U.S. Bancorp(US:USB)2024-04-17 15:51Financial Data and Key Metrics - Q1 2024 earnings per share (EPS) was $0 78, including $0 12 per share of notable items Excluding notables, EPS was $0 90 [6] - CET1 ratio ended the quarter at 10 0%, up 10 basis points from year-end, and return on tangible common equity (ROTCE) was 17 4% on an adjusted basis [6] - Net interest income (NII) on a taxable equivalent basis was approximately $4 billion, down 3 1% linked-quarter, and net interest margin (NIM) declined 8 basis points to 2 70% [13] - Non-interest income increased 7 7% year-over-year, driven by higher payments revenue, capital markets activity, and mortgage banking fees [14] - Non-interest expense for the quarter totaled $4 5 billion, including $265 million of notable items Adjusted non-interest expense decreased 0 2% linked-quarter and 2 7% year-over-year [14] - Non-performing assets increased 20% linked-quarter, primarily due to stress in the commercial real estate office portfolio and one idiosyncratic commercial loan [15] - Net charge-off ratio was 0 53%, up 4 basis points from Q4 2023 and higher compared to Q1 2023 [15] Business Line Performance - Fee income represents about 40% of total net revenue, positioning the company well in a lower interest rate environment [9] - Payments ecosystem showed strong progress, with small business relationships growing 15%-20% and related revenue growing 25%-30% over the past few years [9] - Loan growth was impacted by slow industry demand, with total average loans down 0 5% linked-quarter to $371 billion [11] - Consumer deposit growth remained strong despite industry-wide pressure, with total average deposits stable at $503 billion [11] Market Performance - Deposit mix and pricing pressure were driven by a higher-for-longer interest rate environment, impacting NII expectations for the full year [8] - Corporate and mid-market clients shifted from low-cost deposits to higher-cost deposits, slowing the pace of deposit mix shift [22] - Seasonal deposit inflows at the end of Q1 were higher than usual, with $15 billion to $20 billion in temporary deposits, primarily due to holiday timing and tax season [57] Strategy and Industry Competition - The company is focusing on operational efficiencies and cost management to mitigate the impact of lower-than-expected NII on profitability [8][23] - Investments in digital capabilities, technology modernization, and the payments ecosystem are driving fee growth and client penetration [18] - The company is prioritizing capital-efficient growth and optimizing its funding mix, limiting reliance on short-term borrowings [12] Management Commentary on Operating Environment and Outlook - Management expects NII to stabilize in Q2 and grow in the second half of 2024, driven by loan repricing, deposit stabilization, and securities portfolio churn [51][62] - Full-year 2024 NII guidance was revised to $16 1 billion to $16 4 billion, reflecting changes in client deposit behavior and competitive dynamics [16] - Non-interest income is expected to grow at a mid-single-digit rate for the full year, supported by strong capital markets activity and payments revenue [16] - Credit quality metrics are developing in line with expectations, with non-performing assets expected to moderate after Q2 [32] Other Important Information - The company completed the integration of Union Bank, achieving $900 million in cost synergies [23] - The company is pausing share repurchases to build capital levels, focusing on dividends and investments in the business [72] - The company is actively managing its asset sensitivity to remain neutral in a volatile rate environment [43][65] Q&A Session Summary Question: NII Guidance and Deposit Behavior [21] - The company revised its NII guidance due to slower-than-expected stabilization in deposit mix shifts, particularly in corporate and mid-market segments [22] - Management expects NII to stabilize in Q2 and grow in the second half of 2024, driven by loan repricing and deposit stabilization [22][62] Question: Securities Yield and Deposit Mix [26] - Securities yield was down 1 basis point due to temporary hedging actions, with $3 billion in securities rolling off each quarter at lower yields [27] - Non-interest-bearing deposits (NIB) are expected to continue trending down, potentially reaching the mid-70s as a percentage of total deposits [27][85] Question: Fee Revenue Outlook [28] - Fee revenue growth is expected to be driven by strong capital markets activity, mortgage banking, and payments business, with mid-single-digit growth anticipated for the full year [29] Question: Credit Trends and Charge-offs [31] - Non-performing assets are expected to increase in Q2, primarily due to commercial real estate office stress, but charge-offs are expected to moderate later in the year [32][34] Question: Expense Management [36] - The company is focusing on operational efficiencies, including procurement, third-party spend, and workplace management, to offset NII pressure [23][36] Question: Corporate Deposit Behavior [37] - Corporate clients are shifting from NIB to interest-bearing deposits, with the pace of rotation slowing but expected to continue [38] Question: Asset Sensitivity and Rate Environment [42] - The company is managing its asset sensitivity to remain neutral, with actions taken to hedge against rate volatility [43][65] Question: Payments Business Performance [45] - Payments revenue growth was 4% year-over-year, with strong momentum in card services and merchant payments, offset by temporary declines in travel-related revenue [46] Question: CET1 Ratio and Capital Return [71] - The CET1 ratio increased to 10 0%, with the company pausing share repurchases to build capital levels ahead of Basel III endgame implementation [72] Question: Deposit Surge and NIB Trends [56][82] - The $15 billion to $20 billion deposit surge at the end of Q1 was primarily seasonal, with $10 billion above typical levels, and is expected to normalize in Q2 [57][88] Question: NII Drivers and Medium-Term Outlook [77] - The company expects NII growth in the second half of 2024, driven by loan repricing, deposit stabilization, and securities portfolio churn [62][78] Question: Deposit Beta and NIB Migration [82] - Deposit beta has slowed, with non-interest-bearing deposits expected to decline further, potentially reaching the mid-70s as a percentage of total deposits [83][85] Question: NII Guidance Conservatism [101] - The NII guidance range reflects uncertainty in client behavior and market dynamics, with no significant conservatism or aggressiveness assumed [102]