So I quickly looked at your -- so typically, when we've seen this kind of uplift from the [2.70s], it's because there's some sort of some hedges that are rolling off. And I'm looking at your C&I and CRE yields and then compared it to peers that aren't super hedged, and there doesn't seem to be a mismatch there. Your bond yields are a little bit lower than peers. I'm wondering, and I couldn't really tell all from your swap disclosures at Investor Day, what could be optimized? But beyond rates, what is the balance sheet optimization plan to get you from the 2.70% to 3%?

Question: Erika Najarian - UBS - Analyst : Got it. And my second question is just maybe re-asking Gerard's question another way. When we got together in September during Investor Day, you unveiled a $5 billion buyback. You talked about a modest pace of buyback activity and sort of pegged it, I'm guessing, to the 10% ex-AOCI number, improving to 8.8% this quarter. And if I recall correctly, I think there was some commentary in September about being back half weighted in 2025 in terms of the buyback activity. And as I think about the opportunity -- and I'm guessing based on Gunjan's comments, you think that the stock is in undervalued and obviously, the macro isn't helping the value of the stock either, what is our marker? Is our marker now the 10% CET1, including AOCI is our marker time? Or have things changed because of the economic uncertainty in terms of the buyback pacing?

Question: Ebrahim Poonawala - Bank of America - Analyst : I guess I just wanted to echo what Betsy and Gerard said also. But in terms of the question, John, I just want to make sure I'm not putting words in your mouth, but did you bless that you believe that absent any macro shocks, the margin should be a 3% average for 2027?

Question: Ebrahim Poonawala - Bank of America - Analyst : Got it. And I guess just a separate question on expenses. So laser-focused on operating leverage, it's been flat. Is it fair to assume that we could see multiple quarters of flat to lower expenses in the kind of revenue growth backdrop that you have talked about or guided for, given all the efficiency opportunities within the bank? Or is that being too aggressive?

Question: Bill Carcache - Wolfe Research, LLC - Analyst : Following up on your expense commentary, your 200-plus basis points of positive operating leverage is very clear in your guidance. But is it reasonable to expect that positive operating leverage could break above 300 basis points given the continued tailwinds from fixed rate asset repricing that are fairly mechanical in nature? Your NIM commentary, John, and sort of just that expense trajectory that you've been on, understanding there's a lot of uncertainty at a macro level, but sort of steady state with where we are, would that be a reasonable expectation?

Question: Bill Carcache - Wolfe Research, LLC - Analyst : Understood. And separately on credit, you're flat -- relatively flat reserve rate seems consistent with stable asset quality across your consumer commercial portfolios. But maybe if you could just discuss what you're hearing from clients who are most exposed to changes in tariff policy. There's still lot we don't know, but can you give us a sense for whether your client base is more exposed to the risk of potentially more significant credit event versus simply just slower growth that would be relatively manageable?

Question: Kenneth Usdin - Autonomous Research - Analyst : John, if I could just clean up a couple of quick things. Can you just let us know what curve you're now using in terms of cuts in the 10-year relative to what you gave us in January?

Question: Kenneth Usdin - Autonomous Research - Analyst : Okay. Cool. And then a couple of quick things on fees. So in the payment side, you had talked previously quarters about prepaid card, getting to a run rate, did that happen in the first quarter? And kind of going forward, any other things we should be thinking about outside of seasonality in terms of just the kind of organic growth rate of payments?

Question: Kenneth Usdin - Autonomous Research - Analyst : Okay. And last one, just you mentioned, I think, in your remarks about how the Corporate Services capital markets had a good DCM or debt issuance type of quarter. Do you see some of that as either pull forward in the environment? Or just can you just talk through your general pipelines for the capital market side of the Corporate Services business?

Question: John Pancari - Evercore ISI - Analyst : Just a follow-up there on the fees side. I know you cited mid-single-digit growth expectation on fees. And I just want to see if you could more explicitly break that down by the the various lines if you're -- how you're thinking and if that's changed from previous? And more specifically, I'm interested in card. I think you have pointed out in the past that you're confident in the mid-single-digit growth rate in card in 2025, but it was up about 1.5% year over year this quarter. I know you mentioned card spend was weaker earlier in the quarter and stabilized in March. But how is mid-single-digit sustainable when you come off of this level and there's uncertainty in the macro outlook?

Question: John Pancari - Evercore ISI - Analyst : And again, excluding that prepaid card and then the weather dynamic, I mean, you -- did you achieve would you say about a mid-single-digit

Question: John Pancari - Evercore ISI - Analyst : Okay. Got it. All right. And then separately, back to the operating leverage, not to beat the dead horse. But the 200 basis point expectation, and I know you had indicated several times that you do have some levers if revenue does come in weaker, and we all worry for the industry as a whole. As we're looking at it right now, revenue may come in weaker. So like what are the areas that you actually have levers? What areas can you pull back materially in cost for you already haven't done so? I just want to see if you can kind of maybe walk through that. Because it's clear that you're investing and you're in the middle of still of a transformation in payments and obviously, strengthening your organic capabilities. So curious where the levers are in the cost base.

Question: Saul Martinez - HSBC - Analyst : I wanted to go back to slide 18 and and drill down on that. And if you -- if I run the math on that slide and think about what it implies for net interest income, you have $700 billion plus of average earning assets in '27. If I assume the ratio of earning assets to total assets is roughly constant here and apply 3% NIM, you get to over a $19 billion net interest income figure for 2027, which is a CAGR of over 5% from '24. And versus 25%, where the growth is probably going to be less than that, it kind of implies almost high single-digit growth. And on the back end of that '26 and '27, and it's well above our estimate or consensus. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 16, 2025 / 1:00PM, USB.N - Q1 2025 US Bancorp Earnings Call So I'm curious what your reaction to that is? And are you -- do you think consensus is too low for net interest income? And in addition to that, what do you -- I assume you're assuming -- I think you're assuming low single-digit loan growth and the long end of the curve kind of staying where it's at. But just anything, any additional details on some of the underlying assumptions would be helpful as well.

Question: Saul Martinez - HSBC - Analyst : No, I get that. And I get that it's unclear or you don't want to give a net interest -- a specific net interest income figure for '27. But we have the NIM -- you're giving a NIM figure and you're giving an asset figure. So you can multiply one by the other and extrapolate. So -- and it does seem to be suggesting a much higher figure than where the Street is at in terms of net interest income.

Question: Vivek Juneja - JPMorgan - Analyst : A couple of questions. Firstly, Merchant Processing and Corporate Trust, what percentage of the revenues are in Europe?

Question: Vivek Juneja - JPMorgan - Analyst : Okay. Different topic. Gunjan, your thoughts on this. You've talked about the Edward Jones partnership and driving growth through that. There was an article that I saw about Edward Jones actually submitting an application to set up their own bank and wanting to grow their own deposit program. Could you talk a little bit about how that would work with your partnership?

Question: Vivek Juneja - JPMorgan - Analyst : Okay, okay. And lastly, just in the cleaned-up thing for you, John. Other income, you guided previously to $125 million to $150 million. Is that still the normal run rate given the upside you have this quarter?

Question: Matthew O'Connor - Deutsche Bank - Analyst : I want to follow up on the new credit card, the 0% for two years. And often, there's an upfront drag as you kind of ramp up those loans and then, obviously, the payback on the other side. But anything that we should be modeling for that as we think about kind of upfront next several quarters?

Question: Matthew O'Connor - Deutsche Bank - Analyst : Okay. And then a little bit of lead into my follow-up question on the net interest income guide for 2Q. I think ex day count, if you think the midpoint, it's relatively flat. And I guess, I don't know why not grow a little bit as we think about progressing throughout the year starting in Q2? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 16, 2025 / 1:00PM, USB.N - Q1 2025 US Bancorp Earnings Call