06/26/2025
$USB Q4 2023 AI-Generated Earnings Call Transcript Summary
The operator welcomes listeners to the U.S. Bancorp Fourth Quarter 2023 Earnings Conference Call and introduces the senior executives. The call will be recorded and available for replay. The executives will make prepared remarks and then take questions. The CEO discusses the company's earnings per share and net revenue for the fourth quarter and full year, including notable items.
The company demonstrated strength in its fee businesses, offsetting pressure on net interest income. Total loans and average deposits declined, but credit quality improved and the balance sheet was strengthened. The common equity tier 1 capital ratio increased and the company's dividend was raised. Adjusted earnings per share were $0.99, with notable items totaling $1.1 billion.
The third quarter saw significant costs such as merger and integration costs, a charitable contribution, and a balance sheet optimization charge. The company also restructured their investment securities portfolio to improve net interest income and strengthen their capital and liquidity. Loan demand and deposit competition remained challenging, resulting in a decline in both assets and deposits. The company also rebalanced their securities portfolio, leading to an increase in the average yield. Net interest income declined slightly due to a decrease in the net interest margin.
The net interest margin declined by 3 basis points due to market dynamics, but net interest income is expected to be consistent with the previous quarter. Noninterest income increased by 12.1% due to new account growth and deeper relationships. Noninterest expenses decreased by 1.0% due to lower compensation-related expenses, but there were strategic investments in marketing and business development. Credit quality metrics are returning to pre-pandemic levels, with a non-performing assets ratio of 0.40%. The common equity tier 1 ratio increased to 9.9% as of December 31.
The paragraph discusses the positive impact of earnings accretion and balance sheet optimization on the company's financial performance in 2023. The successful conversion of Union Bank and realization of cost synergies are highlighted as key achievements. The company is confident in its strategy for future growth and is seeing positive momentum in fee-based businesses. The CEO thanks employees for their dedication and opens the call for Q&A.
During the Q&A portion of the earnings call, Scott Siefers from Piper Sandler asked John Stern for more details on the net interest income (NII) outlook for the full year. Stern explained that for the first quarter, NII is expected to be between $4.0 billion and $4.1 billion. For the full year, it is expected to be consistent with the annualized fourth quarter 2023 level of $4.14 billion and may increase slightly. Stern also mentioned that DDA and low cost deposit churn into higher cost deposits is expected to decrease, loan spreads are improving, and asset churn is ongoing.
The speaker discusses the strengthening of loan pipelines and predicts improved loan demand due to potential interest rate cuts by the Fed. However, they also acknowledge that deposit pricing will be competitive due to QT. They mention that first quarter NII projection will be slightly lower than the fourth quarter, but overall, NII growth is expected in the second half of the year. The speaker also mentions the current CET1 ratio and plans for building capital in the future. The question asked is about the balance between building and potentially returning capital.
Ebrahim Poonawala asks John Stern about the assumptions for NII and the sensitivity of the outlook to potential rate cuts. Stern responds that they have projected four interest rate cuts and that the outlook is not significantly affected by the number of cuts. He also mentions that they expect high-single digit revenue growth in merchant processing and corporate payments, as well as margin expansion in the card side with the help of MUB.
The company expects mid-single digit growth from holiday sales and high-single digit growth in the commercial product side. They have decided to exit their ATM cash servicing business which will impact them by $30-35 million per quarter. The company expects growth in their trust investment management fee, wealth management fees, and institutional service businesses. The CEO also mentioned that demand for loans is weakening, but they still expect growth in the commercial side. They did not provide specific guidance on loan growth or deposit growth, but they expect NIB to continue to increase.
The company's loan growth is expected to come from utilization and credit cards, while deposits may be lower in the first quarter due to seasonal factors and the impact of the Fed's liquidity drainage. The rotation out of non-interest-bearing products is expected to slow down as the year progresses. As for operating leverage, the company is aiming for stability in expenses while growing NII and fees, and a specific range for operating leverage is not provided.
The speaker, Andy Cecere, discusses the benefits of the Union deal, which will lead to cost efficiencies of $900 million. These benefits are a result of technology investments and digital and operational improvements. The company will continue to invest in these areas while also managing expenses closely. The speaker expects positive operating leverage in the second half of the year and has levers to pull to achieve this goal. The next question is about credit quality, specifically non-performing assets in commercial. Terry Dolan responds and discusses the credit quality in the fourth quarter.
The bank's portfolio is generally stable, with only a few loans in non-performing status. These loans are well-collateralized and not expected to result in significant charge-offs. The net charge-off rate is expected to normalize by 2024. The bank expects to see high-single digit growth in fee revenues in 2024, with a focus on payments, commercial products, trust, and service charges. Mortgage revenues are expected to remain flat, and there were some one-time fees in the fourth quarter related to tax credits and finance syndication.
The speaker discusses the bank's expected mid-single fee growth for the year and mentions that their balance sheet optimization efforts are now complete. They also mention their current CET1 ratio of 9.9% and their previous target of 8.5% to 9%, and state that they will continue to accrete earnings and monitor potential changes to capital rules before determining a new capital target.
Mike Mayo asks about U.S. Bancorp's expectations for operating leverage and efficiency ratio in 2024. John Stern responds that they are not providing specific guidance for operating leverage, but expect to see improvement in efficiency ratio over time. He acknowledges that the current efficiency ratio is above historical levels, but they are working towards reaching their aspirational target.
In the paragraph, Andy Cecere and Mike Mayo discuss the target for positive operating leverage in the second half of 2024 and the potential for efficiency ratios to decrease into the 50%s. They also mention the growth potential for the payments and small business banking business, which is a key strategic priority for U.S. Bancorp.
The speaker discusses the current pressure on net interest income and the company's plan to achieve positive operating leverage in the second half of 2024. They also clarify that the flat expense guidance for 2024 includes the adjusted level from 2023 and any benefits from exiting the ATM cash business. The company is constantly evaluating different areas of their business, but regulatory changes will not significantly impact their decision to enter or exit certain businesses.
The executives of the company are discussing their plans for managing costs and investments in order to achieve positive operating leverage and navigate regulatory actions. They also mention that the competitive environment may impact their growth strategy, as seen in their decision to not emphasize auto lending due to low returns. In regards to credit card growth, they believe there is still room for healthy growth, but they are also making adjustments to underwriting in light of economic uncertainties. Overall, they are confident in the performance of their credit card business, which focuses on prime and super prime customers.
Gerard Cassidy from RBC Capital Markets asks about competition in the commercial loan market and whether private credit firms like Apollo and Blackstone are customers of U.S. Bancorp. John Stern responds that they do not compete with private credit firms, but rather with peer banks in the commercial space, and that they have good relationships with these firms in other areas such as investment services and capital markets activities.
The Corporate Trust and Global Fund Services businesses at U.S. Bancorp support large private credit funds and are continuing to serve their clients. Depending on the outcome of capital rules, there may be more or less movement into the private capital markets. U.S. Bancorp has a history of maintaining a high ROTCE and being disciplined in giving back excess capital to shareholders through buybacks and dividends. The company expects to continue leading in terms of return and generating and returning capital.
The speaker discusses the bank's plans to return excess capital to shareholders once they have determined their target capital levels. They also mention that they have started to moderate deposit pricing and have seen a decline in higher-cost deposits, particularly in non-relationship-based accounts. This is due to the ebb and flow of managing deposits based on loan growth and client relationships.
During a conference call, Andy Cecere, John Stern, and Ken Usdin discussed the growth of core consumer deposits at the bank. They also talked about the integration of UB and how it has reached a steady state. The team is now focused on moving forward with their payment strategy and leveraging their relationships with both retail and commercial customers. They acknowledge the challenges banks have faced in this area and are focused on competing with software companies and fintechs.
Andy Cecere, CEO of U.S. Bancorp, discusses the company's high-single digit growth in merchant processing and their initiatives to integrate banking and payments. He believes that their advantage lies in their ability to offer a comprehensive package of banking services, deposit lending, treasury management, and payments. He also mentions the migration of noninterest-bearing deposits and expects it to run its course soon. The current cumulative beta for deposit costs is around 49%, but there is still room for it to increase.
The speaker discusses the NIB and how it will be supported by account growth and other factors. They also mention that the beta may increase depending on when the Fed cuts, but it is hard to predict by how much. The call is then concluded.
This summary was generated with AI and may contain some inaccuracies.