U.S. Bancorp (USB) Earnings Call Transcript & Summary

Okay. Thanks, everyone. We're ready for the next session. Up next is U.S. Bancorp. And with us today is Shailesh Kotwal, Head of Payments; and Tim Welsh, Head of Consumer and Business Banking. Shailesh and Tim each have a few slides to run through. So welcome both. And Shailesh, we'll start with you.

Thanks, Matt, and good afternoon, everybody, and thanks for the opportunity here to present to you today. Now before I get started, let me make you aware that we'll be making some forward-looking statements here today. Those are subject to risks and uncertainty. And I'll point you to Slide 2 that has our safe harbor statement for further information. Let's turn to Slide 3 here. As you will see, on the left-hand side here, the red graph represents our branch and ATM footprint. As you can see, we are present in more than 50% of the states here. But more importantly, our consumer businesses are national in nature, particularly our mortgage business, our auto business as well as our payments business. Our credit card business is national in nature. But also our payments business, which is what I'm going to spend some time with you here today, operates both here in North America as well as in Europe. Now with that, let's turn to Page 4. As you will see here, we are the largest non-GSIB bank, and that gives us fewer capital and liquidity requirements compared to our larger peers. But also, we have scale to compete more effectively against both our larger peers as well as our smaller peers. Turning to Page 5. You've heard us talk about our business mix, which is terrific because it's a great balance between interest income generating businesses that are represented on the left-hand side of the page,as well as fee-generating businesses, like payments, our wealth management and investment services. And this gives us a nice balance to provide less volatility in earnings through the cycles. Turning to the next page here. Yes, our individual businesses are quite strong and good contributors to the bottom line. But the whole is stronger than the sum of our parts across these businesses here. We're particularly proud of the payments ecosystem. It's a terrific competitive advantage that we have. I'm going to spend much of our time speaking about that here today. But in addition to that, we have an enormous customer base that we can leverage. We have massive distribution. And that is growing both digitally as well as through partnerships. I'll give you some examples later on. The promise here is -- of that payments ecosystem and weaving these capabilities that we have together to provide more integrated solutions to our customers that are underpinned by data and technology, but also introduce the human element when appropriate to help guide our customers through, co-create with them whenever necessary or appropriate. So I'm going to talk to you about the opportunities that we are seeing both in our payments businesses, and then Tim will talk a little bit about the opportunities that he sees on the consumer side of our businesses. With that, let's turn to Page 7. Now before I talk about the secular opportunities here, let me touch base a little bit on the cyclical side of our business. Now all of you are aware of the cyclical rebound that is taking place in our economy. But throughout 2020, there was a lot of attention paid to our payments businesses. And perhaps for a good reason, there was a lot going on in our economy and our payments business overpunches, overindexes in the businesses that were substantially impacted. In fact, large parts of our economy were practically shut down back in second quarter of last year. Now we have seen a steady rebound from those low levels back in Q2. And our businesses have seen that same reflected in our activity as well. And we remain quite confident that our payments revenues will come back to pre-pandemic levels either at the end of Q4 of this year or certainly early 2022. And with that now, let me turn to Page 8. This is really exciting for us here. We talk about the cyclical rebound that is taking place, but also there is a terrific secular opportunity, particularly on the payment side of our business. We are strong in banking. We are strong in payments. We have had good success in building up our digital capabilities. In fact, the bottom left-hand side of the graph points to some of those success metrics. Over 80% of our transactions are conducted digitally today. And nearly 60% of our loan sales are also digitally enabled. So you see pretty strong momentum there in digital capabilities. And now we are weaving these capabilities together to create simple, holistic solutions for our customers, and that is the unique advantage and attractive value proposition to our customers. I'll touch on some of the examples in the coming pages here. And more recently, as some of you might be aware, we have focused our investments in expanding both our digital capabilities as well as our reach. So with that, let me turn to Page 9. I'll bring some of these to life. Now we've talked about the secular growth here, but let me focus a little bit on the investments that we have made, most of which have been very specifically targeted around our tech-led arena, especially targeted to the small business end of the spectrum. In fact, our tech-led segment within merchant services is the fastest-growing segment. Tech-led often tends to be a partner-led activity. Meaning to say we need to have the technology, but we also need to have right kind of partners to help deliver those solutions integrated to our customers. So partnerships are important in that space, and you will see there, on the top left-hand side, that we have doubled our partnership in 2020 in the middle of the pandemic. And that shows the power when you have the right kind of solutions and the seamless nature of our integration with these partners. Another good example of our tech-led investments is talech. Now talech simplifies, digitizes payments to -- for small businesses. But in addition to that, it helps small businesses manage their business. So it's a fairly important component as small businesses think about how they manage their activity, both payments as well as other activities of their business. And we have seen tremendous success in that. In 2019, as you will see there, we nearly doubled our customer growth via talech, nearly doubled in 2019. But even more exciting is that in the first 4 months of this year, we've already achieved the same growth that we achieved in the entirety of 2020. So we know that the solution is resonating with our customers. So that's one good example. The same type of approach that we have taken to the small business is also something we have deployed as we think about B2B, and we are quite excited about the opportunity that B2B represents both on the commercial as well as on the mid-market as well as large corporate sides of the equation. B2B, in particular, represents a tremendous opportunity, particularly because a lot of that activity is still paper-based. It's expensive and it's delayed with practically no controls. And this is where we have introduced great agile-based methodology through our studios that allows our customers to benefit from all that B2B has to offer, especially leveraging real-time payments. Somebody trying to say...

It's Matt O'Connor, the video and audio feed of Shailesh cut out. [Technical Difficulty]

We'll just give Matt a second here to catch up.

Okay. So I can hear Shailesh.

All right, Matt. Thanks. I'm going to continue. So for those of you that might have lost a connection there, I'm on Slide 9. I spoke about the advantages that we have in digital payments. There you go. Thank you. And I talked about the success that we are seeing through tech-led investments. I talked about the traction in talech, we are really, really excited about. But also on the small business side, and this is, to the right-hand side of the page, I'll give you a couple of examples. Real-time payments is showing tremendous growth. You see from a relatively small base, that we are 200x already this year in 2020 versus 2019, which is when we started. But real-time payments is more than just about transaction processing. It is about delivering better value to our customers. And just to bring this to life, we made real-time payments available to our merchants. It's a product called Everyday Funding. Essentially, our merchant customers can avail of real-time funding benefit based on their transactions for that day, and they settle that evening. Tremendously important to a small business owner. Today, this product launched last year, we already have 10,000 merchants already taking advantage of this value proposition every day. But even more importantly, nearly 1/3 of those merchant customers are new-to-bank customers. And they have both a payments as well as a banking relationship with U.S. Bank. So as you can see, with the right value proposition and stitching these solutions together, it really resonates with a small business owner because it simplifies exactly what they're looking to solve for. So that's the benefit of real-time payments. Now let me turn to Tim who will talk to you about exciting opportunities on his end of the spectrum.

I'm going to pick up on some of the themes that Shailesh talked about there. Obviously, significant investments in digital, but also that human connection to the people and then the integration of all of these pieces together to serve our customers. So as we think about consumer and business banking -- business banking is what we've often called small business. As we think about the consumer and the business banking areas, our view first is that we want to be, as Shailesh just said, we want to be great at digital. That is an absolute prerequisite. I didn't say good at digital. We need to be great at it. And the most important thing from our customers' perspective is that they feel it's -- that our digital tools are intuitive. They're easy to use. They make life a whole lot easier for the customer. That's obviously the most important part of digital. But it is also nice when our digital tools are recognized by third parties and say, "Hey, that stuff is really terrific." And we've seen that in a couple of areas. Just as a few examples. Our app has been rated by an independent third party, Keynova, which looks at all these apps across banking as the #1 app for ease of use and the #2 app overall. And that's not just among regional banks. That's among all banks. Our mortgage process was rated by Kiplinger as having the best digital tools in mortgage. So again, that's not just for the banks, it's for anybody, including fintechs and mortgage. So we're really building and working hard to build that great technical or digital experience. But then we think it's really critical that we add to that for consumers and business banking customers a human element. So it's the digital plus human. So some examples of this. What we're doing in branches with our combination of human and digital, we take that great digital technology, and then we fundamentally change what happens in a branch. You might think of a branch as a place where you used to go and cash a check, and you do that on your own time. What we've seen is that during the pandemic, the fundamental role of the branch has changed. We're now reaching out to a whole lot more customers. As you can see, we're proactively contacting 58% more customers than we did prior to the pandemic. And we're having them come in for appointments, tens of thousands of -- a week where they're sitting down and having discussions about their financial situation. We're helping them with technology. We can go right on to their app or their PC using co-browse technology, and we can help them navigate through some of our digital tools. So we fundamentally have changed what happens within a branch so that it provides financial assistance and technical assistance, and that builds on that great digital platform. At the same time, digital allows us to expand. You're all familiar with our expansion into Charlotte. We've got 2 branches opened, 2 more on the way. There are several other states that we've indicated we're looking at. And we're also building new branches in places across our more traditional footprint that allow us to really create an environment that feels much more like an environment where you can come in and learn the digital tools and get that financial system. So a very different format of the branches no matter where they are. We also have gotten a whole lot better at marketing these digital tools. So again, on the mortgage side, just as an example, we all know how robust the mortgage business has been. Our mortgage, you might recall, we repositioned a few years ago to really focus on the retail purchase side of mortgage. We created a great digital experience. And we've been marketing that very aggressively. And so we're seeing not only significantly a higher level of productivity, but we're seeing that we're taking share across the retail purchase side, up materially our share is over the last several years. So those are all examples of how you combine digital and human in new ways. And then, of course, we have an alliance, which is digitally enabled as well. I think you are aware that U.S. Bank has had a long history of establishing different kinds of partnerships. And the one we've launched with State Farm is particularly powerful, leveraging those digital tools. And if you see on the next page, what it allows us to do is to really expand all across the country, our mix of digital and human. And what you see here is the blue dots represent U.S. Bank locations, the red dots represent State Farm agents. More than 19,000 State Farm agents all across the country who can use our digital tools now to power the potential of the State Farm customers. And you can see on the right, we launched recently the deposit capabilities so they can do checking accounts. We've also launched credit cards and banking services for the agents themselves. And then we'll be doing more on the business banking side for the State Farm customers and then looking to explore a whole lot of other possibilities in the future. So what you see is we take those digital capabilities, we get a national footprint. And very quickly, we're seeing significant uptake. So if you think about just in the short time that we've been working with this alliance with State Farm, we've already seen, on the checking account side, the equivalent increase in production of a small metropolitan area, just since we started. And on the credit card side, it's the equivalent of 2 large metropolitan areas in terms of productivity. So you're seeing a significant uptick even in the very early days of this. And so there's much more runway ahead as we think about ways of combining digital and human in this alliance with State Farm. That's all been on the consumer side. A little bit on the business banking side. I want to touch more on the business banking, that small business side in the next slide. As Shailesh had alluded to, the real power that we're trying to do and we think we are uniquely positioned to do is bring all of the payments capabilities together with the banking capabilities that we have. And that combination of payments and banking, combined with talech that Shailesh talked about, is a particularly powerful and, we believe, unique offering in the market. Because if you think about how a small business operates, they want to be able to integrate their financial services activities into the way they operate their overall business. We need to integrate into the software. And that's what talech plus merchant processing plus banking allows us to do: to be integrated into their operations so that we're just a normal part of how they're doing business every day, managing their cash is similar, taking orders and managing their workforce. That's what we aspire to here. And we see enormous potential in this. As I think you've heard, we have about 1 million small business customers. We see very significant upside here. We can imagine that through deepening the relationships with our existing customers plus adding new customers, as Shailesh was talking about, we could see an increase in revenues of 25% to 30% and an increase in customers of 15% to 20%. So really significant growth potential here, all coming from the integration of these capabilities and connecting them to the operating systems of the small business. So you'll be hearing more about this going forward, but we think it is this combination of human plus digital, bringing together the payments and banking, which is extremely powerful. And so Matt, now that summarizes our comments. Back to you for some questions.

Hello, Matt? [Technical Difficulty]

They still can't hear us, what's going on?

Matt, we can hear you now.

Okay. So guys, I think you can only hear me in the back line. How do I ask you a question? You can repeat it, and it will give you some runway.

Sounds good, Matt. I think we can hear you fine.

Okay. So look, I want to touch on the competitive positioning in each of your 3 businesses. Maybe you could start first in card, which is obviously the biggest segment. You're doing really well before the crisis, outperforming most bank peers in terms of loan growth and fees. Just some color in terms of what was driving that.

Yes. So for those of you that may not have heard the question, the question is our issuing business is the largest component of our payments business, roughly 60%. What are -- what's driving that growth? We are performing pretty well prior to the pandemic and how do we go forward from there? So here, there are 3 things really that distinguish our issuing business from most of the market. One is a competitive product. That's -- it's important to make sure that our product value proposition resonates with our customers. As you might -- some of you would have seen, we just launched a product that is geared towards those people that are looking to travel. So this is a good example of making sure that our products resonate with customers through the pandemic. We updated the value proposition to make sure that people that are looking for takeout and delivery are seeing differentiated value in their products sooner than most of the market reacted to it. So that's one. The second is having a distinguished technology platform that allows us to cooperate with large co-brand and other partnerships as well as small entities in the credit union space. We have a large number of financial institutions. And we don't have the same level of dependency on large single brand, co-brand entities. So that's a second differentiation. And the third is our Elan franchise. We are, by a long shot, a leader in providing soup to nuts turnkey solutions to financial institutions who are looking to partner with somebody that is knowledgeable that knows not only to issue cards, but also manage the back end, as I said, from soup to nuts. And that gives us substantial advantage in the marketplace that provides us distribution that many others lack. So it's the combination of these 3 things that has allowed us to perform better than market, and I do believe that we will continue to do so going forward.

And I think the audience can hear me now, thanks for your patience. In merchant acquiring, I know you get asked this all the time. I'm still asked even recently here,the concern that maybe you've lagged some of the more pure plays, that you don't have scale. And you commented on some of this in your presentation, but can you maybe summarize whether that's the correct perception or incorrect? And why?

I think that's an incorrect perception. And here's the reason why. We've often said -- let me just repeat the question here. Some of you might believe that our products in merchant acquiring may not be competitive. Are we -- is that an accurate reflection or not? Are we competitive? And here's my response. I think that's a misperception. We don't compete generally in the broad-based merchant acquiring space. Particularly, we're absent in the multi-lane retail. And that's a strategic choice. We believe that it is important in the merchant acquiring space. We compete where you have some competitive advantage rather than just processing volume as a competitor value proposition. We've said -- we focus on 4 verticals. We focus on airlines, hospitality, health care and small business. So that's from a vertical-focused standpoint. And then investing in making sure that these entities, particularly in the small business segment, have the right e-commerce value proposition, have the ability to integrate with software vendors the way they choose. Now these investments were being made over the last couple of years. You saw in 2020 our volumes were coming back to be on par with market growth rates. Obviously, given our overindexing in travel and hospitality sectors, we took a little step back in terms of overall volumes. But we think as these industries come back, so will our business.