US Bancorp Q3 2024 Earnings Call Transcript

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

Question: Scott Siefers - Piper Sandler Companies - Analyst : John, I guess, wanted to start with NII. So at least relative to what I had anticipated, it looked like it came in better than you might have thought even as recently as a month or so ago at the Investor Day. I guess, just in sort of simple terms, can you walk through what, in your mind, ended up coming in better than you might have anticipated?

Question: Scott Siefers - Piper Sandler Companies - Analyst : Okay. All right. Perfect. And then if I could switch gears to fees for just a second. Just wanted to chat about the sort of the implied fourth quarter number. So even if we get to the lower end of the full year fee guide, I guess that sort of implies that fourth quarter fees would get back up near sort of $2.8 billion, $2.9 billion level. That might be more typical of one of your seasonally stronger quarters like, typically, I think of you all doing best in the second quarter. Maybe if you can just sort of walk through the main puts and takes and where you would see sort of reaccelerating in momentum into the fourth quarter, please?

Question: Scott Siefers - Piper Sandler Companies - Analyst : Perfect. Okay.

Question: John Pancari - Evercore ISI - Analyst : I know you cited the partial securities repositioning in the quarter. I wanted if you could give us a little bit more color on what you restructured in the quarter and the sizing of that and the yield? And then do you expect further actions on that front? And would further actions started to be factored into your NII expectations? Thanks.

Question: John Pancari - Evercore ISI - Analyst : Okay. All right. And then separately, on the expense side, you put up some pretty good positive operating leverage this quarter and you implied that fourth quarter, you'll see that as well. And I believe at the Investor Day, you expressed confidence in continued positive operating leverage. As you look at 2025, can you maybe help us get a sense of the magnitude of that operating leverage that you think is reasonable as you enter 2025 longer term. I believe the Street is looking at about 150 to 200 basis points operating leverage next year. Wanted to get your thoughts on that as we look at your return profile in the coming years.

Question: John Pancari - Evercore ISI - Analyst : Great. Very helpful, Andy. Thank you.

Question: Betsy Graseck - Morgan Stanley - Analyst : Just two. One follow-up on that is in the guidance for 4Q, you indicated expenses at -- until the $16.8 billion. And I know in the past, you had been

Question: Betsy Graseck - Morgan Stanley - Analyst : Got it. Okay. No, that's helpful. And then on the rate discussion earlier, you got the surprise 50, which you're able to pass through on to the [depositor] side. So as we're thinking about the next several quarters here, does NIM expand further as rates continue to come down? Or is there a catch-up on the asset side that we should be skewing to?

Question: Betsy Graseck - Morgan Stanley - Analyst : Right. And 30% and 50%, that's on total IB deposits or total deposits, which is --?

Question: Betsy Graseck - Morgan Stanley - Analyst : Yeah. Super thanks so much.

Question: Erika Najarian - UBS - Analyst : Just a few follow-up questions. First, on John's previous question.

Question: Erika Najarian - UBS - Analyst : Can you hear me better now?

Question: Erika Najarian - UBS - Analyst : Okay. Sorry about that. Just wanted to follow up on John's question. You mentioned $10 billion of notional was sold. Could you -- so that we can understand the impact for fourth quarter, could you tell us what the average yield was of what was sold and what you invested in? And just a follow-up to Betsy's line of questioning, you said that you saw a 30% beta and the terminal would be north of 50%. As we think about the fourth quarter, is it a sort of a smooth glide path to that 50%? Do you expect it to significantly accelerate from that 30% initial beta?

Question: Erika Najarian - UBS - Analyst : Got it. And my second question is for you, Andy, and this is sort of a broader question. You hosted a very comprehensive Investor Day, and I think the investor reception at least as it followed through to the stock was probably less than desired. And as I think about the feedback from investors, I'm wondering if you could sort of readdress this on this call. You seem determined and you have showed us positive operating leverage. Maybe some quick notes on '25. The comments on the Southeast expansion was also hit on as a potential negative. And the third would be you're now in a place where you're building capital loan growth hasn't yet come back. What would allow you to be a little bit more aggressive more quickly on acting on that $5 billion authority?

Question: Erika Najarian - UBS - Analyst : I guess just to follow up on that, Basel III shouldn't impact that much, right, other than everybody's had already put in the impact of AOCI actually more immediately than whatever phase in Basel III end game has. I guess I'm wondering, as a regional bank, are you -- do you think it's just -- you're just a prudent constituent in terms of not wanting to be aggressive ahead of a new set of revisions? Or are there -- are you also considering the ratings agency? Just sort of wondering what the -- and I completely understand that you're about to buy back in the first quarter. But I think that it's probably an important component of long-only investors starting to increase their position in US bank.

Question: Erika Najarian - UBS - Analyst : Thank you, Andy.

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : First a cleanup question. So are you interested in buying a bank in the Southeast? Because that got a lot of play just following up to the prior question.

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Not even a small bank? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 12:00PM, USB.N - Q3 2024 US Bancorp Earnings Call

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Okay. So my main question here goes back to the operating leverage, which is how much of this is expenses versus revenues? And on the expense side, your investments in the last three, five more years, it's all in the run rate as you said at Investor Day. And how much benefit do you get from being a scale player? Because some smaller banks say they can just buy a lot of these things off the shelf and compete with the likes of U.S. Bancorp. So that's the expense question. And then the revenue question is, Gunjan, I know you're meeting the go-to-market strategy kind of what stage of that go-to-market strategy? And are we seeing the results now? Or do we expect to see more of that results ahead?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : John, on the deposits -- on the deposit pricing, can you share with us the loan-to-deposit ratios for the industry and yourselves are not as high as in previous cycles. Do you think that can give you added flexibility in lowering the cost aside from, obviously, you talked about the institutional deposits that are essentially, I think, index priced? So they come down quickly. But in the other deposit classes, do you think you're going to have

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Very good. And then for Andy or Gunjan, on the organic growth strategy, some of your peers, the bigger banks in particular, have embarked upon a branch build-out across the country, even one super -- or two regional banks have done this as well. Can you share with us as part of your organic strategy, how do you guys view new branches into maybe newer territories, combined with your ongoing digital reach out that, of course, you have?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Very good. Thank you.

Question: Vivek Juneja - JPMorgan - Analyst : Just wanted to understand on payments and delve a little bit into that. You talked last quarter about corporate payments will be lapping this quarter because your tough comps with your trucking related fees last year, but we didn't really see the benefit of that lap in this quarter. So REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 12:00PM, USB.N - Q3 2024 US Bancorp Earnings Call anything there that has caused it to be delayed, nor have we seen really merchant payments pick up in terms of year-on-year fee growth? So any color on what's going on and why the delay? And what gives you confidence that it will actually materialize in the coming quarters?

Question: Vivek Juneja - JPMorgan - Analyst : I have another follow-up for John. John, just one of your comment earlier in response to your question, just piqued my interest. You said expenses were up because net interest income was up. Is there incentive comp tied to growing net interest income? Or is there something else that would drive expenses up when you get net interest income up? That's not really -- any color on that?

Question: Ebrahim Poonawala - BofA Securities - Analyst : I guess one question maybe first on fees, and I appreciate you're not talking about '25 right now. But just talk to us in terms of the linkage of the fee momentum accelerating from this mid-single digits into next year? And how much of that is dependent on loan growth picking up? Or how much of that can happen where even if loan growth or loan demand is fairly muted in the first half, we see better fee revenue momentum being a differentiator for USB? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 12:00PM, USB.N - Q3 2024 US Bancorp Earnings Call

Question: Ebrahim Poonawala - BofA Securities - Analyst : That's helpful. And I guess one follow-up, John. When I look at the 7 basis points NIM expansion, I think you mentioned $10 million lift from the bond book restructuring, that's probably 1 basis point. Should we expect the 7 basis point expansion as getting better as we move forward with a couple more rate cuts this year, the back book repricing? Like how should we think about the cadence of the NIM from your ex any kind of bond restructuring actions? And is it conceivable that we could be at a 3% NIM in the back half of next year?

Question: Ebrahim Poonawala - BofA Securities - Analyst : And one last one, I guess, maybe Andy, I think you mentioned -- and you mentioned this on the Investor Day on the '27 crossing of the -- becoming a Cat 2 bank. Is that in any which way a constraint as you think about pursuing loan growth? Like do you -- is there any reason to believe USB is REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 12:00PM, USB.N - Q3 2024 US Bancorp Earnings Call disadvantaged on pursuing loan growth next year because you're kind of -- you have an eye on the $700 billion asset number? Just address that if you don't mind.

Question: Ebrahim Poonawala - BofA Securities - Analyst : All very clear. Thank you so much.

Question: Matt O'Connor - Deutsche Bank - Analyst : I think you guys announced that you're looking for a new payments head and were looking externally. And I was just wondering if you could update us on if there's any updates on that? And then I guess what type of person are you looking for? And is it to kind of continue the strategy that you've had or potentially reevaluate from areas? I think there's the general view that maybe you could do more repayments given what the revenue pull up there is overall and that you've kind of under punched a little bit. So I don't know if you would agree with that, but what's the thought in terms of what you're looking for the new leadership?

Question: Matt O'Connor - Deutsche Bank - Analyst : And then I guess just from a strategic point of view, and this is really trying to lead you one way or the other, but like are you set on kind of the long-term strategic path that you have in payments? Or are you open to potentially, fairly decent size changes one way or the other? Again, not really a leading question, but it seems like it might be an opportunity to take a fresh look and look for some opportunities that maybe you haven't before.

Question: Matt O'Connor - Deutsche Bank - Analyst : That was helpful. Thank you.

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Just a follow-up to my earlier question related to the benefits of scale and specifically AI. Do you look to be an AI leader or a close follower? Or do you think you can get those tools off the shelf and you just wait and see in the context of the benefits of scale, again, after your years of investing?

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Okay. And just one cleanup from Investor Day as it relates to the digital strategy, I mean going through State Farm. It's just -- just one more time. You had spent the whole day with management in New York City and more information always better. But the idea of going out of market where you don't have too much branches and going through State Farm with the digital strategy, it's just -- are there other examples of banks or nonbanks that have succeeded with that sort of approach? It's just -- we've heard a lot of those stories over the last 20 years, and they haven't played out, so eventually you have to build more branches than you expected or something. So again, that is a little bit of cleanup from Investor Day.

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Making the strategy --

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