US BANCORP \DE\ Q3 FY2024 earnings call

• Diluted earnings per share were $1.03, total net revenue $6.9B. Strong net interest income growth, fee business momentum, and expense discipline supported modest positive operating leverage.
• Revenue growth linked-quarter driven by spread income, favorable loan mix, fixed asset repricing, liability management, and investment securities actions. Non-performing assets stable; common equity Tier 1 capital ratio 10.5%, tangible book value per share $24.71.
• Return on average assets 1.03%, efficiency ratio 60.2%, net interest margin 2.74%.
• Double-digit year-over-year growth in commercial and investment products revenue, and growth in other fee businesses. Balance sheet: Average deposits down 1.0% to $509B, average loans $374B (modest decrease). Investment portfolio restructured, ending balance $167B, average yield 3.20%. Credit quality stable, net charge-off ratio 0.60%. Earnings: $1.03 diluted EPS, $119M net losses on-sales and securities rebalancing offset by tax favorability. Non-interest income $2.7B, core business growing; non-interest expense $4.2B, flat linked-quarter, 1.0% lower year-over-year.

In the third quarter, U.S. Bancorp reported diluted earnings per share of $1.03 and total net revenue of $6.9 billion. Net interest margin expanded 7 basis points to 2.74%. Revenue growth on a linked-quarter basis was driven by improved spread income from favorable loan mix, fixed asset repricing, liability management, and investment securities portfolio actions. Fee businesses showed good momentum with double-digit year-over-year growth in commercial and investment products revenue, and growth in trust, payment services, mortgage banking, and treasury management fee revenues. Average deposits decreased 1.0% to $509 billion linked-quarter, while average loans were $374 billion, a modest decrease. The investment portfolio was restructured, ending balance at $167 billion with an average yield of 3.20% for the quarter. Credit quality metrics were stable, with net charge-off ratio at 0.60%.

• Fourth quarter net interest income expected to be stable to $4.17B. Full-year 2024 net interest income expected at higher-end of $16.1B to $16.4B range. Full-year non-interest income expected mid-single-digit growth, lower end of range. Full-year non-interest expense expected $16.8B. Expect expanding positive operating leverage in Q4 2024 and into 2025.

Factors that could materially change forward-looking assumptions, including macroeconomic conditions, regulatory changes, interest rate fluctuations.

Q: Scott Siefers from Piper Sandler asked about NII coming in better than anticipated.

A: John Stern responded that factors included portfolio remixing, credit card growth (8% year-over-year loan growth), fixed asset repricing, and Fed rate cuts aiding deposit pricing.

Q: John Pancari from Evercore ISI asked about securities repositioning and NIM outlook.

A: John Stern said $10B notional was transacted, impact to quarter ~$10M, no further contemplated actions; NIM expected to be affected by rate cuts and deposit base conducive to cuts.

Q: Betsy Graseck from Morgan Stanley asked about expense guidance and NIM trajectory.

A: John Stern said expense guidance was more precise due to good line-of-sight, and NIM expected to benefit from rate cuts with deposit base conducive and upward sloping curve.

Q: Erika Najarian from UBS asked about securities sold and beta on deposits.

A: John Stern said securities remixing was to improve liquidity and reposition lower-yielding securities; beta on deposits is gradual, with institutional and retail components contributing to terminal beta north of 50%.

Q: Erika Najarian also asked about organic growth strategy.

A: Andy Cecere and Gunjan Kedia discussed focus on organic growth, deepening client relationships, product interconnectivity, digital capabilities, and Southeast expansion; no large bank M&A priority currently.

Q: Mike Mayo from Wells Fargo Securities asked about operating leverage and go-to-market strategy.

A: Andy Cecere and Gunjan Kedia said operating leverage from increased revenue growth and managed expenses; go-to-market in third year of transformation, seeing results in deposit management and client relationships.

Q: Gerard Cassidy from RBC Capital Markets asked about deposits and branch strategy.

A: John Stern said no target loan-to-deposit ratio, focus on holistic client serving; Gunjan Kedia said branches critical, focus on density in current footprint with digital and partner reach.

Q: Vivek Juneja from JPMorgan asked about payments and expense linkage.

A: John Stern said no linkage between net interest income and expenses; Gunjan Kedia discussed payments growth and client value.

Q: Ebrahim Poonawala from Bank of America asked about NIM outlook and loan growth.

A: John Stern said Q4 NIM stable, long-term NIM could reach 3% with continued rate cuts and deposit rotation; Andy Cecere said no constraint on loan growth.

Q: Matt O'Connor from Deutsche Bank asked about payments leadership.

A: Gunjan Kedia said looking for talented payments leader with cultural fit for interconnected solutions; strong conviction in payments strategy.

Q: Mike Mayo from Wells Fargo Securities asked about AI and digital strategy.

A: Andy Cecere said investing in AI with structure and expertise, early innings; Gunjan Kedia discussed successful partnerships like with State Farm and Edward Jones for digital expansion.