US Bancorp Q2 2024 Earnings Call Transcript

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

Question: Scott Siefers - Piper Sandler & Co., Research Division - Analyst : Morning, everyone. Thanks for taking my question.

Question: Scott Siefers - Piper Sandler & Co., Research Division - Analyst : Hey. John, I was hoping you could please sort of discuss the puts and takes within the NII trajectory from here. It looks like we would hopefully get a bump in the fourth quarter after a stable third quarter as we sort of assume the midpoint of the full year range. I guess maybe just a thought or two on factors that would cause you to come in either toward the high end or the low end of the full-year range, please?

Question: Scott Siefers - Piper Sandler & Co., Research Division - Analyst : Okay. Perfect. And then maybe if I could ask you to delve a little more deeply into one portion of that. Just you noted modest loan growth here going forward. What are you all seeing in terms of commercial loan demand? I guess I sort of asked within the backdrop of the modest outlook, but your average commercial loan growth this quarter looked a little more favorable than what we've seen from peers. So just curious as to sort of the insight base on that.

Question: Scott Siefers - Piper Sandler & Co., Research Division - Analyst : Perfect. Okay, good. Thank you very much.

Question: Ebrahim Poonawala - BofA Securities, Research Division - Analyst : Good morning. I guess maybe, John, just following up on the NII. By my math, like your fourth quarter could be as high as $4.3 billion. So I appreciate the puts and takes you provided earlier. As we think about the NII trajectory from your -- in a rate cut scenario, just remind us in terms of the positioning of the balance sheet what 4 to 6 to 8 cuts would imply and flex on the deposit side given sort of your corporate institutional makeup?

Question: Ebrahim Poonawala - BofA Securities, Research Division - Analyst : Got it. And I guess just separately, when you think about the outlook for the back half on fee revenue growth, the mid-single digits, where do you think fee revenue growth is going to be driven? What categories are going to drive that growth? Where do you expect some more moderation relative to what we've seen in the first half of the year? Thank you.

Question: Ebrahim Poonawala - BofA Securities, Research Division - Analyst : Got it. Thank you.

Question: Betsy Graseck - Morgan Stanley, Research Division - Analyst : Hi. Good morning. I know we already talked a little bit about the loan growth piece, but going through the slide deck, you highlighted that there's utilization rate increase. So I guess I'm just wondering -- this -- and it's important, right, because at least you're the first institution I've seen this quarter that's how the utilization increase. Do you think that's a function of the types of industries where you're seeing utilization increase or is that more your new geographies where perhaps more focused attention on new clients is driving that. I would just like [ask] that.

Question: Betsy Graseck - Morgan Stanley, Research Division - Analyst : Okay. Thanks. And then just on the credit outlook here. I got a sense that maybe there was a little bit more credit coming through towards the back half of the year. Is that right? Or did I get that wrong?

Question: Betsy Graseck - Morgan Stanley, Research Division - Analyst : Okay. And are you already reserved for these NCOs? Just wondering if there's a reserve release behind that as well.

Question: Betsy Graseck - Morgan Stanley, Research Division - Analyst : Okay. That's super. Thanks so much.

Question: Erika Najarian - UBS - Analyst : Hi. Good morning. My first question is for you, Andy. I think what was really striking about this quarter is that the balance sheet growth was impressive on both sides of the sheet and really outperforming peers. At the same time, I think we were all surprised by the stress test results, especially given we thought that the PPNR dynamics with MUFG fully baked in would be a little bit cleaner. And so if I'm calculating this right, your adjusted CET1 would be 8% this quarter versus 7.6%. And I'm wondering, as we think about balancing those dynamics, how are you thinking about managing growth relative to this sort of changing unpredictable element of the SCB plus. Obviously, you have done a great job at managing risk-weighted assets last year. And obviously, there's a burn-off rate to the AOCI. At the same time, rates are staying a little bit higher for longer, and there's a huge debate on what's going to happen to the belly of the curve even if everyone subscribes to Fed cuts. So wondering how we should think about balance sheet management from here, especially in light of the good growth that you experienced this quarter? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, USB.N - Q2 2024 US Bancorp Earnings Call

Question: Erika Najarian - UBS - Analyst : So Andrew, just as my follow-up is based on what you've just told us, it doesn't seem as if, as we think about the rest of 2024 and the CCAR year, '24 October 1, September 24, 30 of next year, it doesn't sound like we should expect this similar active balance sheet management in terms of growth as we saw in '23.

Question: Erika Najarian - UBS - Analyst : Okay, perfect. Thank you.

Question: Ken Usdin - Jefferies LLC, Research Division - Analyst : Hey, guys. Good morning. I just wanted to ask you to dig in a little bit on the payments business. Obviously, the sequential math worked as normal, but the year-over-year growth looked like it slowed from 4% in the first quarter to 3% in the second. I know we have some easier comps coming up in the second half. But can you just kind of help us understand just the absolute trajectory within the three business areas? And what -- how do you expect that kind of growth rate to go aside from just comps? Thanks.

Question: Ken Usdin - Jefferies LLC, Research Division - Analyst : Great. Thank you. One more follow-up on NII. You had a really good second quarter result, but the outlook for the third quarter is stable, and that's with an extra day. And I'm just wondering, can you just walk us through like what's the hold back in terms of NI not just growing from here? Was there either some things that helped in the second that don't recur. It looked like your securities yields were a lot higher as one example, but I'm not sure if that would have been it. So like why don't we just see the growth straight up from that [40 to 50] zone we just saw in the second quarter?

Question: Ken Usdin - Jefferies LLC, Research Division - Analyst : Okay, got it. Great. Thank you.

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : Hi. I just think my math is wrong here, if you can help me out with that. Again, even assuming the four items you just mentioned for NII not going higher in the third quarter. If you could just highlight your fixed asset reprice a little bit more. Here's my math, and it's clearly wrong. Because one, you said securities should reprice up 6 to 8 basis points per quarter, if I heard that correctly. So if you take 7 basis points on $168 billion of securities, that would be like $100 million extra next quarter. You take your mortgage book of $117 billion, and you take 7 basis points on that. I wasn't sure if you've met some basis points on that. But then you get up to almost $200 million more for NII on a base of $4 billion, that would be 5% growth next quarter, 5% growth the quarter after that, et cetera, et cetera. And that's not your guidance. So first, if you could just fix my math as far as the fixed asset repricing on the securities and mortgages, what I'm doing wrong. And then confirm or not, those four items that you mentioned to offset all of that. Thank you.

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : And just for clarification, you did intend -- the mortgage books should reprice upward by 7 basis points a quarter also, same as the security?

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : And then one more follow-up and I'll requeue. Your noninterest-bearing deposits. You mentioned that as one of the risk factors you said it's slowing. Can you remind us what it did between the second and first quarter and what's your all-time low for that ratio?

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : Okay. Thank you.

Question: Gerard Cassidy - RBC Capital Markets, Research Division - Analyst : Hi, Andy. Hi, John.

Question: Gerard Cassidy - RBC Capital Markets, Research Division - Analyst : John, you talked about the deposits and how you will approach them as the Fed starts to cut rates, I thought it was interesting in your supplement on the average balance sheet that one of your largest -- your largest deposit category, if I'm seeing it correctly, money market savings. The yield without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, USB.N - Q2 2024 US Bancorp Earnings Call was down from the prior quarter at 3.85% versus 3.92% in the March quarter. Can you share with us what kind of strategies you used or what took that down when many of the other rates like time deposits obviously went up in the quarter?

Question: Gerard Cassidy - RBC Capital Markets, Research Division - Analyst : I got it. I don't want to put words in your mouth, but when the Fed starts to cut rates from this line item at least, you guys could potentially benefit from lower rates and the balances continue to grow, which obviously would be beneficial. Andy, just a more bigger macro question. John touched it a little bit a moment ago about the utilization rate on the C&I loans. Can you share with us when you guys go out and talk to clients, what do they think -- commercial clients that is, what are they thinking about CapEx spending, which would enable them to draw down lines. And then second, are you seeing any increased competition from alternative lenders, whether it's private credit or other that may be affecting the C&I loan growth?

Question: Gerard Cassidy - RBC Capital Markets, Research Division - Analyst : And just as a quick follow-up on the competition. Are you guys seeing more aggressive underwriting for banks that want to grow that balance sheet? How are you seeing that from the underwriting standpoint?

Question: Gerard Cassidy - RBC Capital Markets, Research Division - Analyst : Okay. Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, USB.N - Q2 2024 US Bancorp Earnings Call

Question: Matt O'Connor - Deutsche Bank AG - Analyst : Good morning. I wanted to circle back on payments. A lot of good details kind of by segment, but I was wondering if you could update kind of your thoughts on the growth you expect for full year this year. And then just still -- it might be a little bit lower than what you were thinking before? And then just the medium-term outlook, if that's still the same.

Question: Matt O'Connor - Deutsche Bank AG - Analyst : Okay. And then what's the prepaid card risk mitigation that you referred to? Maybe I missed if you've mentioned that in the past, but can you just remind us what that is? And how long it might [drive for] Thanks.

Question: Matt O'Connor - Deutsche Bank AG - Analyst : And then how much of a drag is it? And how long will it continue? That's my last one. Thanks.

Question: Matt O'Connor - Deutsche Bank AG - Analyst : Okay.

Question: Vivek Juneja - JPMorgan Chase & Co, Research Division - Analyst : Hi. Thanks. A couple of just follow-ups. One on payments. So I try to understand, I know you said merchant you expect to get to high single digit, what's happening with the -- when I look at the volumes, merchant was only up 1.7% year on year, and that's the slowest volume growth we've seen in six quarters. So why has despite all the tech-led initiatives, which are great and the other areas that you're trying to extract, why is volume growth slowed so much? And then what would cause that to turn around?

Question: Vivek Juneja - JPMorgan Chase & Co, Research Division - Analyst : Okay. Shifting gears. You're talking about charge-offs going to 60 basis points in the second half. Delinquencies are down, so that should help. But your C&I losses are running high. Despite the losses, NPLs are running -- still up. Where -- first, a two-part question there. Where in C&I are you seeing these losses, which industry sectors and our overall charge-off rate of 60 basis points, which categories do you expect would tick that up from where you are currently, given the outlook for delinquencies coming down?

Question: Vivek Juneja - JPMorgan Chase & Co, Research Division - Analyst : Okay. So you had one large loan written off, but then what refilled that bucket, John, given that the NPL has actually ticked up, not down in C&I? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, USB.N - Q2 2024 US Bancorp Earnings Call

Question: Vivek Juneja - JPMorgan Chase & Co, Research Division - Analyst : Okay. Thank you.

Question: John Pancari - Evercore ISI Institutional Equities, Research Division - Analyst : Andy, I appreciate the color you gave on capital and as you look at it, I know it sounds like you're still on the sidelines on buybacks as you walk through your priorities and the expectation for capital here. But I guess, what changes that? Is it continued pull to par on the AOCI side? Is it Basil III clarity? Is it clarity on rates. What gets you to the point where you get confidence in buyback outlook or how you're thinking about your internal CET1 target. If you could just walk us through the thought process there.

Question: John Pancari - Evercore ISI Institutional Equities, Research Division - Analyst : Okay. Thanks. I appreciate that. And then separately, on operating leverage. I know you reiterated your confidence in achieving positive operating leverage in the second half of this year. I mean can you help us -- I know you're not giving formal 2025 expectations, but I'm trying to think about without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, USB.N - Q2 2024 US Bancorp Earnings Call what that positive operating leverage you're generating in the back half of that expectation, what that could mean as we look into the quarters through 2025. I mean it looks like [the intent] is ballparking around 300 basis points positive operating leverage when you look at full year '25 expectations. You were above 200 basis points in 2022, but in the years prior, you were well below that. What's a good way to think about it, medium-term in terms of where USB should be operating from that standpoint.

Question: John Pancari - Evercore ISI Institutional Equities, Research Division - Analyst : Okay, great. Thanks.

Question: Chris Kotowski - Oppenheimer & Co. - Analyst : Yes, good morning. Hi. It's a small item, but a curiosity to me. I mean I noticed that your automobile loan portfolio is down by more than 30% year over year. And I'm just curious, how did that category suddenly become like no-fly zone because you think it's short duration assets. Do you think it would be attractive given the --

Question: Chris Kotowski - Oppenheimer & Co. - Analyst : Okay. All right. Thank you.

Question: Saul Martinez - HSBC - Analyst : Hi. Good morning, guys. Just a follow-up on the cards growth, 1.4% year on year, credit of 4.3%. I guess, John, is that entirely due to the exiting or the reducing of exposure to prepaid? Or are you seeing any weakness in debit as well. That would be somewhat unusual, typically debit in an environment where there is an economic slowdown tends to outperform. So just any additional color there? And just wanted to reaffirm that, that -- this is sort of a transitory thing, and you should lap this and I suspect in the fourth quarter, is that -- did I get that right?

Question: Saul Martinez - HSBC - Analyst : Okay. Got it. And then just a follow-up on deposit dynamics. You've talked a few times about a slowing in the rotation and -- but if I look at period end non-interest-bearing, it did fall close to 5% sequentially, much different -- much worse than -- or much larger sequential decline than you look -- you see on average. Just anything there that you want to call out? What drove that? Is this -- and is it something that's somewhat transitory or not?

Question: Saul Martinez - HSBC - Analyst : Got it. All right. Thanks very much.

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : Hi. During the last quarter, there's been a few management changes, people leaving, people getting repositioned. And I think as we get ready for the September 12 Investor Day, we might look at presenters and say, wow, these are a lot different than the presenters at your last Investor Day. So I'm just trying to figure out what the tea leaves are saying and maybe you can just tell us directly, Andy. And in terms of what is your time horizon for remaining CEO? And I only ask that given some of these recent changes. So -- and who are the contenders to be the next CEO of US Bancorp. And would you consider looking outside US Bancorp for your successor? Just a little more color on all these moves that have taken place. Thanks.

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : Okay. And the departures.? Anything related to that? Is that --

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : Okay. And so the theme, not to front run your conference too much is, it's one USB. So you've done more one USB with Wealth and Commercial, and now you're looking to be one USB, deliver the whole firm to the client, that sort of simple statement that's easy to say, tough to execute.

Question: Mike Mayo - Wells Fargo Securities, LLC, Research Division - Analyst : Okay. All right. Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, USB.N - Q2 2024 US Bancorp Earnings Call

Question: Ken Usdin - Jefferies LLC, Research Division - Analyst : Hey, thanks, guys. I just had a follow-up on the securities book. Just can you help us understand the meaningful increase that happened this quarter in the yields and then also, you mentioned 50% of the bond book is floating. Is that the total bond book? And then can you help us understand how much of that book is swapped and what you do with that going forward given the rate outlook. Thanks.

Question: Ken Usdin - Jefferies LLC, Research Division - Analyst : Okay. So just -- so are you saying that that's -- it gets you to around half of the total book AFS and HTM?

Question: Ken Usdin - Jefferies LLC, Research Division - Analyst : Okay. Cool. And sorry, just one last one. Under $16.8 billion for cost after the second quarter result. Can you just remind us what that means for the trajectory from here? And thanks again for the follow-ups. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 12:00PM, USB.N - Q2 2024 US Bancorp Earnings Call