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    USB
    Earnings call· Mar 2025(Q1 FY25)

    US BANCORP DE USB

    Apr 16, 2025 Source

    Executive summary

    U.S. Bancorp Q1 FY25 — Strong Operating Leverage and Capital Build

    U.S. Bancorp reported Q1 FY25 earnings, demonstrating strong expense discipline and positive operating leverage, alongside continued capital accretion. The new CEO reaffirmed commitment to medium-term targets, focusing on organic growth, particularly in payments, and maintaining a disciplined risk management culture amidst market volatility. The company aims to balance capital distributions with ongoing capital build while navigating macroeconomic uncertainties.

    Highlights

    5

    • Achieved 270 basis points of year-over-year positive operating leverage on an adjusted basis.

    • Delivered third consecutive quarter of revenues outpacing expenses on an adjusted basis.

    • CET1 capital ratio increased 20 basis points to 10.8%.

    • Net charge-off ratio improved modestly to 0.59%.

    • Average loans increased 0.9% linked-quarter, driven by commercial lending initiatives.

    Concerns

    4

    • Total average deposits decreased 1.1% linked-quarter due to seasonal patterns.

    • Lower short-end rates impacted average yield across investment portfolio and loan book.

    • Consumer spending saw a modest pullback early in the year, though stabilized by end of March.

    • Uncertainties remain regarding ongoing tariff discussions.

    Guidance & targets

    10
    CategoryTargetConfidence
    Net interest income (FTE)
    $4.1B-$4.2B
    high materiality
    High
    Total noninterest income
    Approximately $2.9B
    medium materiality
    High
    Total noninterest expense
    $4.2B or lower
    high materiality
    High
    Positive operating leverage (YoY adjusted)
    200 basis points or more
    high materiality
    High
    Total net revenue growth (adjusted)
    3%-5%
    high materiality
    Medium
    Positive operating leverage
    Greater than 200 basis points
    high materiality
    High
    Net interest margin
    3%+
    high materiality
    Medium
    Average earning assets
    $700B+
    medium materiality
    Medium
    Net interest income
    Over $19B
    high materiality
    Medium
    Other revenue run rate
    $150M
    low materiality
    High

    Segment performance

    1
    SegmentRevenueYoYQoQMargin
    Merchant Acquiring
    Undergoing multiyear transformation focusing on interconnectivity, 5 industry verticals (retail, services, travel, entertainment, healthcare), and a tech-led operating model. Recently moved up to #5 in Nielsen's 2025 report ranking for processing volume.
    Tech-led revenue: >1/3 of total Merchant Processing revenueRevenue focus on 5 industry verticals: 90%
    		5% of total U.S. bank revenue———

    Operational metrics

    13
    Positive Operating Leverage
    270year-over-year adjusted
    Q1 FY25

    Achieved on an adjusted basis, contributing to the third consecutive quarter of revenues outpacing expenses.

    Cumulative Deposit Beta
    mid-40sin line with expectations
    Q1 FY25

    Remains in line with expectations.

    Noninterest-Bearing Deposits to Total Deposits
    16approximately
    Q1 FY25

    Remains in line with expectations.

    Other Revenue
    $150Mupper end of $125M-$150M range
    going forward

    Expected to be on the higher end of the previously guided range for the foreseeable future.

    Average Loans Growth
    0.9
    linked-quarter

    Driven by commercial lending initiatives, partially offset by higher paydowns in CRE and continued auto loan runoff.

    Card Business Growth
    1.5
    year-over-year Q1 FY25

    Growth rate for the card business, impacted by prepaid card item and weather earlier in the quarter. Credit card specifically grew 4%.

    Total Purchase Volumes (Payments)
    $925B
    trailing 12-month Q1 FY25

    Across all payments businesses. Target is to be more in line with market growth.

    Elan Franchise Financial Institutions Served
    1,200
    current

    Serves financial institutions across the U.S. in a white-label capacity.

    Union Bank Consumer Penetration
    2/3
    current

    Relative to the rest of the U.S. Bank franchise.

    Union Bank Small Business Penetration
    <1/2
    current

    Relative to the rest of the U.S. Bank franchise.

    Investment Spend Shift
    2/3 offense vs 1/3 defense
    current

    Investment over the years has shifted more towards offense (growth-oriented) from defense (infrastructure).

    Annual CapEx
    $1.25B
    annual

    Capital expenditure levels.

    Annual OpEx and Total Tech Amount
    $2B-$2.5B
    annual

    Operational expenditure and total technology spend on an annual basis.

    Industry KPIs

    13
    MetricValueDetails
    Loans$379BUSD
    Deposits$507BUSD
    Rotce ROE17.5%
    Cet1 ratio10.8%
    Capital returns$100MUSD
    Fee income lines$2.8BUSD
    Allowance reserves$7.9BUSD
    Net interest income$4.12BUSD
    Net interest marginImproved
    Net charge offs npls0.59%
    Total operating expenses$4.2BUSD
    Provision for credit lossesSmall reserve release of $10MUSD
    Efficiency ratio operating leverageImproved

    Product announcements

    2
    ProductTypeDetails
    Bank Smartlylaunch
    New Affluent Transactor Productslaunch

    Deals & partnerships

    1
    Edward JonesFinancial services partnership, providing banking capabilities.

    Edward Jones's own bank application is for limited scope CD-like savings products; U.S. Bancorp will provide the bulk of banking capabilities.

    Risks & headwinds

    4
    Intense market and economic volatilitycurrent environment

    None

    Mitigation: Consistent and deep culture of risk management; prepared for a variety of possible scenarios.

    Considerable macroeconomic uncertainty to the outlookcurrent environment

    None

    Mitigation: Flexing expense programs; confidence in medium-term targets based on plausible scenarios.

    Ongoing discussions around tariffscurrent

    Incremental qualitative reserves included in allowance for credit losses.

    Mitigation: Monitoring, strong credit and risk management team identifying exposed portfolios (automobiles, building materials), understanding client supply chains.

    Downward trend in consumer sentimentcurrent

    None

    Mitigation: Not yet seeing impact in spend patterns, mix tilts towards affluent/nondiscretionary spend.

    What to watch in Q2 FY25

    5

    Net Interest Income Growth

    Q2 FY25
    CurrentRelatively stable linked quarter (ex-days)
    TargetGrowth (ex-days)

    Why it matters

    NII is a primary driver of bank profitability, and its growth trajectory indicates the effectiveness of balance sheet management and rate sensitivity.

    We expect net interest income for the second quarter on a fully taxable equivalent basis to be in the range of $4.1 billion to $4.2 billion.

    Q&A highlights

    7

    What interest rate environment would be most beneficial for U.S. Bancorp, given the current impact of lower short-end rates on portfolio yields?

    Management desires a neutral interest rate risk position with an upward sloping curve. Lower short-end rates help funding, while longer-term rates help fixed-rate asset repricing. Hedges are in place to protect capital from rate shocks.

    “Ideally, we would like to see a more upward sloping curve that will be more beneficial to us. The lower short-end rates would help our funding position and longer-term rates will help with the repricing of our fixed rate assets.”

    asked by Gerard Cassidy · answered by John Stern

    2 min read6 chapters

    Detailed Narrative

    01

    Strategic Priorities Under New Leadership

    Gunjan Kedia, the new CEO, outlined three immediate strategic priorities: tightly managing expenses, driving organic growth across businesses, and transforming the payments business. These are aimed at achieving medium-term targets despite macroeconomic shifts and restoring investor confidence. The focus is on building out organic growth capabilities, which has historically been supplemented by acquisitions.

    02

    Expense Management and Operating Leverage

    The company has delivered six consecutive quarters of expense discipline on an adjusted basis, which has funded organic growth and driven positive operating leverage. Four expense programs are underway, designed for sustainable productivity and client service, with additional levers available to flex based on the revenue environment. This approach allows for reinvestment of savings into growth initiatives.

    03

    Payments Business Transformation

    The payments business is undergoing a multiyear transformation focusing on greater interconnectivity across the bank, a sharper focus on five industry verticals (retail, services, travel, entertainment, healthcare), and a strategic shift to a tech-led operating model. The goal is to align with market growth rates while maintaining strong margins, leveraging payments to anchor client relationships. Tech-led operations now represent over one-third of total Merchant Processing revenue.

    04

    Capital and Credit Quality

    U.S. Bancorp increased its CET1 capital ratio by 20 basis points to 10.8% and reported a tangible book value per share of $25.64, up 13.8% year-over-year. Credit quality metrics improved, with a modest net charge-off ratio of 0.59% and a small reserve release of $10 million. However, incremental qualitative reserves were added to reflect increased tariff-induced macroeconomic uncertainty🌐.

    05

    Balance Sheet Dynamics

    Total average deposits decreased 1.1% linked-quarter, in line with seasonal patterns and prioritization of relationship-based deposits. Average loans increased 0.9% linked-quarter, driven by commercial lending, partially offset by CRE paydowns and auto loan runoff. Lower short-end rates impacted average yields on the investment portfolio and loan book, though fixed asset repricing is expected to drive future NIM expansion.

    06

    Edward Jones Partnership

    The partnership with Edward Jones is expected to continue, with Edward Jones's own bank application limited to CD-like savings products. U.S. Bancorp will provide the bulk of banking capabilities, indicating a well-contemplated and complementary relationship. This partnership is seen as an important growth driver.

    AI-generated summary of the company’s earnings call. Not investment advice.