Release Date: July 17, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- U.S. Bancorp (USB, Financial) reported diluted earnings per share of $0.97, excluding a one-time FDIC special assessment charge, resulting in $0.98 per share.
- Net interest income increased, supported by improved spread income and growth in fee-based businesses.
- Average total deposits increased by 2.2%, with continued growth in consumer deposits despite industry headwinds.
- The CET1 capital ratio increased by 30 basis points from the prior quarter and 120 basis points from last year, ending the quarter at 10.3%.
- Non-interest expense, as adjusted, decreased both on a linked-quarter and year-over-year basis, benefiting from cost synergies with Union Bank and prudent expense management.
Negative Points
- Non-performing assets increased by approximately 3.7% linked quarter, reflecting a slower pace of change.
- The ratio of non-performing assets to loans and other real estate increased to 49 basis points from 48 basis points in the previous quarter.
- Net charge-off ratio increased by 5 basis points from the first quarter, with expectations to approach 60 basis points in the second half of the year.
- Average non-interest-bearing deposits decreased by 1.6% on a linked-quarter basis, indicating a continued emphasis on relationship-based deposit generation.
- Elevated deposit levels and higher on-balance sheet liquidity drove a 3-basis point decline in net interest margin to 2.67%.
Q & A Highlights
Q: John, can you discuss the puts and takes within the NII trajectory from here? What factors would cause you to come in either toward the high end or the low end of the full-year range?
A: Sure, Scott. We're pleased with our net interest income growth and the actions we've taken to position ourselves for future deposit rotation and rates paid stabilization. The higher and lower end of the range will depend on deposit rotation and beta, rate paid, earning asset repricing, and loan growth. We expect stable third quarter net interest income and growth thereafter, with modest deposit rotation and rate paid adjustments based on market conditions.
Q: What are you seeing in terms of commercial loan demand? Your average commercial loan growth this quarter looked more favorable than peers.
A: We did see pockets of loan growth in the corporate loan book, but the overall loan growth environment remains tepid with cautious clients. The growth was driven by higher utilization rates in certain areas, but we don't see a significant change in trend.
Q: How are you positioned for a rate cut scenario, and what would 4 to 6 cuts imply for your balance sheet?
A: We are well positioned given our deposit mix, with approximately 50% retail-based and 50% institutional/corporate balances. In a rate cut environment, institutional corporate balances will adjust quickly, while retail balances will have a slower arc. This positioning allows us to benefit from a steepening curve with lower short-term rates and higher long-term rates.
Q: Where do you expect fee revenue growth to come from in the back half of the year?
A: We expect momentum in payments, trust and investment management fees, and capital markets. Payments will benefit from strong core growth in merchant processing, corporate payments, and credit card spend. Trust and investment management fees and capital markets will continue to see strong market backdrops and deepening client relationships.
Q: Can you explain the utilization rate increase in your C&I loans? Is it industry-specific or geography-specific?
A: The utilization rate increase was modest and more of a mix shift rather than a change in trend. It was driven by higher utilization levels in certain loans that were brought on, rather than a broader trend across industries or geographies.
Q: What is your outlook for credit quality in the back half of the year?
A: Our guidance remains unchanged. We expect net charge-offs to approach 60 basis points, with stabilization in delinquencies and non-performing assets. We feel appropriately reserved for potential adverse economic conditions.
Q: How are you managing growth relative to the changing dynamics of the SCB and capital accretion?
A: We are focused on investing in the business, dividends, and buybacks. Our CET1 ratio is 10.3%, and we expect strong capital accretion each quarter. We will update our capital distribution and targets at our Investor Day on September 12, considering the final Basel III end game rules.
Q: Can you provide more details on the payments business and its growth trajectory?
A: We expect high single-digit growth in merchant and corporate payments, and mid-single-digit growth in credit and debit cards. Merchant processing will benefit from tech-led initiatives and non-travel categories, while corporate payments will see strong growth as we lap previous challenges in freight and fleet.
Q: What factors are holding back NII growth in the third quarter despite a strong second quarter result?
A: The primary factors are deposit behavior, rate paid competitiveness, and the potential for Fed rate cuts. We expect stable third quarter NII due to these factors, with growth resuming thereafter.
Q: Can you explain the recent management changes and their impact on the company's strategy?
A: The changes are part of our natural evolution. Gunjan's appointment as President aims to unify our businesses with a customer-centric approach, leveraging our diverse set of businesses for growth. We will provide more details at our Investor Day.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
