Q1 2025 US Bancorp Earnings Call
Operator: Welcome to the US Bancorp First Quarter 2025 Earnings Conference. Following a review of the results, there will be a formal question and answer session. If you would like to ask a question, please press star then 1 on your phone. If you wish to withdraw your question, please press star then 1 again.
Welcome to the U S Bancorp first quarter 2025 earnings conference call.
Following a review of the results there will be a formal question and answer session.
Speaker Change: I'd like to ask a question. Please press Star then one on your phone if.
If you wish to withdraw your question. Please press Star then one again.
Operator: This call will be recorded and available for replay beginning today at approximately 11 a.m. Central Time.
Speaker Change: This call will be recorded and available for replay beginning today at approximately 11, a M central time.
George Andersen: I will now turn the conference call over to George Andersen, Director of Investor Relations for USB. Thank you, Julianne, and good morning, everyone. Today I'm joined by our President and new Chief Executive Officer, Gunjan Kedia, and Senior Executive Vice President and CFO, John Stern. In a moment, Gunjan and John will be referencing a slide presentation together with their prepared remarks. A copy of the presentation, our press release, and all supplemental analyst schedules can be found on our website at ir.usbank.com.
Speaker Change: I will now turn the conference call over to George Anderson Director of Investor Relations for U S Bancorp.
George Anderson: Thank you Julianne and good morning, everyone today, I'm joined by our President and New Chief Executive Officer, <unk>, <unk>, and senior Executive Vice President and CFO, Jon Stern in a moment, Jim and John will be referencing a slide presentation together with their prepared remarks, a copy of the presentation, our press release and all sub.
Speaker Change: Mental analyst schedules can be found on our website at IR that U S Bank Dot com.
Unknown Executive: Please note that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that can materially change our current forward-looking assumptions are described on page 2 of today's earnings presentation, our press release, and in reports on file with the SEC.
Speaker Change: Please note that any forward looking statements made during today's call are subject to risks and uncertainty.
Speaker Change: Factors that could materially change our current forward looking assumptions are described on page two of today's earnings presentation, Our press release and our reports on file with the SEC.
Unknown Executive: Following Gunjan and John's prepared remarks, we will be happy to take any questions that you have.
Ghansham: Following Goodyear and John's prepared remarks, we will be happy to take any questions that you have I will now turn the call over to Ghansham.
Gunjan Kedia: I will now turn the call over to Gunjan. Thank you, George. And good morning, everyone.
Ghansham: Thank you George and good morning, everyone.
Gunjan Kedia: As we begin the call today, I want to first take a moment to acknowledge the loss of our friend and colleague, Terry Dolan, who most recently served as our Chief Administration Officer. We have truly appreciated the outpouring of support we have received from the investment community since his tragic passing last month and our thoughts remain with his friends and family.
Ghansham: As we begin the call today I want to first take a moment to acknowledge the loss of our friend and colleague Terry Dolan, who most recently served as our Chief Administration Officer.
Ghansham: We have truly appreciated the outpouring of support we have received from the investment community since its tragic passing last month and our thoughts remain the best friends and family.
Gunjan Kedia: If I could turn your attention to slide 3, in the first quarter we reported earnings per share of $1.03 and delivered a return on tangible common equity of 17.5%. We are pleased with the progress we have made on our strategic priorities and achieved year-over-year positive operating leverage of 270 basis points this quarter on an adjusted basis. Our continued discipline on expenses, good momentum across our fee businesses, and modest margin expansion all contributed to us achieving our third consecutive quarter of revenues outpacing expenses on an adjusted basis. Importantly, our credit quality and capital levels are strong.
Ghansham: If I could turn your attention to slide three in the first quarter, we reported earnings per share of a dollar tree and delivered a return on tangible common equity of 17, 5%.
Ghansham: We are pleased with the progress we have made on our strategic priorities and achieved year over year positive operating leverage of 270 basis points this quarter on an adjusted basis.
Ghansham: Our continued discipline on expenses good momentum across our fee businesses and modest margin expansion all contributed to us achieving our third consecutive quarter with revenues outpacing expenses on an adjusted basis.
Ghansham: Importantly, our credit quality and capital levels are strong.
Gunjan Kedia: This quarter, our net charge-off ratio improved modestly, and we continued to build capital.
Ghansham: Quarter on net charge off ratio improved modestly and we continued to build capital.
Gunjan Kedia: We are in an environment of intense market and economic volatility, however our management team has successfully navigated through a wide range of conditions over the years and we are prepared for a variety of possible scenarios. Our consistent and deep culture of risk management will continue to be a competitive advantage as we go forward.
Ghansham: We are in an environment of intense market and economic volatility.
Ghansham: However, our management team has successfully navigated to a wide range of conditions over the years and we are prepared for a variety of possible scenarios.
Ghansham: Our consistent and deep culture of risk management.
Ghansham: Continue to be a competitive advantage as we go forward.
Yes.
Gunjan Kedia: Slide four is a snapshot of US Bancorp today. As the largest non-GSIB bank in the country, we operate at considerable scale in the markets we serve. Our franchise is quite unique. Fee income represents 41% of total net revenue and is driven by an extensive and diversified product set. Today, two-thirds of our businesses operate nationally through an optimized digital and physical distribution model. Our client franchise of almost 15 million clients has strong loyalty and depth with us. These advantages are important to our unique and ongoing growth story.
Ghansham: Slide four is a snapshot of U S Bancorp today.
Ghansham: As the largest non G SIB bank in the country B all created considerable scale in the market to be sold.
Ghansham: Our franchise is quite unique our fee income represents 41% of total net revenue and is driven by an extensive and diversified product set.
Ghansham: Do they do towards our five businesses operate nationally through an optimized ditch to and physical distribution model.
Client franchise of almost 15 million clients has strong loyalty and depth with us. These advantages are important to our unique and ongoing growth story.
Gunjan Kedia: I'll turn you to slide 5. As I step into my role as Chief Executive Officer of US Bancorp, I want to reaffirm my commitment to our medium-term targets. The macroeconomic backdrop has shifted since I invested in September, and I acknowledge that there is still considerable uncertainty to the outlook.
Speaker Change: I'll turn you to slide five as I step into my role as Chief Executive Officer of U S. Bancorp I want to reaffirm my commitment to our medium term targets.
Speaker Change: The macroeconomic backdrop has shifted since our investor day in September and I acknowledge that there is still considerable uncertainty to the outlook.
Gunjan Kedia: However, a wide range of plausible forward-looking macroeconomic scenarios still support our targets. I have three immediate strategic priorities to achieve our goals. Tightly manage our expenses, drive organic growth across our business, and transform our payments business. It is important to emphasize that while we are focused on organic growth, we remain deeply committed to high returns and a disciplined risk management culture.
However, a wide range of plausible forward looking macroeconomic scenarios still support our targets.
Speaker Change: I have three immediate strategic priorities to achieve our goals.
Speaker Change: Tightly manage our expenses drive organic growth across our business and transform our payments business.
Speaker Change: It is important to emphasize that while we are focused on organic growth. We remain deeply committed to high returns and disciplined risk management culture.
Speaker Change: Yeah.
Gunjan Kedia: Slide 6 gives you more color on our expense management program. We have been actively focused on reducing expenses since early 2024. Our investment spend has stabilized and is increasingly shifting to growth-oriented investments. In addition, we are structurally driving productivity through all our operations.
Speaker Change: Slide six gives you more color on that expense management program.
Speaker Change: We have been actively focused on reducing expenses since early 2024.
Speaker Change: Our investment spend has stabilized and is increasingly shifting to growth oriented investments.
Speaker Change: In addition, we are structurally driving productivity through all our operations.
Gunjan Kedia: As the chart on the left shows, we have now delivered six consecutive quarters of expense discipline on an adjusted basis. This has been an important funding mechanism for organic growth and a significant driver of the positive operating leverage we have delivered.
Speaker Change: As the chart on the left shows we have now delivered six consecutive quarters of expense discipline on an adjusted basis.
Speaker Change: This is been an important funding mechanism for organic growth and a significant driver of the positive operating leverage we have delivered.
Gunjan Kedia: On the right are our four expense programs. These are well underway. These initiatives are designed to improve sustainable productivity and balance that with high quality client service and operating effectiveness.
Speaker Change: On the right are our four expense programs these are well underway.
Speaker Change: These initiatives are designed to improve sustainable productivity and balance stopped with high quality client service and operating effectiveness.
Gunjan Kedia: Notably, we have additional levers we can pull and are watching the revenue environment closely to appropriately balance and flex our expense programs. On slide 7, a diversified mix of fee-generating businesses is truly a competitive advantage for us. On the left, we are disaggregating the dynamics of our fee growth last year. Confidence in our medium-term fee growth targets is supported by the strength we have in our core businesses like trust and investment management and capital markets fee businesses, as well as the execution momentum we have across our other organic growth initiatives. Headwinds around consumer fees and the sale of our ATM cash provisioning business are also dissipating and support stronger fee growth going forward.
Speaker Change: Notably we have additional levers we can pull and are watching the revenue environment closely to appropriately balance and flex our expense programs.
Speaker Change: Okay.
Speaker Change: On slide seven our diversified mix of fee generating businesses is truly a competitive advantage for us.
Speaker Change: On the left we have disaggregated the dynamics of our fee growth last year.
Speaker Change: Confidence in our medium term fee growth targets are supported by the strength, we have in our core businesses like trust and investment management and capital markets fee businesses.
Speaker Change: As well as the execution momentum we have across our other organic growth initiatives.
Speaker Change: Headwinds around consumer fees and the sale of our ATM cash provisioning business are also dissipating and support stronger fee growth going forward.
Gunjan Kedia: We are focused on leveraging a broad range of products and digital capabilities to deepen relationships with our clients and expand our reach through partnerships.
Speaker Change: We are focused on leveraging our broad range of products and digital capabilities to deepen relationships with our clients and expand our reach through partnerships.
Gunjan Kedia: I'll move to slide 8. We have an opportunity to do better with our payments businesses. Money movement capabilities are critical to anchoring client relationships, and we are committed to building a vibrant payments franchise. Our payments business drives both fee income as well as net interest income with $42 billion in attractive average loan balances. Net interest income is an important part of our payment story and as you can see on the left, we have grown our average loan balances in line with or better than the industry. Our loan growth has benefited from a range of competitive products that offer quite attractive value propositions, especially to borrowers.
Speaker Change: I'll move to slide eight.
Speaker Change: We have an opportunity to do better with our payments businesses.
Speaker Change: Money movement capabilities are critical to anchoring client relationships and we are committed to building a wide Brent payments franchise.
Speaker Change: Our payments business drives both fee income as well as net interest income with $42 billion in attractive average loan balances.
Speaker Change: Net interest income is an important part of our payment story and as you can see on the left.
Speaker Change: <unk> grown our average loan balances in line with or better than the industry.
Loan growth has benefited from a range of competitive products that offer quite attractive value proposition, especially to border was.
Gunjan Kedia: Total purchase volumes across all of our payments businesses were at $925 billion this quarter for the trailing 12-month period.
Speaker Change: Total bush's volumes across all of our payments businesses were at $925 billion. This quarter for the trailing 12 month period.
Gunjan Kedia: The growth here could be stronger and our target is to be more in line with the market. We have a greater focus on the affluent customer and products like Banks Smartly were designed specifically to target this segment.
Speaker Change: The growth you could be stronger and our target is to be more in line that the market.
Speaker Change: We have a greater focus on the affluent customer and products.
Speaker Change: Bank smartly designed specifically to target this segment.
Gunjan Kedia: As I look ahead, with two new leaders in place since the start of the new year, we are actively redeploying expense saves to scale up our execution, our sales and marketing efforts and payments. Some areas of focus are California, where our acquisition of Union Bank has given us access to a large and affluent consumer and small business base. and the expansion of our Elan franchise which currently serves over 1,200 financial institutions across the U.S.
Speaker Change: As I look ahead with two new leaders in place since the start of the new year, yet actively redeploying expensive to scale up our execution of sales and marketing efforts in payments.
Speaker Change: Some areas of focus are California, where our acquisition of Union Bank has given us access to a large and affluent consumer and small business base.
Speaker Change: And the expansion of our Elon franchise, which currently serves over 1200 financial institutions across the U S.
Gunjan Kedia: Finally, While our merchant acquiring business contributes just over 5% of total US bank revenue, it is a unique part of our portfolio and I know one that garners a lot of attention from the investment community as it is the key differentiator for the company. We are in the middle of a multi-year transformation here to reposition this business in three ways. The first is greater interconnectivity across the bank. The second is a sharper focus on five industry verticals. And the third is a strategic shift to a tech-led operating model that is more consistent with the buying behavior of consumers today.
Finally, why.
Speaker Change: While our merchant acquiring business contributes just over 5% of total U S Bank revenue. It is a unique part of our portfolio and I know one that garners a lot of attention from the investment community as it is a key differentiator for the company.
Speaker Change: We're in the middle of a multiyear transformation here to reposition this business in three ways.
Speaker Change: The first is greater interconnectivity across the bank. The second is this sharper focus on five industry verticals.
Speaker Change: The third is the strategic shift to a tech led operating model that is more consistent the buying behavior of consumers today.
Gunjan Kedia: Tech Lead represents over one-third of total merchant processing revenue and most of our revenue generation is now concentrated in our five targeted verticals. We have most recently moved up to number five in Nielsen's 2025 report, Ranking for Processing Volume. And we do have more room to grow here.
Speaker Change: Dirk led represents over one third of total merchant processing revenue and most of our revenue generation is now concentrated enough five targeted verticals.
Speaker Change: We have most recently moved up to number five in nuisance 2025 report ranking for processing volume.
Speaker Change: And we do have more room to grow here.
Gunjan Kedia: Our medium-term fee growth targets for the overall bank expect a mid-single-digit growth rate for payments, with more upside beyond that time frame.
Speaker Change: Our medium term fee growth targets for the overall bank expect a mid single digit growth rates for payments, but more upside beyond that timeframe.
Gunjan Kedia: Finally, before I hand it over to John, I want to highlight a simpler management structure on slide 9. We are very fortunate to have a deep management bench and I am confident we will execute with urgency on our priorities.
Speaker Change: Finally, before I hand, it over to John I want to highlight a simpler management structure on slide nine.
Speaker Change: We are very fortunate to have a deep management bench and I'm confident we will execute with urgency on our priorities.
John Stern: Now, let me turn the call over to John, who will provide more detail on the quarter, as well as forward-looking guidance. Thanks, Gunjan. If you turn to slide 10, I'll start with some highlights for the quarter, followed by a discussion of first-quarter earning trends. In the first quarter, we reported earnings per share of $1.03, with year-over-year top-line revenue growth and disciplined expense management. On the right-hand side of this slide, you can see that most credit quality metrics and capital levels improved both sequentially and year-over-year. This quarter, a more favorable portfolio mix and improved asset quality resulted in a small reserve release of $10 million.
Speaker Change: Now, let me turn the call over to John who will provide more detail on the quarter as well as forward looking guidance.
John: Thanks, Tien tsin.
John: If you turn to slide 10, I'll start with some highlights for the quarter, followed by a discussion of first quarter, earning trends.
John: In the first quarter, we reported earnings per share of $1 three.
John: With year over year topline revenue growth and disciplined expense management.
John: On the right hand side of this slide you can see that most credit quality metrics and capital levels improved both sequentially and year over year.
John: This quarter more favorable portfolio mix and improved asset quality resulted in a small reserve release of $10 million. The allowance. This quarter also included.
John Stern: The allowance this quarter also included some incremental qualitative reserves to reflect increased tariff-induced macroeconomic uncertainty. Our loan portfolio is well diversified, and we are appropriately reserved and prepared for a wide range of potentially adverse macroeconomic conditions. Our CET1 capital ratio increased 20 basis points to 10.8% this quarter as we continue to balance ongoing capital accretion with modest share repurchase. Our tangible book value per share was $25.64 at March 31st, up 13.8% year-over-year.
John: Some incremental qualitative reserves to reflect increased tariff induced macroeconomic uncertainty.
John: Our loan portfolio is well diversified and we are appropriately reserved and prepared for a wide range of potentially adverse macroeconomic conditions.
John: Our CET one capital ratio increased 20 basis points to 10, 8% this quarter as we continued to balance ongoing capital accretion with modest share repurchases.
John: Our tangible book value per share was $25 64 at March 31.
John: Up 13, 8% year over year.
John Stern: Slide 11 provides key performance metrics. Our Return on Average Assets and Net Interest Margin Improvement Link Quarter from Solid Financial Performance, Continued Expense Discipline, and Efficient Balance Sheet Management.
John: Slide 11 provides key performance metrics.
John: Our return on average assets and net interest margin improved linked quarter from solid financial performance continued expense discipline and efficient balance sheet management.
John Stern: Slide 12 provides a balance sheet summary. Total average deposits decreased 1.1% on a link quarter basis to $507 billion in line with seasonal patterns and continued prioritization of relationship-based deposits and pricing disciplines. Both our mid-40s cumulative deposit beta and percentage of non-interest bearing to total deposits of approximately 16% remain in line with expectations. Average loans totaled $379 billion, a modest increase of 0.9% on a link quarter basis driven by commercial lending initiatives that were partially offset by higher paydowns within our commercial real estate portfolio and continued runoff of auto loans. At March 31st, the ending balance on our investment portfolio was flat at $171 billion.
John: Slide 12 provides a balance sheet summary.
John: Total average deposits decreased one 1% on a linked quarter basis to $507 billion in line with seasonal patterns and continued prioritization of relationship based deposits and pricing discipline.
John: Both our mid forties cumulative deposit beta and percentage of noninterest bearing to total deposits of approximately 16%.
John: Main in line with expectations.
John: Average loans totaled $379 billion, a modest increase of <unk>, 9% on a linked quarter basis, driven by commercial lending initiatives that were partially offset by higher paydowns within our commercial real estate and portfolio and continued runoff of auto loans.
John: At March 31, ending balance on our investment portfolio was flat at $171 billion.
John Stern: This quarter, the average yield across both our investment portfolio and loan book were impacted by lower short end rates, which more than offset the benefits of fixed asset repricing and improved assets.
John: This quarter the average yield across both our investment portfolio and loan book were impacted by lower short end rates, which more than offset the benefits of fixed asset repricing and improved asset mix.
John Stern: Turning to slide 13. Net interest income on a fully taxable equivalent basis totaled $4.12 billion, relatively stable to the fourth quarter after adjusting for two fewer days as expected.
John: Turning to slide 13.
John: Net interest income on a fully taxable equivalent basis totaled $4, one 2 billion relatively stable to the fourth quarter. After adjusting for two fewer days as expected.
John Stern: Slide 14 highlights trends in non-interest income. Non-interest income totaled $2.8 billion, an increase of 5.0% on a year-over-year basis.
John: Slide 14 highlights trends in noninterest income.
John: Noninterest income totaled $2 8 billion, an increase of 5.0% on a year over year basis, driven by payments and trust and investment management fees.
John Stern: Driven by Payments and Trust in Investment Management Fees Link quarter revenue was impacted by seasonal declines in both payment services and other revenue while our decline in trust and investment management fees resulted from less favorable market conditions.
Linked quarter revenue was impacted by seasonal declines in both payment services and other revenue, while our decline in trust and investment management fees resulted from less favorable market conditions.
John Stern: Turning to slide 15, non-interest expense for the quarter totaled $4.2 billion, stable with adjusted non-interest expense in the fourth quarter and consistent with our previous guidance. Continued expense discipline and operational efficiencies partially offset seasonal increases in performance based incentives and merit, as well as a higher charitable foundation contribution.
John: Turning to slide 15, noninterest expense for the quarter totaled $4 2 billion stable with adjusted noninterest expense in the fourth quarter and consistent with our previous guidance.
John: Continued expense discipline and operational efficiencies, partially offset seasonal increases in performance based incentives and merit as well as a higher charitable foundation contribution.
John Stern: Slide 16 highlights our credit quality performance on a linked quarter and year-over-year basis. Our ratio of non-performing assets to loans and other real estate was 0.45% at March 31st, an improvement from the previous quarter and a year ago. The first quarter net charge-off ratio of 0.59% improved one basis point link quarter, and our allowance for credit losses totaled $7.9 billion, or 2.07% of period end loans at March 31st.
John: Slide 16 highlights our credit quality performance on a linked quarter and year over year basis.
John: Our ratio of nonperforming assets to loans and other real estate was 0.45% at March 31, an.
John: An improvement from the previous quarter and a year ago the.
John: First quarter net charge off ratio of 0.59% improved one basis point linked quarter.
John: And our allowance for credit losses totaled $7 9 billion.
John: Or 2.07% period end loans at March 31.
John Stern: On slide 17, our Common Equity Tier 1 Capital Ratio increased 20 basis points to 10.8% as of March 31st, net of distribution. Our CET1 ratio, including AOCI, was 8.8%.
John: On slide 17, our common equity tier one capital ratio increased 20 basis points to 10, 8% as of March 31, net of distributions, our CET one ratio, including OCI was eight 8%.
John Stern: During the quarter, we completed $100 million of share repurchases, and moving forward, we expect the level and pace of buybacks to remain modest as we balance continued capital accretion with distributions and further evaluate broader macroeconomic conditions.
John: During the quarter, we completed a $100 million of share repurchases and moving forward, we expect the level and pace of buybacks to remain modest as we balance continued capital accretion with distributions and further evaluate broader macroeconomic conditions.
John Stern: Turning to slide 18. We wanted to provide some additional clarity on our projected balance sheet trajectory and the drivers of net interest margin expansion. These drivers are supportive of our medium-term target.
John: Turning to slide 18.
John: We wanted to provide some additional clarity on our projected balance sheet trajectory and the drivers of net interest margin expansion. These drivers are supportive of our medium term target.
John Stern: As the slide shows, we do not expect to become a Category 2 bank before 2027. Further, we expect that our trajectory will benefit from an improved asset mix, fixed asset repricing, and continued optimization of our funding mix. The timing and, ultimately, where we land within the range provided will depend on several factors, including the path of interest rates and loan growth.
John: As the slide shows we do not expect to become a category two bank before 2027.
John: Further we expect that to our trajectory, we will benefit from an improved asset mix fixed asset repricing and continued optimization of our funding mix the.
John: The timing and ultimately where we land within the range provided will depend on several factors, including the path of interest rates and loan growth.
John Stern: Moving to slide 19, our first quarter results met the guidance we provided in mid-January. We are monitoring the ongoing discussions around tariffs and recognize that uncertainties remain.
John: Moving to slide 19, our first quarter results met the guidance we provided in mid January.
John: We are monitoring the ongoing discussions around tariffs and recognize that uncertainties remain.
John Stern: I'll now provide second quarter and full year 2025 forward-looking guidance based on our current expectations. Starting with the second quarter 2025 guidance, we expect net interest income for the second quarter on a fully taxable equivalent basis to be in the range of $4.1 to $4.2 billion. Total non-interest income is expected to be approximately $2.9 billion.
I'll now provide second quarter and full year 2025 forward looking guidance based on our current expectations starting with the second quarter 2025 guidance. We expect net interest income for the second quarter on a fully taxable equivalent basis to be in the range of $4 one to $4 2 billion.
John: Noninterest income is expected to be approximately $2 9 billion.
John Stern: We expect total non-interest expense to be $4.2 billion or lower in the second quarter. and we expect to deliver positive operating leverage in the second quarter of 200 basis points or more on a year-over-year adjusted basis.
John: We expect total noninterest expense to be $4 $2 billion or lower in the second quarter.
John: And we expect to deliver positive operating leverage in the second quarter of 200 basis points or more on a year over year adjusted basis.
John Stern: I'll now provide full year 2025 guidance which is consistent with our previous guidance. Total net revenue growth on an adjusted basis is estimated to be in the range of 3-5% compared to the full year 2024. We expect to achieve positive operating leverage of greater than 200 basis points for the full year.
John: I'll now provide full year 2025 guidance, which is consistent with our previous guidance.
John: Total net revenue growth on an adjusted basis is estimated to be in the range of 3% to 5% compared to the full year 2024.
John: We expect to achieve positive operating leverage of greater than 200 basis points for the full year.
John Stern: Slide 20 shows that we have made measurable progress toward achieving our medium-term targets.
John: Slide 20 shows that we have made measurable progress toward achieving our medium term targets.
John Stern: Compared to the first quarter of 2024, we have improved both our profitability and efficiency ratios and have continued to enhance our capital positioning and operating leverage trajectory. We have more work to do, but we are pleased with our progress to date.
John: Compared to the first quarter of 2024, we have improved both our profitability and efficiency ratios and have continued to enhance our capital position positioning and operating leverage trajectory.
Speaker Change: We have more work to do but we are pleased with our progress to date I'll now hand, it back over to <unk> FERC closing remarks.
Gunjan Kedia: I'll now hand it back over to Gunjan for closing remarks. Thank you, John.
Speaker Change: John Let me close on slide 21, I am excited to lead our exceptional bank into the future.
Gunjan Kedia: Let me close on slide 21. I am excited to lead our exceptional bank into the future. Over the last two years, we have been focused on integrating our union bank franchise and then swiftly building back capital after the banking failures of 2023. We are now focused on organic growth. And our momentum on expenses is timely as we navigate a highly uncertain environment, and that gives us strategic flexibility.
Speaker Change: Over the last two years, we have been focused on integrating our Union Bank franchise, and then swiftly building back capital after the banking failures of 2023.
Speaker Change: We are now focused on organic growth.
Speaker Change: And our momentum on expenses is timely as we navigate a highly uncertain environment and that gives us strategic flexibility.
Gunjan Kedia: Moving forward, my top priority is to restore investor confidence in our story and our execution. Finally, on behalf of our U.S.
Speaker Change: Moving forward my top priority is to restore investor confidence in our story and our execution.
Finally on behalf of our U S Bank team I want to sincerely. Thank Andy <unk> for his 40 plus years of thoughtful dedicated and steady leadership.
Gunjan Kedia: bank team, I want to sincerely thank Andy Cecere for his 40-plus years of thoughtful, dedicated, and steady leadership. We all wish Andy well in his retirement.
Speaker Change: We all wish Andy well in his retirement.
Operator: With that, we will now open the call for questions. Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
Speaker Change: With that we will now open the call for questions.
Speaker Change: Thank you at this time as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad, well pause for just a moment to compile the Q&A roster.
Gerard Cassidy: Our first question comes from Gerard Cassidy from RBC Capital Markets. Please go ahead. Your line is open. Thank you.
Speaker Change: Our first question comes from Gerard Cassidy from RBC capital markets. Please go ahead. Your line is open.
Speaker Change: Thank you.
John Stern: Gunjan and John, before I ask my question, on behalf of all of the bank analysts in the investment community, I really want to offer our sincere condolences about Terry's tragic death. Not only will he be missed by his family and all his colleagues at US Bancorp, he'll be missed by everybody on this call and throughout the investment. All of us will keep him and his family in our thoughts. on on the question. John, can you go back to your comments about the yields in the portfolios, how you referenced that? earning asset yields and came down for the quarter.
Gerard Cassidy: Good engine and John before I ask my question on behalf of all of the bank analysts and the investment community I really want to offer our sincere condolences about terry's tragic deaths not only really be missed by his family and all of his colleagues at U S. Bancorp he'll be missed by everybody on this call.
Gerard Cassidy: And throughout the investment community all of Us will keep him and his family.
Gerard Cassidy: Thoughts and prayers.
Speaker Change: On the question John can you go back to your comments about.
Gerard Cassidy: The yields in the portfolios, how you referenced that the.
Gerard Cassidy: Earning asset yields came down for the quarter and you pointed out I think on slide 12 in your comments that the impact of lower short term rates more than offset the benefits of the repricing of fixed rate assets, what's the ideal interest rate environment for U S Bancorp.
John Stern: And you pointed out I think on slide 12 in your comments Impact of lower short-term. more than offset the benefits of the repricing of fixed rate assets.
John Stern: The Ideal Interest Rate Environment for US Bancorp Sure Gerard, and first of all thank you for those comments, they mean a lot and we appreciate that very much. On to your question on the yields within the portfolio and ideal positioning and things like that, just more from a technical standpoint, the investment portfolio, about half of the AFS book, or about just over a quarter of the book in total is floating rate in nature. Of course, we have that, a lot of hedges in place to protect from shocks on higher rates, to protect capital in that sense, so that's the positioning for it.
Gerard Cassidy: In your view.
Gerard Cassidy: Sure Gerard and first of all thank you for those those comments they mean a lot and we appreciate that very much.
Gerard Cassidy: Onto your question on the yields and within the portfolio.
Gerard Cassidy: An ideal positioning and things like that just more from a technical standpoint, the investment portfolio.
Gerard Cassidy: About half of the RFS book.
Gerard Cassidy: We're about just over a quarter of the book in total is floating rate in nature of course, we have that.
Gerard Cassidy: A lot of hedges in place and to protect from from shocks on higher rates to protect capital in that sense. So that's the positioning for it.
John Stern: That positioning along with how we manage the rest of the balance sheet provide us how we think about interest rate sensitivity and how we want to position the bank from interest rates shocks. So today, even though the investment portfolio has some mix towards floating rate, we have other things that can offset that such as receive fixed swaps on the commercial loans as an example. And so when you put it all together, what we'd like to have is a neutral interest rate risk position on the balance sheet, neutral to shocks. Now ideally, we would like to see a more upward sloping curve, that will be more beneficial to us.
Gerard Cassidy: That positioning along with how we manage the rest of the balance sheet provide.
Gerard Cassidy: US how we think about interest rate sensitivity and how we want to position the bank from interest rates shocks. So today.
Gerard Cassidy: Even though the investment portfolio is some.
Gerard Cassidy: Mix towards floating rate, we have other things that can offset that such as receive fixed swaps on the commercial loans as an example, and so when you put it all together we have a what we'd like to have as a neutral interest rate risk position on the balance sheet neutral to shocks now ideally we would like to see a more upward sloping curve.
Gerard Cassidy: Curve.
Gerard Cassidy: That will be more beneficial to us.
John Stern: The lower short end rates would help our funding position, and longer term rates will help with the repricing of our fixed rate assets. So those are kind of the puts and takes as we think about the balance sheet. I appreciate that, John.
Gerard Cassidy: Lower short end rates would help our funding position and.
Gerard Cassidy: And longer.
Gerard Cassidy: Our higher longer term rates will help with the repricing of our fixed rate assets. So those are kind of the puts and takes as we think about the balance sheet.
I appreciate that and then as a follow up you've talked about your capital levels. Your CET, one ratios exposure, especially including the OCI at eight eight which of course is well above your required level.
John Stern: And then as a follow up, you talked about your capital levels, your CET1 ratios, especially including the AOCI at 8.8, which, of course, is well above your required level. And you're still, you know, being cautious on the buybacks. Historically, as you all know, you folks have traditionally given back 70 to 80% of annual earnings and buybacks and dividends. What kind of environment will we need to see for you guys to be comfortable to get back into that kind of 70 to 80% return of earnings to shareholders and buybacks? Sure. So I think as we talked about at Investor Day, we talked about our capital ratio and where it needs to be.
Gerard Cassidy: And you are still being cautious on the buybacks historically as you. All know you folks have traditionally given back 70%, 80% of annual earnings in buybacks and dividends.
Gerard Cassidy: Kind of environment will we need to see for you guys to be comfortable to get back into that kind of 70% to 80% return of earnings to shareholders in buybacks and dividends share. So I think as we talked about at Investor day, we talked about our capital ratio and where it needs to be.
John Stern: We targeted approximately 10% on a Category 2 basis, which you just cited that the ratio where we're at right now. And, you know, we still are awaiting, you know, capital rules and things like that. Obviously, there's more favorability there with the regulatory environment. But we are, as we get closer, we would anticipate, you know, that we would increase our share repurchases as we approach and achieve that approximately that 10% capital level. And the numbers that you cite, that 70-80%, that's the number that we provided to you on a full payback in our Investor Day, and that is consistent with our thinking.
Gerard Cassidy: We targeted approximately 10% on a category two basis, which you just cited that the ratio of where we're at right now and.
Gerard Cassidy: We still are awaiting capital rules and things like that obviously, there is theres more favorability there with the regulatory environment, but we are as we get closer we would anticipate.
Gerard Cassidy: That we would incur.
Gerard Cassidy: Increase our share repurchases as we approach and achieve that that that approximately that 10% capital level.
Gerard Cassidy: And the numbers that you cite that 70, 80%. That's a number that we provided to you on a full payback in our Investor day and that is consistent with our thinking.
John Stern: Great.
Speaker Change: Great and good luck in retirement and wish you a lot of future success. Thank you.
Gerard Cassidy: And Andy, good luck in retirement. I wish you a lot of future success. Thanks Gerard.
Speaker Change: Thanks Gerard.
Scott Siefers: Our next question comes from Scott Siefers from Piper Sandler. Please go ahead. Your line is open.
Speaker Change: Our next question comes from Scott <unk> from Piper Sandler. Please go ahead. Your line is open.
Scott Siefers: Morning, everyone. Thanks for taking the question.
Speaker Change: Good morning, everyone. Thanks for taking the question I guess first of all I'd Echo <unk> sentiments and thoughts as well.
John Stern: I guess first of all, I'd echo Gerard's John, within the 3 to 5% full year revenue growth target, any change in sort of the expected balance between NII and fees? I know you'd talked previously about sort of a mid single digit fee growth aspiration for the year. So maybe just within your response, if you could sort of speak to any updates on main fee drivers throughout the year with like a particular emphasis on the payments momentum that you would see developing, if possible. Sure. So thanks, Scott. You know, first of all, you're right. No change to our guidance.
Speaker Change: John.
Speaker Change: Within the 3% to 5% full year revenue growth target any change in sort of your expected balance between NII and fees.
Speaker Change: <unk> talked previously about sort of a mid single digit fee growth aspiration for the year. So maybe just within your response if you could.
Speaker Change: So to speak to any updates on main fee drivers throughout the year with a.
Speaker Change: A particular emphasis on the payments momentum that you would see developing if possible.
Speaker Change: Sure. So thanks Scott.
Speaker Change: First of all you are right no change to our guidance, 3% to 5% is our expectation.
John Stern: Three to five percent is our expectation. And we acknowledge, of course, that the market is uncertain. There's things in the tariff discussions that everyone is watching. We acknowledge that. But we still feel good about our revenues and our ability to execute. On the net interest income side, we shared a slide in terms of how we see a path of how a net interest margin will grow. And that starts with fixed asset repricing and better mix in terms of our loan book. On the fee side of things, we still believe the mid-single digit is an appropriate way to think about fee growth for the year.
Speaker Change: We see and we acknowledge of course that the market is uncertain there is theres things.
Speaker Change: In the tariff discussions that everyone is watching we acknowledge that but we still feel good about our our revenues and our ability to execute.
Speaker Change: On the net interest income side, we shared a slide in terms of how we see a path of how net interest margin will grow and that starts with fixed asset repricing and better mix in terms of our loan book on the fee side of things. We still believe the mid single digits is an appropriate way to think about fee growth for the for the year.
John Stern: Gunjan commented on the payment side of things, and we have good initiatives beyond that, as well as in other parts like capital markets and trust and investment management and all these other sorts of things. And then importantly, I know you didn't ask, but expense, we have a lot of levers there as well, which will help us achieve operating leverage that we have talked about in terms of 200 basis points or more for the full year. So we understand the market has changed, but our clients are resilient and we have a lot of confidence in our ability to execute.
Speaker Change: <unk>.
<unk> commented on the payment side of things and we have good initiatives beyond that as well as in other parts like capital markets and trust and investment management and all these other sorts of things and then.
Speaker Change: Importantly, I know you didn't ask but expense we have a lot of levers there as well which will help us.
Speaker Change: <unk> operating leverage that we have talked about in terms of 200 basis points or more for the full year. So we understand the market has changed.
Speaker Change: Our clients are resilient and we have a lot of confidence in our ability to execute.
Speaker Change: Yeah.
Scott Siefers: Okay, perfect. Thank you for that.
Speaker Change: Okay perfect. Thanks for that and then maybe sort of a top level. One can you sort of address what youre seeing just in terms of.
Scott Siefers: And then maybe sort of a top level one, can you all sort of address what you're seeing, just in terms of some of the consumer spending patterns? I mean, for your size, just given the payments business, you see sort of an outsized amount of spending, just curious, you know, what changes, if any, you've seen since this all, all this uncertainty really ramped up? And if there's been any change in particular since early April, when, when things really began to hit it in a bigger way?
Speaker Change: Some of the consumer spending patterns for your size just given the payments business, you see sort of an outsized amount of spending.
Speaker Change: Spending just curious.
Speaker Change: What changes if any you've seen since this all.
Speaker Change: All of this uncertainty really ramped up.
Speaker Change: There has been any change in particular since early April when when things really began to.
Speaker Change: And in a bigger way.
Gunjan Kedia: Scott, let me start there. We saw a modest pullback in consumer spending early in the year, and that was very weather-related. And it has stabilized towards the end of March. We are watching the downward trend in consumer sentiment, but not seeing that in our spend patterns. Our mix does tilt towards the more affluent customer and towards non-discretionary everyday spend patterns. So that could be an explanation, but we are seeing steady consumer spend patterns in the first quarter.
Scott: Scott, Let me start there.
We saw a modest pullback in consumer spending early in the year and that was very weather related and it has stabilized.
Scott: Towards the end of March.
Scott: We are watching the downward trend in consumer sentiment, but not seen that in our spend patterns.
Scott: Our mix dusk till two words, the more affluent customer and towards non discretionary everyday spend pattern so that could be.
Scott: An explanation, but we are we are seeing steady.
Speaker Change: You must spend patterns in the first quarter.
Scott Siefers: Perfect.
Speaker Change: Perfect Alright, Thank you both for all the color.
Scott Siefers: All right.
Scott Siefers: Thank you both for all the color.
Scott Siefers: Thank you, Scott.
Speaker Change: Thank you Scott.
John Mcdonald: Our next question comes from John McDonald from Truist Securities. Please go ahead. Your line is open. Yes, hi, good morning.
Speaker Change: Our next question comes from John Mcdonald from <unk> Securities. Please go ahead. Your line is open.
John Mcdonald: Yes, hi, good morning, Ghansham I wanted to ask you a little bit bigger picture on the payments business.
John Mcdonald: Gunjan, wanted to ask you a little bit bigger picture on the payments. You've acknowledged it's been a little bit disappointing relative to what you see as its potential. Did we collectively have too high expectations for payments in the last couple of years, or is it a question of needing to get further along in this shift towards the tech-enabled in order to better align, you know, the business with the industry dynamic?
Speaker Change: You've acknowledged it's been a little bit disappointing relative to what you see as potential did we collectively have too high expectations for payments in the last couple of years or is it a question of needing to get further along in this shift towards the tech enabled in order to better align the business with the industry dynamics.
Gunjan Kedia: Good morning, John. It is a very good question. It's not anchoring too high. The industry is quite attractive. The way we manage our business is quite focused on margins. So I think the right way to think about our personal aspirations is to have a very nice balance of margin and growth. What we are seeing here is that the balance sheet side, the NII side of the payments business is actually very attractive and it is tracking with the industry. And our product offerings historically have been quite attractive for the borrower segment. So we like that. We want to continue that.
John Mcdonald: Good morning, John It is a very good question.
Speaker Change: It's not <unk>.
Speaker Change: <unk> too high the industry is quite attractive the way, we manage our business.
Speaker Change: <unk> is quite focused on margins. So I think the right way to think about our personal aspirations is to have a very nice balance of margin and growth.
Speaker Change: What we are seeing here is that the balance sheet side. The NII side of the payments business is actually very attractive and it is tracking to the industry.
Speaker Change: And our product offerings historically has been quite attractive for the board or segment. So we like that we want to continue that we are leaning in on also the affluent transact.
Gunjan Kedia: We are leaning in on also the affluent transactor segment with a new lineup of products that is attractive to them so we can also augment a free growth. So our expectation would be that we would be in line with the market on volumes and we would maintain our margin and it will be a very healthy, accretive sort of trajectory for the overall payments business for us. And then of course, I always want to remind you that the reason we are in the payments is not because it's a standalone attractive business. It's a very, very attractive product to anchor our client relationships across all banking products.
Speaker Change: Segment that a new lineup of products that is attractive to them. So we can also augment our fee growth. So our expectation would be that we would be in line with the market on volumes and will maintain our margin and it will be a very healthy accretive.
Speaker Change: <unk> set a trajectory for the overall payments.
Speaker Change: Business for US and then of course always want to remind you that the reason we are in the payments is not because it's a standalone attractive business. It's a very very attractive product to anchor our client relationships across all banking products. So so.
Gunjan Kedia: So that's sort of our expectation for payments.
Speaker Change: So that's sort of our expectation for payments.
John Stern: Great.
John Stern: And then, John, a question on expenses. You can put this in the category of no good deed goes uncriticized. You've done a great job keeping quarterly expenses flat for a bunch of quarters in a row now.
Speaker Change: Great and then John a question on expenses you can put this in the category of no. Good deed goes on criticized.
Speaker Change: Done a great job keeping quarterly expenses flat for a bunch of quarters in a row now can you just remind us why that's still enables you to invest enough to play offense against some aggressive payments competitors in a bunch of offense minded banks that are expanding throughout the country.
John Stern: Can you just remind us why that still enables you to invest enough to play offense against some aggressive payments competitors and a bunch of offense-minded banks that are expanding? Well, I think the beauty of our expense programs is we've been able to take a lot of the savings that we've had and invested in and continue to invest. You know, John, we talked in investor day about how our investment has over the years has gone more from defense in building out, you know, all the infrastructure needed to more offense or more two thirds offense versus one third defense.
Speaker Change: Well I think the beauty of our expense programs as we've been able to take a lot of the savings that we've had and invested in and continue to invest.
Speaker Change: You know John we talked in Investor day about our investment has over the years has gone more from defense and building out.
Speaker Change: All the infrastructure needed to more offense or more two thirds offense versus one third defense. When we think about our capex levels, which isn't that kind of a one and a quarter.
John Stern: When we think about our CapEx levels, which is in that kind of one and a quarter billion dollars, we have OpEx and tech or total tech amount and that kind of that two, two and a half billion dollars on an annual basis. And so we continue to invest in all the products and capabilities that Gunjan has been talking about. And so we feel really good about the levers that we have. And that's been part of our plan is to take savings and continue to invest and be offensive minded about it.
Speaker Change: We have Opex and tech are total tech.
Speaker Change: And that kind of that two to $2 $5 billion on an on an annual basis and so we continue to invest in all the products and capabilities that <unk> has been talking about and so we feel really good about the levers that we have and thats been part of our plan is to take savings and continue to invest and be offensive minded about it.
Speaker Change: Okay. Thank you.
Betsy Graseck: Our next question comes from Betsy Graseck from Morgan Stanley. Please go ahead. Thank you and I also thank you, Gerard, for saying that.
Speaker Change: Our next question comes from Betsy <unk> from Morgan Stanley. Please go ahead. Your line is open.
Betsy: Thank you and.
Speaker Change: I also thank you Gerard for saying that and team I will always remember Terry's big.
Betsy Graseck: And team, I will always remember Terry's Big smile and warm embrace. And Andy, so all the best for you. in your retirement. And I hope you enjoy every moment of it.
Betsy: Big Smile and warm embrace.
Andy: And Andy So all the best for you.
Betsy: And your retirement and I hope you enjoy every moment of it.
Speaker Change: Back to business.
Gunjan Kedia: Back to business. Gunjan, just a follow up to the last question. When we think about the market here that you're trying to match the growth rate of, maybe you could give us a little bit of an understanding as to what market we're talking about. When I speak with investors on At this topic, I hear many different thoughts on what the market is. Is it pure play merchant acquirers? Is it... Other banks in the payments ecosystem, of which, you know, everybody is obviously, or leaders in that regard, it would just be helpful to understand what your definition of market and market growth rate is.
Speaker Change: And then just a follow up to the last question. When we think about the market here that youre trying to match the growth rate of maybe you could give us a little bit of an understanding as to what market. We're talking about when I speak with investors on.
Speaker Change: This topic I hear many different thoughts on what the market is it pure play merchant acquirers is it.
Speaker Change: Other banks in the payments ecosystem of which you know everybody is obviously we're leaders in that regard. It would just be helpful to understand what your definition of market end market growth rate is thanks, so much.
Gunjan Kedia: Thanks. Thank you Betsy and thank you for your remarks for Terry and Andy. So first we think of market as being US, not global, because the growth rates are different. We have a credit box, a very specific, intentional range that we target, so we think about that, which is not sort of super, super, super prime, and it's certainly not subprime. We're very well-positioned, sort of in the right mix of yield versus charge-off rates in that middle to high segment. And then the third is we want profitable margins, so we do actually, in our internal thinking, think of the big, big e-commerce, large box retailers as a different growth rate, because we're very committed to high returns, and that market is big enough and growing healthy enough for it to be a very vibrant business for us.
Speaker Change: Thank you Betsy and thank you for your remarks from Terry and Andy.
Speaker Change: So first we think of market as being U S not global because the growth rates are different.
Speaker Change: Have a credit box to very specific intentional range that we target. So we think about that which is not a super Super Super Prime and it's certainly not subprime we are very well positioned in the right mix of yield versus this charge off rates in that.
Speaker Change: That middle to high segment and then the third is we want profitable margins. So we do actually now.
Speaker Change: Internal thinking think of the big Big E Commerce large.
Speaker Change: Box retailers as a different.
Speaker Change: Growth rate.
Speaker Change: Because you're very committed to hydro tons and that market is big enough and growing healthy enough for it to be a very vibrant business for us.
Gunjan Kedia: Okay, great. And then just to follow up is on lending in general, and I noticed your CNI lending was quite strong this quarter. Anything in payments there? And I did notice that your CNI lending commentary in the press release had to do with a majority of that coming from non non-bank or non-depository financial institutions. So could you give us some color on that and is payments a part of that NDFI? Yeah, so, Betsy, I'll start with that. So on the on the commercial side, we in commercial loans, we did see nice growth there. There's really three drivers as I as I think about it.
Speaker Change: Okay, Great and then just a follow up is on lending in general and I noticed your C&I lending was quite strong this quarter.
Speaker Change: Anything in payments, there and I did notice that year C&I lending commentary in the press release has to do with.
Speaker Change: A majority of that coming from none.
Speaker Change: Non bank.
Speaker Change: Our non depository financial institutions. So could you give us some color on that in his payments are part of that and EFI.
Speaker Change: Yeah. So.
Speaker Change: I'll start with that so on the on the commercial side.
Speaker Change: Commercial loans, we did see nice growth there, there's really three drivers as I as I think about it.
John Stern: We had some growth in AVS lending, which is what you were referring to that obviously was a driver, we had greater utilization rate, and that was across the board. And throughout the quarter, it wasn't just at the end of the quarter, it persisted. And it hit it was all markets. And we were up 50 basis points. And I'd say we're getting closer to kind of our long, very long term, normal rates in terms of utilization, which is which is good to see. And then the third thing is, we've been seeing nice growth in our middle market loans, particularly in expansion markets where we have been where we have been growing.
Speaker Change: We had some <unk>.
Speaker Change: Growth in Avs lending, which is what you were referring to that obviously was a driver we had greater utilization rate and that was across the board and throughout the quarter. It wasn't just a.
Speaker Change: At the end of the quarter it persisted and it hit and it was all markets and we were up 50 basis points and I'd say, we're getting closer to kind of our.
Speaker Change: Long very long term normal rates in terms of utilization, which is which is good to see and then the third thing is we've been seeing nice growth in our middle market.
Speaker Change: Loans, particularly in expansion markets, where we have been where we have been growing as we've.
John Stern: As we've on one of the pages that we have, we signify where those expansion markets are. So those are the three things that, that we're, we're, that we've, we have saw, we saw during the quarter for for the growth that you mentioned. Thanks so much.
Speaker Change: One of the pages that we have we signify where those expansion markets are so those are the three things that that were that we saw we saw during the quarter four for the growth that you mentioned.
Speaker Change: Thanks, so much.
Mike Mayo: Our next question comes from Mike Mayo from Wells Fargo.
Speaker Change: Our next question comes from Mike Mayo from Wells Fargo. Please go ahead. Your line is open.
Mike Mayo: Please go ahead, your line is open. Hi, as well said by Gerard and Betsy on the tragedy. Gunjan, you're now CEO of US Bancorp, I guess as of yesterday, and you did highlight some changes in management to make it more simple, interconnected, focused on the five verticals. You said your number one priority is to restore investor confidence, and you can see by the stock price, it's not the valuation it once was. You said you want to have better expenses, organic growth, and payments leading the way to better returns and always superior risk management. Hopefully, I summarized that okay, and I said it yesterday, Andy, I love you, but unfortunately, I didn't love the stock price performance.
Speaker Change: Well said by Gerard and Betsy on the tragedy.
Speaker Change: Yes ghansham.
Ghansham: You are now CEO of U S Bancorp and I guess as of yesterday and you did highlight some.
Ghansham: Changes in management to make it more simple interconnected focusing the five verticals you said your number one priority is to restore investor confidence.
Ghansham: And you can see by the stock price, it's not an evaluation at once was you said you're going to have better expenses organic growth and payments staying the way to better returns and always superior risk management, So hopefully I summarize that okay.
Speaker Change: And I said at Investor Day, like Andy I Love, you, but unfortunately, I didn't love the stock price performance.
Mike Mayo: And so restoring investor trust with getting that confidence back to the company, which should lead to the stock price. So Gunjan, I mean, sometimes you have all-star teams, or often you have all-star teams that lose to regular teams, and so you can have a lot of good players. It just doesn't work out. So I'd say it just, from a stock price standpoint, it hasn't worked out over the longer term.
Speaker Change: And so restoring Investor Trust, we're getting that confidence back to the company, which should lead to the stock price So <unk> Jeong.
Speaker Change: So sometimes you have all star teams are often have all star teams that lose drag their teams and so you'll have a lot of good players. It just doesn't work out so I would say.
Speaker Change: From a stock price standpoint, it hasnt worked out over the longer term so <unk> Janet.
Gunjan Kedia: So Gunjan, stylistically, I know you're doing a lot of continuation, but what are you doing differently now versus Andy? I know you're next to each other, and your partners, and all that, but I want to know how you're different that might evolve US Bancorp to better performance that would lead to a higher stock price, and your number one goal, restoring investor confidence.
Speaker Change: Stylistically.
Speaker Change: I know you're doing a lot of continuation, but what are you doing differently now versus Andy I know you are next to each other and your partners and all that but I don't know how you are different that might evolve U S. Bancorp to better performance that would lead to a higher stock price and your number one goal historic investor confidence. Thank you.
Gunjan Kedia: Thank you. Good morning, Mike. So let me just start by acknowledging that I'm not happy with the stock performance as well. And so we feel the urgency and we hear the message. The priorities that I have laid out do reflect my observations and what we need to do differently. So the expense discipline, which was very core to the US bank story, needs to come back and you've seen us make very strong progress there. That allows us to not just deliver the positive operating leverage and the efficiency ratio targets that we are aiming for, but also invest in organic growth so it's a sustainable performance trajectory.
Speaker Change: Okay.
Speaker Change: Good morning, Mike. So let me just start baked knowledge in that I'm not happy with the stock performance is that.
Speaker Change: So we feel the urgency and we hear the message.
Speaker Change: The priorities that I have laid out do reflect my observations and what we need to do differently.
Speaker Change: So the expense discipline, which is very core to the U S banks story needs to come back and you've seen us make very strong progress there that allows us to not just deliver the positive operating leverage and efficiency ratio targets that we.
Speaker Change: That we are aiming for but also invest in organic growth rates are sustainable.
Speaker Change: Sustainable performance trajectory. The second thing is as you know U S. Bank's history has been to.
Gunjan Kedia: The second thing is, as you know, US Bank's history has been to go through a series of acquisitions and then in more recent times since the GFC to outperform through risk management. We do need to build out the organic growth muscles. So the focus on taking a very exceptional set of businesses, because our portfolio is very attractive. and Amplifying Their Performance, especially in payments, are all the priorities that I think say things need to be done differently. And finally, it just comes back to a culture that will show a very different level of urgency around execution.
Speaker Change: To go through a series of acquisitions and then in more recent times since the GSC to outperform to risk management, we do need to build out the organic growth muscles. So the focus on taking a very exceptional set of businesses.
Speaker Change: Our portfolio is very attractive and amplifying their performance, especially in payments are all the priorities that I think things need to be done differently.
Speaker Change: And finally, just comes back to a culture that will show a very different level of urgency around execution.
Gunjan Kedia: So again, I'll close my remarks by just acknowledging your comments, that we have an exceptional franchise and we're very confident that the results will be better going forward. I appreciate that.
Speaker Change: So again I'll close my remarks by just acknowledging your comments that we have.
Speaker Change: <unk> franchise, and we are very confident that the results will be better going forward.
Speaker Change: I appreciate that when you look at the five verticals.
Gunjan Kedia: When you look at the five verticals, it might be the first time you mention it.
Speaker Change: But that might be the first time you mentioned it what are the five verticals and you said that most of revenues and what's the opportunity to move.
Gunjan Kedia: What are the five verticals? And you said that's most of revenues. And what's the opportunity to move the human bank franchise up to the US Bancorp levels? It seems like those would be some organic growth opportunities. Thanks. That is indeed very, it's an important organic growth opportunity. And here you are talking about our merchant businesses. And just a reminder, the merchant MPS business is about 5% of our overall bank, but a very important differentiator for us. It's a very competitive space. And the reason to think about focusing on the five verticals is you can build stronger tech-led value propositions for each of the verticals.
Speaker Change: Franchise up to the U S Bancorp.
Speaker Change: <unk> because it seems like those would be some organic growth opportunities.
Speaker Change: That is indeed, very it's an important organic growth opportunity and here you are talking about our merchant businesses.
Speaker Change: And just a reminder, the merchant NPS business is about 5% of our overall.
Speaker Change: Bank, that's a very important differentiator for us, it's a very competitive space and the reason to think about.
Speaker Change: Focusing on the five verticals as you can build stronger that led our value propositions for each of the verticals. They are very large verticals. So the retail services travel and entertainment and health care.
Gunjan Kedia: They are very large verticals.
Gunjan Kedia: So they are retail, services, travel, entertainment, and healthcare. And the more we have focused our acquisition efforts and our organic growth efforts on those verticals, The deeper and the better execution we have, and today about 90% of our revenue focuses on those verticals. and Union Bank of the potential to move that up to your level. So Union Bank is a very affluent franchise, a very attractive franchise, more than a million plus clients, 200,000 small businesses. Where we are there is about two-thirds of the penetration on the consumer side relative to where we are on the rest of the franchise and less than half on the small business side.
Speaker Change: And the more we have focused our acquisition efforts and our organic growth efforts in those verticals.
Speaker Change: The deeper and better execution behalf and today about 90% of our revenue focuses on those verticals.
Speaker Change: And Union Bank.
Speaker Change: Potential to move that up to your level.
Speaker Change: So Union bank is a very affluent franchise, so very attractive franchise more than a million plus clients 200000 small businesses.
Speaker Change: Third we are there is about two thirds of the penetration on the consumer side relative to where we are on the rest of the franchise and less than half on the small business side, so getting those two.
Gunjan Kedia: So getting those two US bank levels in the medium term is a very important growth opportunity for us.
Speaker Change: U S bank levels in the medium term, it's a very important growth opportunity for us.
Gunjan Kedia: Now, you didn't ask, but let me just talk about a second one, too, which is our Elan franchise. You know, we serve 1,200 financial institutions in a white-label way across the U.S. That platform has really improved. Just last year, we have made... Some very nice enhancements to the user experience in the core platforms, and that's another growth engine that we are very excited about. All right, thank you.
Speaker Change: Now you didn't ask but let me just talk about a second one too which is that Elon franchise.
Speaker Change: Serve 1200 financial institutions in a white label way across the across the U S that platform has really improved just last year, we have made.
Speaker Change: Some very nice enhancements to the user experience and the core platforms and that's another growth engine that we are very excited about.
Speaker Change: Alright, thank you.
Mike Mayo: Thank you, Mike.
Speaker Change: Thank you Mike.
Erika Najarian: Our next question comes from Erika Najarian from UBS. Please go ahead, your line is open. Yes, hi, good morning.
Speaker Change: Our next question comes from Erika Najarian from UBS. Please go ahead. Your line is open.
Erika Najarian: Yes, hi, good morning.
John Stern: My first question is for John. I just wanted to unpack on slide 18 your comments of a medium-term net interest margin of 3% plus, medium-term representing 2026-2027. So I quickly looked at your... So typically, when we've seen this kind of uplift from the 270s, it's because there's some sort of, you know, some hedges that are and, you know, I'm looking at your C9CRE yields and I compared it to peers that aren't super hedged. And there doesn't seem to be a mismatch there. Your bond yields are a little bit lower than peers.
Speaker Change: My first question is for John.
Speaker Change: Just wanted to unpack on slide 18 your comment of.
Speaker Change: Medium term net interest margin of 3% plus medium term representing 2026 2027.
Speaker Change: I quickly looked at your so typically.
Speaker Change: When we've seen this kind of uplift from the two <unk>, it's because there's some sort of.
Speaker Change: Some hedges that are rolling off and you know I'm looking at your C&I and CRE are our yields and then compared it to peers that aren't super hedged.
Speaker Change: And there doesn't seem to be a mismatch there youre bond yields are a little bit lower than peers I'm wondering.
John Stern: I'm wondering, you know, and I couldn't really tell from your swap disclosures at Investor Day, what could be optimized, but beyond rates, what is the balance sheet optimization plan to get you from the 270s to 3%? Sure. Thanks, Erika. So a couple things there in terms of the hedges and just how we're progressing here. You know, what we're signifying there is the loan growth and investment portfolio mix, as well as the repricing. So a lot of this is mechanical in terms of the repricing. I mentioned before, we have $5 to $7 billion on average per quarter that roll off on fixed rate loans that will reprice 150 to 200 basis points better.
Speaker Change: I Couldnt really tough from your disclosure your swap disclosures at Investor day, what could be optimized but beyond rates what is the balance sheet optimization plan to get you from the 273%.
Erika Najarian: Sure. Thanks, Erika so a couple of things there.
Speaker Change: In terms of the hedges and just how how we're progressing here.
Erika Najarian: What were signifying there is the loan growth and investment portfolio.
Speaker Change: Mix as well as.
Speaker Change: The repricing so a lot of this is mechanical in terms of the repricing I.
Speaker Change: I mentioned before we have 5% to $7 billion on average per quarter that roll off on loans are fixed rate loans that will reprice 150 to 200 basis points better.
John Stern: And then an investment portfolio $3 billion on average for the quarter. And so those at the same levels as well, 150 to 200 basis points. So those things will help drive up net interest margin over time, as well as how we think about the mix of our loan books. So repositioning to things that have higher yield, better returns, those sorts of things.
Speaker Change: And then in the investment portfolio of 3 billion on average for the quarter and so that those.
Speaker Change: At the same levels as well 150 to 200 basis points. So those things will help.
Speaker Change: Drive up net interest margin over time.
Speaker Change: And as well as how we think about the mix of our loan book, So repositioning to things that have higher yield better returns those sorts of things. The other component of it then is on the deposit funding side and that is going to have a little bit of market attached to it so to the extent the fed cuts.
John Stern: The other component of it then is on the deposit and funding side. And that is going to have a little bit of market attached to it. So to the extent the Fed cuts and funding costs go down, that will accelerate our trajectory on net interest margin if we stay at a flatter rate or inverted like we are today on the short end of the curve, then it could take a little bit longer. And that's just contemplated within this guide here. And so those are the things that we are considering. You also made a comment on hedges.
Speaker Change: And funding costs go down that will accelerate our trajectory on net interest margin if we stay at a flatter rate.
Speaker Change: Or inverted like we are today on the short end of the curve and that it could take a little bit longer and Thats just contemplated within this with this guide here.
Speaker Change: And so those are the things that we are considering you also made a comment on hedges and I just just to be clear.
John Stern: And just to be clear, There is really no net interest income impact from our hedges. The payfix swaps that we have on the investment portfolio from an accrual standpoint completely offset receipt fix swaps we have on the commercial loan book. And so you may look at peer comparisons. I know that's hard to do because you don't see every single swap and all that sort of thing. But at the end of the day, when you put it all together, all these rates, all these hedges were in roughly the same zip code of rates that we are today.
Speaker Change: There is really no net interest income impact from our hedges the pay fixed swaps that we have on the investment portfolio.
Speaker Change: From an accrual standpoint completely offset receive fixed swaps, we have on the commercial loan book and so you're you may look at peering comparisons I know that's hard to do because you don't see every single swap and all that sort of thing, but at the end of the day when you put it all together all these rates for all of these hedges were put on in roughly the same Zip code.
Speaker Change: Of rates that we are today and so the accrual of all of it is negligible to the net.
John Stern: And so the accrual of all of it is negligible to the net interest income. Got it.
Speaker Change: Net interest income.
Speaker Change: Got it and my second question is just maybe maybe re asking Gerard question another way.
Erika Najarian: And my second question is just maybe re-asking Gerard's question another way. When we got together in September during Investor Day, you unveiled a $5 billion buyback. You know, you talked about a modest pace of buyback activity and sort of pegged it, I'm guessing, to the 10 percent XAOCI number, improving to 8.8 percent, you know, this quarter. And if I recall correctly, I think there was some commentary in September about being back half-weighted in 2025 in terms of the buyback activity. And I guess as I think about. You know, the opportunity and, you know, I'm guessing based on Gunjan's comments, you know, you think that the stock is inherently undervalued and obviously the macro isn't helping the value of the stock either.
Speaker Change: When we.
Speaker Change: Got together in September at Investor Day, you unveiled a $5 billion buyback.
Speaker Change: You talked about a modest pace of buyback activity.
Speaker Change: Pegged it I'm guessing to the 10% ex a OCI number.
Speaker Change: Improving to eight 8%.
Speaker Change: This quarter and if I recall correctly I think there was some commentary in September about being back half weighted in 2025 in terms of the buyback activity and I guess as I think.
Speaker Change: Think about it.
Speaker Change: The opportunity and you know I'm guessing based on <unk> comments, you know you think that the.
Speaker Change: Stock is inherent undervalued. It obviously the macro is it helping the value of the stock either.
Speaker Change: Well what is our marker is our marker now the 10% of CET one.
John Stern: What is our marker? Is our marker now the 10%? You know, CET1, including AOCI, is our marker time? Or, you know, have things changed because of the economic uncertainty in terms of the buyback?
Speaker Change: <unk> is our mark or time, or how have things changed because of the economic uncertainty in terms of the buyback pacing.
John Stern: Yeah, so it's a number of things, Erika, that we looked at. You know, I mean, obviously, in September, we talked about our new buyback program and how we will balance out distribution with capital build. And we continue to see that and want to do that. We've been doing a good job in marching higher our capital levels, as we mentioned, the 8.8. But we aspire to be at 10% on a Cat 2 basis. And so, you know, as we kind of move forward, our objective is to continue to grow the share repurchases over time. But in the meantime, we want to make it more balanced, we want to continue to grow capital.
Speaker Change: Yes. It is.
Erika Najarian: It's a number of things Erika that we looked at.
Speaker Change: Obviously in September we talked about are.
Speaker Change: Yeah.
Speaker Change: Our new buyback program and how we will balance our distribution with with.
Speaker Change: With with capital build and we continue to see that and want to do that we've been doing a good job and marching higher our capital levels. As we mentioned the eight eight but we aspire to be at 10% on a cat two basis and so.
Speaker Change: As we kind of move forward.
Speaker Change: Our objective is to continue to grow the share repurchases over time, but in the meantime, we want to make it more balanced we want to continue to grow capital and we are mindful of other things such as loan growth such as the macroeconomic environment share price, obviously matters. So all those things we have to consider but those are that's kind of a glide path that we've talked about and that's still consistent.
Gunjan Kedia: And we are mindful of other things such as loan growth, such as the macroeconomic environment, share price obviously matters. So all those things we have to consider. But that's kind of the glide path that we talked about. And that's still consistent with what we mentioned back in September. And John, I'll just add, Erika, we are very committed to the overall distribution levels and getting to that in due course. So this is really a matter of managing the transition, especially in a time like that prudently and not being in a in a rush to do something small, but very committed to the long term distribution targets we have.
Speaker Change: With what we mentioned back in September.
Speaker Change: And John I'll, just add Eric we are very committed to the overall distribution levels and getting to that in due course. So this is really a matter of managing the transition, especially in a time like that prudently and not being.
Speaker Change: In a rush to do something small, but very committed to the long term distribution targets we have.
Speaker Change: Got it thank you.
Erika Najarian: Thank you.
Speaker Change: Okay.
Ebrahim Poonawala: Our next question comes from Ebrahim Poonawala from Bank of America. Please go ahead. Your line is open. Good morning. I guess I just want to echo what Betsy and Gerard said, so. But in terms of... John, just want to make sure I'm not putting words in your mouth, but...
Speaker Change: Our next question comes from Ebrahim <unk> from Bank of America. Please go ahead. Your line is open.
Speaker Change: Hey, good morning.
Speaker Change: First just wanted to echo what <unk> said so.
Speaker Change: But.
Speaker Change: In terms of.
Speaker Change: The question.
Speaker Change: John just wanted to make sure I'm not putting words in your mouth, but.
John Stern: Did you bless that you believe that, absent any macro shocks, the margin should be a 3% average for 2027? So we didn't necessarily say that, Ebrahim, what we're talking about is our expectations that we will achieve 3% net interest margin over the medium term, 2026 or 2027. Those are the two dates that we have in mind. It's not an average or anything, it's just achieving that level. The speed and pace in which we can get there really depend on, with respect to at least the last one, the curve shape, deposit environment, and then a bonus would be loan growth as well, which we have a very modest amount in our forecast, given the environment that we're in.
Speaker Change: Did you bless that you believe that absent any macro shocks the margin should be clean.
Speaker Change: 3% average for 2027.
Speaker Change: So we didn't necessarily say that Abraham what we're talking about is our expectations that we will achieve 3% net interest margin over the medium term 2026 or 2027. Those are those are the two dates that we have in mind.
Speaker Change: Is that an average or anything it's just achieving that achieving that level the speed and pace in which we can get there really depend on.
Speaker Change: With respect to at least the last one the curve shape deposit environment and and then.
Speaker Change: <unk> would be loan growth as well, which we have a very modest amount in our forecast given the environment that were in the first two are fairly mechanical and are very much in our control and so that's the third is more of a flip is the more of the item that we're watching more and so that's kind of what we meant by that.
John Stern: The first two are fairly mechanical and are very much under control, and so the third is more of the flip, is more of the item that we're watching more, and so that's kind of what we meant by those comments. Got it.
Speaker Change: Those comments.
Speaker Change: Got it and I guess, just a separate question on expenses. So laser focused on operating leverage. It has been flat is it fair to assume that we could see multiple quarters of flat to lower expenses.
John Stern: And I guess just a separate question on expenses. So laser focus on operating leverage, it's been flat.
John Stern: Is it fair to assume that we could see multiple quarters of flat to lower expenses in the kind of revenue growth backdrop that you have talked about or guided for, given all the efficiency opportunities within the bank? Or is that being too aggressive?
Speaker Change: Yeah in the kind of revenue growth backdrop that you have talked about our guided for given all the efficiency opportunities within the bank or is that being too aggressive.
John Stern: Ebrahim, let me start there. What we are managing to is delivering positive operating leverage. To the extent that the revenue picture has some uncertainty to it, we are flexing our expense base to deliver both positive operating leverage and invest back into growth. So what you should be looking for is the consistent positive operating leverage and the expense base will depend on the revenue environment.
Speaker Change: Ebrahim, let me start there what we are managing to is delivering positive operating leverage.
Speaker Change: They extended the revenue picture has some uncertainty to it we are flexing our expense base to deliver both positive operating leverage and invest back into growth. So what you should be.
Speaker Change: I'm looking for is the consistent positive operating leverage in the expense base will depend on the revenue environment.
John Stern: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Bill Carcache: Our next question comes from Bill Carcache from Wolf Securities. Please go ahead, your line is open. Good morning, Gunjan and John. And thank you for taking my questions. Following up on your expense commentary, your 200 plus basis points of positive operating leverage is very clear in your guidance. But is it reasonable to expect that positive operating leverage could break above 300 basis points given the continued tailwinds from fixed rate asset repricing that are fairly mechanical in nature? Your NIM commentary, John, and sort of just that expense trajectory that you've been on, understanding there's a lot of uncertainty at a macro level, but, you know, sort of steady state with where we are, would that be a reasonable expectation?
Speaker Change: Our next question comes from Bill Kirk cash from Wolfe Securities. Please go ahead. Your line is open.
Speaker Change: Good morning, John and thank you for taking my questions following up on your expense commentary.
Speaker Change: Youre 200, plus basis points of positive operating Leverages very clear.
Speaker Change: Your guidance, but.
Is it reasonable to expect that positive operating leverage could break above 300 basis points. Given the continued tailwind from fixed rate asset repricing that are fairly mechanical in nature. Your NIM commentary, Jonathan and sort of just add expense trajectory that <unk> been on understanding theres a lot of <unk>.
Speaker Change: Uncertainty at a macro level, but.
Speaker Change: Sort of steady state with where we are would that be a reasonable.
Speaker Change: Expectation.
John Stern: Sure. Thanks, Bill. So I think, you know, in terms of operating leverage, just to reiterate what Gunjan said, we're looking at obviously growing our revenues through a number of different initiatives that we've talked about and how that comes to be. Obviously, there's a macroeconomic environment that we have to acknowledge. And to the extent that that is better than what we had expected, then we will grow expenses to match that. If things are on the other side, then we'll flex down and we have the levers to do that. Ultimately, we're talking about achieving over 200 basis points of positive operating leverage.
Speaker Change: Sure. Thanks, Phil So I think in <unk>.
Speaker Change: In terms of operating leverage just to reiterate what <unk> said, where we are.
Speaker Change: We're looking at obviously growing our revenues through a number of different initiatives that we've talked about and how that comes to be obviously theres a macroeconomic environment that we have to acknowledge and to the extent that that is better than what we had expected then we will grow expenses too.
Speaker Change: To match that if things are on the other side, then we'll flex down and we have the levers to do that ultimately we're talking about.
Achieving over 200 basis points of positive operating leverage and that may bounce up and down a little bit above that level quarter to quarter based on the circumstances of that quarter. So could something hit 300 basis points. It could it's possible, but we would likely want to invest and make some additional investments during that particular quarter. So that's going to be the throttle.
John Stern: And that may bounce up and down a little bit above that level, quarter to quarter, based on the circumstances of that quarter. So could something hit 300 basis points? It could. It's possible. But we would likely want to invest and make some additional investments during that particular quarter. So that's going to be the throttle that we think about as we move forward.
Speaker Change: That we think about as we move forward.
John Stern: Understood. Thanks, John.
Speaker Change: Understood. Thanks, Shannon separately on credit you are flat.
John Stern: And separately on credit, your flat, relatively flat reserve rate seems consistent with stable asset quality across your consumer commercial portfolios.
Speaker Change: Relatively flat reserve rates seems consistent with stable asset quality across your consumer commercial portfolios, but.
John Stern: But maybe if you could just, you know, discuss what you're hearing from clients who are most exposed to changes in tariff policy, there's still a lot we don't know. But can you give us a sense for whether your client base is more exposed to the risk of a potentially more significant credit event versus simply just slower growth that that would be relatively Sure. Thanks, Bill. So, broadly speaking, we're not seeing anything overall. It's way too early, as you said. The commentary changes frequently. And so, we're all awaiting and watching. However, all that said, as you would expect, we have a very strong credit and risk management team.
Speaker Change: Maybe if you could just.
Speaker Change: Discuss what Youre hearing from clients were most exposed to changes in tariff policy Theres still a lot. We don't know, but can you give us a sense for whether your client base is more exposed to the risk of potentially more significant credit event versus simply just slower growth that that would be relatively manageable.
Speaker Change: Sure. Thanks, Bill so.
Speaker Change: Broadly speaking, we're not seeing anything.
Speaker Change: Overall, it's way too early as you said the commentary changes frequently and so we're all waiting and watching however, all that said as you would expect.
Speaker Change: Have a very strong credit and risk management team. They have an idea of the subsets of portfolios that we look at.
John Stern: They have an idea of the subsets of portfolios that we look at. That would be all the natural players that you would think of when you think of tariffs on things like automobiles and building materials and things of that variety. So, when you think of that sort of thing, you know, the important thing is also understanding the client, because each client is going to have a different supply chain and different unique circumstances. So, it's really about understanding the portfolio and getting ready for those sorts of events. We're hopeful for it, but we're also acknowledging that there are conversations out there on tariffs, and we want to be prepared for it.
Speaker Change: That would be all the natural players that you would think of when you think of tariffs on on things like automobiles and building materials and things of that variety. So when you think of that sort of thing.
Speaker Change: The important thing is also understanding the client because each client is going to have a different supply chain in a different unique circumstances. So it's really about understanding the portfolio and getting ready for those sorts of events. We're hopeful for every for it but we're also acknowledging that there are conversations out there on tariffs and we want to be.
Speaker Change: Prepared for it.
John Stern: Thank you for taking my questions.
Speaker Change: Thank you for taking my questions.
Ken Usdin: Thank you. Our next question comes from Ken Usdin from Autonomous Research. Please go ahead. Your line is open. Thanks. Good morning.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Ken <unk> from Autonomous Research. Please go ahead. Your line is open.
Speaker Change: Thanks, Good morning, Doug.
John Stern: John, if I could just clean up a couple of quick things. Can you just let us know what curve you're now using in terms of cuts in the 10-year relative Sure, so right now our most recent forecast includes two cuts, one in the summer and one in the fall from the Federal Reserve on the short end, and then the long-term rates are pretty much in the zip code of what we have today throughout the course of the year. So that's effectively what our projections are at this point.
Speaker Change: John if I could just clean up a couple of quick things can you just let us know what curve youre now using in terms of cuts in the 10 year relative to what you gave us in January.
John Mcdonald: Sure. So right now our most recent forecast includes two cuts one in the summer and one in the in the fall.
John Mcdonald: From the Federal reserve on the short end and then the long term rates are pretty much in the ZIP code of what we have today throughout the course of the year. So that's effectively what our expectation of our projections are at this point.
John Stern: And then a couple quick things on fees. So in the payment side, you had talked previously quarters about prepaid card getting to a run rate. Did that happen in the first quarter and kind of going forward?
Speaker Change: Okay Cool and then a couple of quick things on fees. So in the payment side, you had talked previously quarters about prepaid card getting too.
Speaker Change: Run rate did that happened in the first quarter and kind of going forward.
John Stern: Any other things we should be thinking about outside of, you know, seasonality in terms of just the kind of organic growth rate of payment? Yeah, so prepaid card had some impact this quarter. That's all completed now. It was worth a couple points within that line item of the card book. That's all completed now. And so going forward, I would expect normal seasonality that you would expect from and we've talked about that or had that in our slides in the previous in terms of the trends that we see from a seasonal basis. So all those things still hold and that's our expectation going forward.
Speaker Change: Any other things, we should be thinking about outside of seasonality in terms of just the kind of organic growth rate of payments.
Speaker Change: Yes, so prepaid card had some impact this quarter Thats. All completed now is worth a couple of points within that line item of the card book.
Speaker Change: Thats all completed now and so going forward I would expect normal seasonality that you would expect from and we've talked about that are have that in our slides in the previous in terms of the trends that we see from a seasonal basis, although all of those things still hold and that's our expectation going forward.
John Stern: Thank you.
John Stern: Okay, and last one, just, you mentioned, I think, in your remarks about how the corporate services capital markets had a good DCM or, you know, debt issuance type of quarter. Do you see some of that as either, you know, pull forward in the environment or just can you just talk through your general pipelines for the capital markets side of that corporate Sure, yeah, the capital markets business continues to show a lot of growth opportunities. We've been growing our client base, both in terms of high grade as well as investment grade as well as high yield.
Speaker Change: Okay and last one just on.
Speaker Change: You mentioned I think in your remarks about how the corporate services capital markets had a good DCM or debt issuance type of quarter.
Speaker Change: Do you see some of that is either pull forward in the environment or just can you just talk through your general pipelines for the capital market side of that corporate services business. Thanks.
Speaker Change: Sure, Yes, the capital markets business continues to show a lot of growth opportunities, we've been growing our client base.
Speaker Change: Both in terms of high grade as well as.
Speaker Change: Our investment grade as well as high yield.
John Stern: The foreign exchange and derivative or client interest rate derivative businesses have very strong pipelines. The market volatility has been very good to those as we continue to build that out. So we have a lot of momentum in that space, and we feel really good about it as we march throughout the course of the year.
Speaker Change: The foreign exchange and derivative or client interest rate derivative.
Speaker Change: Businesses have very strong pipelines the market volatility has been very good to those businesses.
Speaker Change: We continue to build that out so we have a lot of momentum in that space and we feel really good about it as we as we March throughout the course of the year.
Speaker Change: Okay.
Speaker Change: Alright, Thanks John.
John Pancari: Our next question comes from John Pancari from Evercore ISI, please go ahead your line is Good morning. Just to follow up there on the fee side, I know you cited mid-single digit growth expectation on fees, and I just want to see if you can more explicitly break that down by the various lines, how you're thinking, and if that's changed from previous. And more specifically, I'm interested in CARD. I know, I think you have pointed out in the past that you're confident in a mid-single digit growth rate in CARD in 2025. But it was up about 1.5% year-over-year this quarter.
Speaker Change: Thank you. Our next question. Our next question comes from John <unk> from Evercore ISI. Please go ahead. Your line is open.
Speaker Change: Good morning, just a follow up there on the fee side I know you cited mid single digit growth expectation on fees and I just wanted to see if you can more explicitly break that down by the various lines that youre, how youre thinking.
Speaker Change: It's changed from previous and more specifically I'm interested in card I know I think you have pointed out in the past that you are confident in the mid single digit growth rate in card.
Speaker Change: In 2025, but it was up about one 5% year over year. This quarter. I know you mentioned card spend was weaker earlier in the quarter and stabilized in March but how is mid single digits attainable when you're coming off of this level and there's uncertainty in the macro outlook. Thanks sure.
John Stern: I know you mentioned CARD spend was weaker earlier in the quarter and stabilized in March. But how is mid-single digits attainable when you're coming off of this level and there's uncertainty in the macro? Sure. So, you know, in terms of mid-single-digit growth, that's for the entire fee complex that we have, not just CARD. CARD was impacted, as I mentioned, with the prepaid item for the first quarter. But as we get beyond that, then we expect to grow. And, you know, the payment trends that Gunjan spoke of was really a temporary phenomenon in terms of the weather.
Speaker Change: Sure. So in terms of mid single digit growth that's for the entire <unk>.
Complex that we have.
Speaker Change: Not just card card was impacted as I mentioned with the prepaid item for the first quarter, but as we get beyond that then we expect.
Speaker Change: To grow.
Speaker Change: And the payment trends that <unk> spoke of was really a temporary phenomenon in terms of the weather. So that's really what we what we saw there we expect to see growth in that as well as areas like trust capital markets that I just spoke of.
John Stern: So that's really what we saw there. We expect to see growth in that, as well as areas like trusts, capital markets that I just spoke of, and things like that. Other revenue was also up, and I would mention, you know, we've given a range of $125 to $150 million. I would expect that to be on the upper end of that range as we move forward throughout the course of the year. So it's those sorts of things that are driving us for that mid-single-digit growth for the fee complex. And again, excluding that, the prepaid card and then the weather dynamic, I mean, Did you achieve, would you say, about a mid-single-digit growth year-over-year pace on an adjusted basis in the card?
Speaker Change: And things like that.
Speaker Change: Other revenue was also up and I would mentioned, we've given a range of $125 million to $150 million I would expect that to be on the upper end of that range as we move forward throughout the course of the year. So it's those sorts of things that are driving us for that mid single growth four digit growth for the fee complex.
Speaker Change: And again excluding that.
Speaker Change: The prepaid card and then the weather dynamic I mean.
Speaker Change: You did you achieve what would you say, it's about a mid single digit growth year over year pace.
On adjusted basis in the card business.
John Stern: Well, card grew at 4% credit card, just overall, forgetting the prepaid for a moment. So we're at that we're at that pace. So we feel we feel good about this trajectory.
Speaker Change: While card grew at 4%.
Speaker Change: What card.
Speaker Change: Overall forgetting the prepaid for a moment so were at that were at that pace. So we feel we feel good about the trajectory.
Erika Najarian: Okay got it alright, thanks for that John and then separately back to the operating leverage not to beat a dead horse but.
John Stern: Thanks for that, John.
John Stern: And then separately, back to the operating leverage, not to be the dead horse, but the the two on your basis point expectation, and I know you, you had indicated several times that you do have some levers. If revenue does come in weaker, and we all worry for the industry as a whole, as we're looking at it right now, revenue may come in weaker.
Erika Najarian: The 200 basis point expectation and I know you had indicated several times that you do have some levers.
Speaker Change: If revenue does come in weaker than we all worry for the industry as a whole as we're looking at it right now revenue may come in weaker so like what are the areas that you actually have levers what areas are can you pull back materially and costs were you already haven't done. So I just want to see if you can kind of maybe walk through that because it's clear.
John Stern: So like, what are the areas that you actually have levers? What areas can you pull back materially and costs where you already haven't done? I just want to see if you can kind of maybe walk through that because it's clear that you're investing and you're in the middle of a still of a transformation in payments and obviously strengthening your organic capability. So curious where the real levers are. Sure. So, you know, in terms of the cost base, we, a lot of the programs that we listed on our slide deck is really programs that we have on on expenses.
Erika Najarian: That you're investing in your you are in the middle.
Speaker Change: Or are you still of a transformation in payments and obviously.
Speaker Change: Strengthening organic capabilities, so curious where the levers are in the cost base.
Speaker Change: So in terms of the cost base, we have a lot of the programs that we listed on our slide deck is really programs that we have.
John Stern: And some of these things are short term, that can be realized immediately, some are take a longer time to implement. And so the timing of that matters in terms of the levers that we can pull. And so, as, as we've talked about with operating leverage, we have flexibility within that expense, those expense programs to increase or increase the pace of savings or not, depending on the revenue environment. And so obviously, we're watching the revenue environment like everybody else. And this is just the number of things that we can do, whether it's real estate, or automation, or looking at our org structures and things of that variety, we have control over.
Speaker Change: On expenses and some of these things are short term that can be realized immediately some are take a longer time to implement and so the timing of that matters in terms of the levers that we can pull and so as as we've talked about with operating leverage we have flexibility within that expense those expense programs too.
Speaker Change: Increase or increase the pace of savings or not depending on the revenue environment and so obviously, we're watching the revenue environment like everybody else and this is just the number of <unk>.
Speaker Change: Things that we can do whether it's real estate or automation or looking at our org structures and things of that variety, we have control over and so those are the sorts of levers that we have and John I'll just add that the flexes in how much we reinvest back into the business. The expense savings. We are focused on on driving so the flex is just how much we invest.
Gunjan Kedia: And so those are the sorts of levers that we have.
Gunjan Kedia: And John, I'll just add that the flexes and how much we reinvest back into the business, the expense savings, we are focused on on driving. So the flex is just how much we invest back in the business.
Speaker Change: Back in the business.
Speaker Change: Okay, great. Thank you thanks, John Thank you.
Gunjan Kedia: Thank you, Gunjan. Thanks, John.
Saul Martinez: Thank you. Our next question comes from Saul Martinez from HSBC, please go ahead your line is open. Hi, thank you for taking my questions. I wanted to go back to slide eight. and drill down on that. And if you if they run the math on that slide and think about what it implies for net interest income. You have $700 billion plus of average earning assets in 27. If I assume the ratio of earning assets to total assets is roughly constant from here and apply 3% NIM, you get to over a $19 billion net interest income figure for 2027, which is a CAGR of over 5% from 24 versus 25, where the growth is probably going to be less than that.
Speaker Change: Yes.
Speaker Change: Our next question comes from Sal Martinez from HSBC. Please go ahead. Your line is open.
Sal Martinez: Alright. Thank you for taking my questions I wanted to go back to slide 18, and drill down on that and if you run the math.
Speaker Change: On that slide in.
Think about what it implies for net interest income you have $700 billion plus.
Speaker Change: Plus of average earning assets in 2007.
Speaker Change: If I assume the ratio, earning assets. The total assets is roughly constant from here.
Speaker Change: Apply 3% NIM.
Speaker Change: You get to over $19 billion net interest income figure for 2027, which is a CAGR of over 5% from 24.
Speaker Change: 25, where the growth is probably going to be less than that kind of implies almost high single digit growth.
Saul Martinez: It kind of implies almost high single-digit growth on the back end of that, 26 and 27. And it's well above our estimate or consensus.
Speaker Change: On the back end of that 26 27.
Speaker Change: And it's well above our estimate or consensus so I'm curious what your reaction to that is are you do you think consensus is too low for net interest income and.
John Stern: So I'm curious what your reaction to that is, and do you think consensus is too low for net interest income? And in addition to that, I think you're assuming low single-digit loan growth and the long end of the curve kind of staying where it's at. But just any additional details on some of the underlying assumptions would be helpful as well.
Speaker Change: In addition to that what are you.
Speaker Change: Seniors youre assuming.
Speaker Change: Youre, assuming low single digit loan growth.
Speaker Change: And the long end of the curve.
Speaker Change: Kind of staying where it's at but just anything any additional.
Speaker Change: Details on some of the underlying assumptions would be helpful as well.
John Stern: Sure, Saul. Thank you for that. So what we wanted to project is just our thoughts on what our thoughts are on particularly on the asset side, how the balance sheet is going to grow. As you suggest, if you do the math on just kind of the midpoints of those ranges, it's really a kind of a low single-digit growth, which implies the loan growth is muted. And that's what we see, and that's what we forecast. Now, it certainly could be bigger than that, depending on how the economy evolves, et cetera. We don't know that.
Speaker Change: Sure sure. So I'll. Thank you for that so.
What we wanted to project is just our thoughts on what are.
Speaker Change: Thoughts around particularly around the asset side, how the balance sheet is going to grow as you suggest if you do the math on just kind of the midpoint of those ranges, it's really a kind of a low single digit growth, which implies the loan growth is.
Speaker Change: Is.
Speaker Change: Muted and that's that's what we see and that's how we that's what we forecast now it certainly could be bigger than that depending on how the economy evolves et cetera. We don't we don't know that I mean getting.
John Stern: I mean, getting out to 2027 and making a call on net interest income is very hard to do, obviously. And I won't do that here. I'm just offering a page to share with you our thoughts on how the net interest margin will evolve over time. And it really is driven by the two things that are quite mechanical and are under our control, which is loan and investment portfolio repricing and remixing that we think will be very beneficial to us. And then the funding component will have some market components, as I mentioned. So those are kind of the highlights of that page.
Speaker Change: Now to 2027, and making a call on on net interest income is very hard to do obviously.
Speaker Change: We'll do that here I'm, just offering a page to share with you our thoughts on how the net interest margin will evolve over time and it really is driven by the two things that are quite mechanical in our control, which is loan and investment portfolio repricing and remixing that we think will be very beneficial to us and then the funding component.
Speaker Change: We'll have some market components as I mentioned so.
Speaker Change: Those are kind of the highlights of that page. We just wanted to provide a path of how we're thinking about net interest margin go forward.
John Stern: We just wanted to provide a path of how we're thinking about net interest margin go forward. No, I get that, you know, and I get that it's, you know, unclear, or you don't want to give a net interest, a specific net interest income figure for 27. But, you know, we have the NIM, you're giving a NIM figure, and you're giving an asset figure. So, you know, you can multiply one by the other and, you know, extrapolate. So, you know, and it does seem to be suggesting a much higher figure than, you know, where the street is at in terms of net interest income.
Speaker Change: Yes.
Speaker Change: And I get that it's unclear.
Speaker Change: You don't want to give a net interest in specific net interest income figure for 2007, but.
Speaker Change: We have the NIM youre, giving a NIM figure and youre, giving an asset figure so.
Speaker Change: You can multiply one by the other and sure extrapolate so.
Speaker Change: And it does seem to be suggesting a much higher figure than.
Speaker Change: Where the street is that in terms of net interest income.
John Stern: Yeah, I mean, it's it's, again, it's based on our our internal view of how we believe that the net interest income will evolve, given the assets that we have in the balance sheet, how those were repriced over time, and how our deposit optimization can work over time. Again, we assume a upward sloping curve here. And in some of the projections we talked about investor day, those apply to this. And so that's those are those are some of the factors that we have to consider. And it creates a wide range of change, but we wanted to provide you at least the path of how we think about it within our modeling.
Speaker Change: Yes, I mean, it's again, it's based on our internal view of how we believe that the net interest income will evolve given the assets that we have on the balance sheet, how those will reprice over time and how our deposit optimization can work over time again, we.
Speaker Change: We assume a upward sloping curve here.
Speaker Change: And in some of the projections, we talked about Investor day, those apply to this and so that's those are those are some of the factors that we have to consider it.
Speaker Change: Creates a wide range of change, but we wanted to provide you at least the path how we think about it.
Speaker Change: Within our modeling.
Saul Martinez: Okay, that's helpful. I'll see the floor.
Speaker Change: Okay. That's helpful.
Speaker Change: Thank you.
Speaker Change: Okay.
Vivek Juneja: Our next question comes from Vivek Juneja from J.P. Morgan. Please go ahead. Your line is. Thanks. A couple of questions. Firstly, Merchant Processing and Corporate Trust What percentage of the revenues are in Europe? Well, on the merchant side, it's about a third of the revenues as it relates to that. On the trust and fund services, it's even smaller than that. It's probably sub 10%, I would say.
Speaker Change: Our next question comes from Vivek <unk> from JP Morgan. Please go ahead. Your line is open.
Speaker Change: Thanks.
Vivek: Couple of questions.
Vivek: Firstly merchant processing and corporate trust.
Vivek: What percentage of the revenues are in Europe.
Vivek: Well on the merchant side it's.
Vivek: It's about a third of their revenues as it relates to.
Vivek: To that on the on the Trust and fund services, it's even smaller than that.
Vivek: It's probably sub 10% I would say.
Vivek: Okay.
Gunjan Kedia: Different topics. Gunjan, your thoughts on this. You've talked about the Edward Jones partnership and driving growth through that. There was an article that I saw about Edward Jones actually submitting an application to set up their own bank and wanting to grow their own deposit program. Could you talk a little bit about how that would work with your partnership? Good morning, Vivek. So we are very aware of their plans and we have been all through our discussions around our partnership. What they are trying to do with their own bank application is a very limited scope for CD-like saving products, but the big bulk of banking capability that combines with the financial advice and brokerage capabilities is going to come from us.
Vivek: Different topic.
Speaker Change: Ghansham I'll touch on this you've talked about the Edward Jones.
Vivek: Sure.
Vivek: And driving growth for that.
Vivek: There was an article that I saw about Edward Jones actually.
Vivek: Depending on application to set up their own bank.
Vivek: Wanting to grow their own deposit program could you talk a little bit about how that would work with your partnership.
Speaker Change: Good morning, Vivek. So they are very aware of their plants and we have been able to our discussions around our partnership.
Speaker Change: What they are trying to do with their own bank application is a very limited scope for cedar.
Speaker Change: <unk> life saving products that the big bulk of banking capability.
It combines the Dev.
Speaker Change: The financial advice and brokerage capabilities is going to come from us. So this is Betty.
John Stern: So this was very well contemplated to our discussions, not a surprise to us. And lastly, just in the cleanup thing for you, John, other income. is a you'd guided previously to 125 to 150 million is that still the normal run rate given the upside you have this for Yeah, I think that we'll be on the high end of that range as we think about that going forward. Some more in the 150 area is kind of how I think about that for the foreseeable future.
Speaker Change: Well contemplated to our discussions not a surprise to us.
Speaker Change: Okay.
Speaker Change: And last thing just in the cleanup thing for you and John other income.
Speaker Change: You had guided previously to a $1 $25 million to $150 million is that still the normal run rate given the upside you had this quarter.
Speaker Change: I think that will.
Speaker Change: We will be on the high end of that range as we think about that going forward. Some more in the 150 area is kind of how we think about that for the foreseeable future.
Speaker Change: Okay.
Speaker Change: Thank you.
Matt O'connor: Our last question will come from Matt O'Connor from Deutsche Bank. Please go ahead. Your line is Morning, Matt. Hi, I want to follow up on the new credit card. 0% for two years. Often there's an upfront drag as you kind of ramp up those loans and then obviously the payback on the other side, but anything that we should be modeling for that. as we think about kind of up front next several quarters. Matt, the concept is very appropriate. There is an investment into building out the pipeline. We managed that quite carefully so that it does not change the overall dynamics of the fee growth and it's a consistent inching up of the organic growth to create momentum going forward.
Speaker Change: Our last question will come from Matt O'connor from Deutsche Bank. Please go ahead. Your line is open.
Speaker Change: Good morning, Matt.
Matt O'connor: Hi, I wanted to follow up on the new credit card.
Speaker Change: Zero percent for two years and often there is an upfront drag as you kind of ramp up.
Speaker Change: As loans and then obviously the payback on the other side, but anything that we should be modeling.
Speaker Change: For that.
As we think about kind of upfront next.
Several quarters.
Speaker Change: Matt the concept is very appropriate there is an investment into building out the pipeline the manage that quite carefully so that it does not change the overall dynamics of the fee growth and so.
Speaker Change: It's a consistent inching up of the organic growth two to create momentum going forward. So we would not expect it to show up in your modeling in any meaningful way, but it does create pipeline strength 18 to 24 months out.
Matt O'connor: So we would not expect it to show up in your modeling in any meaningful way, but it does create pipeline strength 18 to 24 months out.
John Stern: Okay, and it's a little bit of a lead into my follow up question on the net interest income guide for 2Q. I think X day count, if you take the midpoint, it's relatively flat. And I guess, I don't know why, why not grow a little bit as we think about progressing throughout the year starting in 2Q.
Speaker Change: Okay.
Speaker Change: My follow up question on the net interest income guide for QQ I think ex day count if you take the mid point, it's relatively flat.
Speaker Change: And I guess I don't know why why not grow a little bit as we think about progressing throughout the year is starting to occur.
John Stern: Yeah, sure, Matt. So I think just given the environment and how things have evolved, we wanted to provide a little bit more of a range. We do expect net interest income to grow. Obviously, there is one more day. So that's about 20 million or so for the second quarter. X that we do expect growth, but we you know, it's a volatile market. And we wanted to we had some uncertainties and we don't or there is uncertainty, I should say in the marketplace. And we want to reflect that.
Speaker Change: Yeah sure Matt So I think just given the environment and how things have evolved we wanted to provide a little bit more of a range. We do expect net interest income to grow obviously there is one more day, so that's about $20 million or so for the second quarter ex that we do expect growth but.
Speaker Change: It's a volatile market and we wanted to we had some uncertainties. We are there is uncertainty I should say in the marketplace and we wanted to reflect that.
Speaker Change: Got it thank you.
Operator: There are no further questions at this time. Mr. Andersen, I turn the call back over to you. Thank you to everyone who joined our call this morning. Please contact the Investor Relations Department if you have any follow-up questions. You may now disconnect the call. Thank you. This concludes today's conference call. You may now disconnect.
Speaker Change: There are no further questions at this time, Mr. Anderson I turn the call back over to you.
Speaker Change: Thank you to everyone who joined our call. This morning. Please contact the Investor Relations Department. If you have any follow up questions. You may now disconnect the call. Thank you.
Speaker Change: This concludes today's conference call you may now disconnect.
Speaker Change: [music].