U.S. Bancorp ($USB)

Good morning, everybody. Welcome to the second day of the RBC Financial Institutions Conference. And we're kicking off the fireside chats this morning with U.S. Bancorp. Immediately to my left is John Stern, the Chief Financial Officer. He joined the organization back in 2000, and he's assumed the leadership of the Financial division in 2023. He's Vice Chair and Chief Financial Officer, as I mentioned. Also to his left is Stephen Philipson, who is Vice Chair and Head of the Wealth, Corporate and Commercial Institutional Banking Group. He's been with U.S. Bancorp since 2009 and has been on a number of the different departments and divisions within U.S. Bancorp, which, as we all know, is a bank that has almost $700 billion in assets, $81 billion market cap and is one of the premier regional banks with a price to tangible book value of about 1.8x. So gentlemen, thank you for joining us. I really appreciate it.

Yes. Thank you.

And maybe we could start off with both John and Stephen with just an overview in the sense that what are you seeing in your customers, the commercial banking area as well as on the consumer side? There are some crosscurrents; of course, we got the geopolitical issues now. But what are you guys seeing right now in your markets?

Sure. So first of all, good morning. Thank you for having us. From an economy standpoint, the way we look at it, it's quite constructive. It's a resilient economy. I know a lot of people have said that, but it's so true. I mean there's a lot of headlines out there, a lot of things that we look at, particularly from a risk management standpoint, we're always looking, but there's just -- there's nothing at this point that makes us rises to the level of something that we think is going to derail things. So it's steady as she goes. From a consumer standpoint, spend is strong across all different type of clients, whether the credit quality of the client base that we have remains quite robust in terms of their spending patterns. And then on the business side, it's robust across -- and broad-based in many of the industries. And Stephen, I don't know if you want to maybe provide a little more color on that?

Yes, I'd just add on the corporate and commercial side, sentiment is strong and it's strengthening. There are macro uncertainties out there. But when we talk to most companies, they've gotten used to dealing with some of these macro uncertainties over the last several years, and they're investing, whether it's M&A or CapEx. And similar on the commercial real estate side, we've seen a deceleration in paydowns that we saw throughout last year and seeing robust pipelines in both C&I and CRE.

Coming back to the resilience, Stephen, of the customers. We're hearing yesterday that because of the pandemic, a lot of companies had to really change the way they operate, which is now a silver lining to this type of period. Is that something that you guys have seen as well with your customer base?

Absolutely. We're actually just talking with a client yesterday about this that particularly on the corporate side, there is a lot more, I would say, nimble approach to managing the business. And it did start back with the pandemic and adjusting supply chains and whether it's tariffs or wars, our customers are much more adept and able to pivot to these curveballs.

Very good. Maybe there's only a few weeks left in the quarter, John. Is there any update to guidance that you guys would like to provide?

Sure. Yes. No change to our guidance for the first quarter, Gerard. We have -- but maybe I'll give a couple -- a little bit of color to how we see the quarter shaping up. From a net interest income standpoint, we had talked about a range of 3% to 4% year-on-year growth, and we expect to be at the high end of the range on that, just given loan growth has been quite strong and so that's powering the net interest income side of the equation. On the fee side, we've talked about 5% to 6% year-on-year growth, and we'll be at the high end of that range as well, given the strength in the capital markets. It remains quite robust. And so that's going to be helpful. Expenses will maintain at that approximately 1% on year-on-year growth. So you put that all together and really meaningful positive operating leverage for the quarter. And so we're really pleased with the outcomes of where we're at right now.

And that's been the real strength over the last -- the third and fourth quarters, the positive operating leverage.

Yes. That's right.

It really stood out, and it looks like it's going to standout again.

Yes. It's going to continue. Yes.

Yes. Following up on the loan growth comment. Maybe you can share with us what areas are you seeing the loan growth? What does it look like, as we go out for the full year? Is it coming in C&I or commercial real estate, consumer? I mean if you both could comment?

Yes, I'll start and maybe Stephen can add on more into his businesses. But the areas that we see a lot of growth continue to be in the card side of the equation and C&I part of the equation. Those have been kind of the main areas where we focused on multi-client and multiservice type of clients. So we're getting multiple products with clients. We know that those are stickier that they generate more revenue for us over time. But the other group that's getting involved is in the commercial real estate side. That's -- we're starting to see fewer paydowns, more activity in that area. We saw a little bit of growth in the fourth quarter. We'll continue to see that in the first. And so that's positive. Mortgage is probably the one area where it's going to probably offset just because with paydowns from rates coming down a little bit. But all in all, we feel really good about -- we've talked about a 3% to 4% year-on-year loan growth, that's probably the right area for us to be at this particular juncture. Stephen?

And just diving into my businesses a little bit. On the C&I side, we're seeing some meaningful growth in the pipelines and loan balances. And it's being driven again by the combination of M&A and just good old-fashioned CapEx. We're seeing some benefit from the reshoring of manufacturing. We're seeing good activity in terms of equipment purchases. So it's a nice contrast relative to the last few years. The last few years, a lot of our loan growth, we built out a structured credit business and a lot of the loan growth was coming from that NDFI segment. And this is the first time in the last few years where we're really seeing what we call the core C&I being the driver. And on the commercial real estate side, just adding to John's comments, it's also pretty widespread in terms of the pipeline growth. It's across retail, industrial, parts of multifamily. So it's sort of, again, getting back to the good old-fashioned plain vanilla CRE growth. And there's a lot of demand for data center financing out there, which grabs a lot of headlines. It's something that we'll remain pretty cautious around and very selective. And that would apply to most of the areas that are in the headlines these days. We never bend our credit box to chase growth. And so as a result, we'll stay pretty diversified. Areas like software, we're not big in. Technology is less than total technology. We stay focused on high-quality cash flow loans. And when you look at our book, we're less than 3% of our commercial loans are in technology. And it's -- so it's kind of a nice environment right now because the most attractive opportunities are just the basics of C&I and CRE.

Yes. Speaking of the data center build out that's going on in our country, are you guys seeing any of the ancillary companies that support, not necessarily the actual construction loan, but it's more of the C&I loans to support the ancillary companies to help with this build out?

Yes, we do see some opportunities, and that's where we are more active, like on the equipment side and certainly on the energy and power side. A lot of opportunities with our utility clients is as they build out capacity, and that's a sector that we've always been meaningful in and are very comfortable with that, that regulated utility risk and see continued growth there.

Got it. John, you gave us the NII outlook for the first quarter. And what are you thinking about for the remainder of the year? The puts and takes across the balance sheet and yields, how are you framing that out?

Yes. So net interest income, there's a lot of moving pieces that tend to kind of come together. But maybe some of the puts and takes I'll go through, and we've talked about this in the past, but it's worth going through that. We've talked about the mixing of our book, more C&I, more card, now a little bit more commercial real estate. So more into that. Those are higher-yielding loans than we've been booking at prior junctures. So I think that's all positive. On the fixed asset repricing side of the equation, that's going to continue to be a tailwind for us. There, I would just say that spreads, though -- and rates have probably down a little bit. And so the spreads -- our reinvestment yields have probably compressed a bit. But we'll have a little bit more volume that will reprice. So that should help offset some of that, but still positive trajectory from a repricing standpoint. Then it comes down to deposits. The deposits are always the story. It's always a competitive market, always has been, always will be. But the 2 areas we're really focused on deposits is going to be, one, the consumer side. We're very focused on how do we grow the consumer franchise. We've been doing a nice job of that over the last year or 2. We continue to expect to do that. Products like our Smartly product, where you combine a card with a checking or savings has proved to be a really good tool for us to grow deposits and bring in an affluent base that we haven't necessarily had in the past. On the commercial side, we're very focused on operational deposits with -- that are tied to fees, again, multiproducts with these customers. And so that's -- those are the 2 areas we are really focused on. The rest we just kind of let run off or move on. So that's kind of how we're thinking about deposits at this point. Maybe I should just add, since you asked about net interest income. Just interest rates, in general, that's another piece that always plays a part. We have 2 cuts still in their forecast. If that happens or doesn't happen, it's not going to be a material driver. And we're pretty well insulated from shocks and things like that. But we're positioned for an upward sloping curve. So the more upward sloping, the better it is for our business over the longer term.

And I know you've talked about this in the past that having the customers with the multiple products are just so much more profitable and stickier than a 1-product customer. And that seems like that's one of the successes that you guys are having.

Absolutely. Yes. And we have a lot of products to utilize. And I think that's a benefit of having a big diversified business that we do.

Okay. And speaking of products and moving to the fee side. Maybe you guys can share with us the acquisition of BTIG and how that fits into these -- your products? And can you tell us also where you see it impacting your business going forward, that acquisition?

Yes. Why don't you start, then I'll...

Yes. So this came about, we started talking to BTIG about this last year. We've been building our capital markets businesses now for over 15 years coming out of the financial crisis. And we're always focused on fixed income, and we've grown a really nice fixed income business with about $1.4 billion in revenues, and we've been expanding products over the years. The last couple of years, we added commodities, we added securitizations, brokered CD origination. And we continue to have a pipeline of new products that we'll roll out on the fixed income side. But we always had this gap on the equity and advisory side since we started building that capital markets business. And we knew that was something the equity and advisory would be tough to build organically. So we know if we were going to get into that business eventually and a lot of our clients have asked us to add that capability over the years, we knew we'd have to acquire it. But if we're going to acquire it, there were 2 big qualifications. One would be cultural fit; and two would be sort of risk management culture or approach. And BTIG checked both those boxes. From a cultural standpoint, we've worked with them for over 10 years. So for over 10 years, they've been our equity referral partner. And if a client wanted to put us on an equity deal, we referred it to BTIG, they executed it and then we shared in the fee, which wasn't always ideal. Some clients didn't like that the fee getting diluted, but it worked and we worked well together. So we knew from a cultural standpoint, there was a good fit. Over 100 BTIG employees regularly interact with team members at U.S. Bank. And then from a risk management standpoint, we knew there was a good fit because these guys operated for over 20 years through the financial crisis, through the pandemic without a safety net. So risk management was existential for them. So it checked both of those boxes and it allows us -- that was really the last major product gap for us in our toolkit. So we're excited to see that move forward, and we see a lot of opportunities after closing. Historically, we've only been able to advise clients on one part of their capital structure, on the debt side. Now we'll be able to go in and have a conversation around the whole capital structure. We'll be able to talk about their strategic aspirations and become that much more of a trusted adviser. And then in areas like fund services, we'll now be able to introduce fund services capabilities to BTIG clients. And then with our existing fund services clients, add things like outsourced trading, prime brokerage, equity derivatives. So a much more fulsome offering there. Wealth management, as we advise companies on IPOs, on selling their companies, there's a wealth management opportunity to help them -- help owners invest those proceeds. And then in our existing fixed income business, BTIG has outstanding distribution. They didn't have a balance sheet. So their distribution was their biggest strength, and they have global distribution that we can plug into our fixed income business. So just a ton of ways for us to work together and really enhance our capabilities for our clients.

And can you remind us, Stephen, it's going to close when about...

We're targeting the second quarter, subject to regulatory approvals.

Okay. Great.

And maybe I can just add a couple of more things just from a financial standpoint. The strategy is quite sound, and we've been -- we're really pleased with the strategic rationale why we're moving forward here. But financially, it's been doing quite well, better than what we would have expected. So we talked about $175 million to $200 million of revenue that will come on board once we close, which second quarter is what we are thinking. It will probably be on the high end of that range given what we know right now. And with that revenue and reduced integration costs, we think it will be slightly accretive from an EPS standpoint this year. We thought it would be more of a neutral event as we kind of thought about the year. And the other thing I would just say, as a reminder, it's going to be 12 basis points of capital when we do close. The final thing I would say is when we talked at Investor Day about our capital markets growth, we had talked about a 12% to 15% growth projection, and that's fantastic growth. And it's all thanks to the gentleman to my left here, who's built a big platform. As we get this bigger revenue base, we'll still be growing quite strongly and it will be probably in the low double digits area. So it's going to be a bigger base, strong growth and we're really excited about it.

That's great. And speaking of fees, as a regional bank, you've got one of the highest fee components of total revenues of your peers, close to 40% to 50%, depending on how you measure it. Aside from this capital markets area, can you share with us where you're seeing the momentum today in the fees and what's driving those other fee lines?

Yes. So I think of the fees in really 4 different kind of buckets from our -- from my seat anyway. And one, we just talked about the capital markets, and we're making great progress there. Second would be the institutional trust and custody and fund services and all those institutional businesses, really strong growth. Based on activity, it's reoccurring. So if prices go up, go down, it's not going to be consequent -- it's all about market activity. We have great market share. Those are a great set of businesses for us. Payments, another great group of products that we have developed over time. You might recall, we were at a conference, I think, in Boston that we -- you might have been at, and we had our leaders there talk about our business strategies there. It's a great gateway business. We pull in a lot of clients organically through different product sets that we have there that other banks probably can't get attached to. And there, the strategies are strong, but they'll take some time for the revenues to show up. That's okay. It's a mid-single-digit business right now, but we have aspirations to grow that. And we see a lot of business that we know we have won, but have not yet installed. So we're really excited about the momentum there. And then the fourth is really the consumer side.

Yes. Got it. Stephen, obviously, on the institutional business, you're differentiating yourselves, as you described, with the capital markets. Are there other areas that differentiates USB from the peers in the institutional world?

Yes, Gerard, I would say the investment services businesses, so fund services, corporate trust, custody, that's a big differentiator for us. We are unique in that we have these large-scale businesses that are very difficult to replicate. They produce annuity-like fee streams as well as attractive deposits. And it's a really meaningful differentiator for us. So Fund Services in the fourth quarter, we highlighted how in the ETF business, which is a fast-growing segment of the market, we've got dominant market share. In Corporate Trust, we're #1 in every market that we serve. And these -- again, they've always been attractive annuity-like businesses. But as we grow the product set like capital markets around Investment Services, we're finding whole new ways to leverage that strong franchise. And I'll give you one example. Recently, we had a Fund Services client where we provided the fund administration for this fund, this asset manager from their early days. So we came in, we provide the plumbing, that's what you do in those Investment Services businesses. And it was a great annuity-like revenue stream and partnership as this fund manager grew and added new funds. But then as we built out these other capabilities, we're able to serve them in other ways. We're able to provide them securitization financing, we're able to service trustee when they do a takeout of that securitization, we're able to provide the hedging that's contractually required in that securitization. So you take a client where we were making a couple of million dollars a year and now you're making tens of million dollars a year. You're going from providing the plumbing to sort of building the whole house. So it's a great opportunity. We talk about interconnectivity, and that's how it works. And you take a franchise like that, that we're able to not just leverage that annuity-like revenue stream from these franchises, but they're now foundational in how we're building broader relationships.

Very good. Maybe just coming back to you, Stephen, again. What's been a competitive impact from private credit in the commercial lending area that you oversee?

Yes. So private credit hasn't impacted us in the same way as others in terms of being this competitive threat from a credit standpoint just because we've never been big in highly leveraged lending. So we didn't have those -- we weren't serving those customers from a credit standpoint and at risk of losing them. Where we've benefited with private credit is in those investment services businesses, whether it's our CLO business or our alternatives business and Fund Services, where we partner with them and provide that plumbing for their funds. And the nice thing in terms of how we interact with private credit, and I don't think there's going to be a massive correction in private credit. But if there were a big downturn, from a credit standpoint, where we interact with them is we provide highly structured lending to some private credit funds, things like subscription finance facilities or AAA tranches of CLOs and AAA consumer ABS. So we're sort of top of the waterfall, highly structured credit exposure in terms of how we face-off with private credit from a credit standpoint. So in a downturn, we've got great protections, lots of credit enhancement underneath. And then from an Investment Services standpoint, our Investment Services business, as John alluded to, it's more about the outstandings in the marketplace. So we're not dependent on the success of a new fund raise or the performance of a fund. It's more about the outstanding. So like in the instance of CLOs, it would take a massive deleveraging in the market for it to start to dent that -- to see outstandings come down and start to dent that Investment Services revenue.

Moving over to expenses and investments. On the fourth quarter earnings call, Gunjan talked about positive operating leverage. It's a focus point for obviously U.S. Bancorp for 2026. Can you remind us the levers that you have to maneuver that positive operating leverage as we go forward?

Sure. So first of all, we're very committed to positive operating leverage. We talked about a little bit of that for the first quarter, what we're seeing; and our targets for the full year, we've talked about in the past. But I would say, if I step back, if I look at 2025, the way we got there was really -- we had strong revenue growth, but it was only about 4%. We had stronger expense discipline. And so as I look forward into 2026, we want more of that to be coming from the revenue side in terms of that. So that's our goal in terms of growing those revenues through all the strategies we just are starting to articulate here. And I think from that seat, if something does go bump in the night, Stephen talked about a scenario where things happen and the revenues don't come in, we have a lot of levers. We spent a lot of time in Gunjan's early tenure and at the end of Andy's tenure as CEO of looking for big expense blocks like real estate, like organizational design and efficiency, some automation and things like that. We've been taking those savings and plowing into growth of late, more marketing, more technology. We know the levers we can pull at any time to meet that moment if needed. So we're committed to operating leverage in that sense.

Very good. Speaking of technology, maybe both of you, if you could, how is U.S. Bancorp using AI in today? And what are some of the opportunities that AI brings to the table for you folks over the next couple of years?

Yes. I'll start and maybe Stephen can give a couple of examples. But from an AI perspective, probably like a lot of companies, we started our program probably a couple of years ago-or-so. We brought in some good expertise. We stood up a center of excellence. We did a lot of the things that you would expect, and we attack big rocks. So we went after developer productivity, call center resources, fraud management and things like that. So that's really where we spent our time. The last couple of months have been different. We've been deploying the tools to the business lines, and it's just been an uptick from the lines organically. It's like unlike anything -- usually, these things are top down. We need to drive efficiencies. But there's a genuine effort within the company to see how does these tools, within the right risk management framework, put it into place and to help make their lives easier, to make their process more efficient, make their product more effective, and we're starting to see the benefits of that. Gerard, we've had flat expenses now for 10 quarters. And the first couple of quarters were very intentional. We're going to use these programs to cut costs. The last few quarters have really been more, I won't say surprises to us, but we've been pleasantly surprised with some efficiencies we've gotten out of the business. I think it's because of some of these tools that are really helping us along the way. So a lot of runway to go, and we're really excited about it, but maybe...

I'll give you a real-time example in my businesses. So getting back to those investment services businesses, they are large businesses moving tons of money every day, very operationally complex. Historically, as we see the revenues grow in that business, as those market outstandings grow, we see revenues grow, we have to scale expenses almost in lockstep to support that growth. But what we're looking at now are opportunities utilizing AI for things like wire matching, reconnaissance, deal document searches, NAV reporting. As we implement AI agents to support some of that, we'll be able to scale the growth without having -- scale the revenue growth without having that same lockstep growth in expense. And so there's a real opportunity to expand margin in the business as we deploy AI.

Very good. I'd be remiss not to ask U.S. Bancorp about credit. You guys have developed a very strong reputation on managing credit well. Aside from downtown office commercial real estate that we're all aware of, what are you guys keeping your eyes on in terms of credit trends? And second, when you think of your ROTCE targets of high-teens, what does that assume for a net charge-off ratio when you go in there?

Yes. So first of all, from a credit standpoint, it's quite stable. We look at a lot of different things. We're constantly -- we have our processes, as you're well aware, in terms of how we manage and risk manage the credit book. Office is obviously starting to fade into the sunset in terms of that story. But other than that, it's been very stable. We expect stable charge-offs. We expect that sort of thing for the foreseeable future. And I would just say any reserve build we have here on out is really going to be tied to loan growth. And as we book more loans, we'll need to cover the provision expense on that side, which is very normal. I would say to your second question really on what environment do we need to have for our high teens ROTCE, which is where we're at right now? It's probably this environment. It's pretty steady unemployment rate, charge-offs in the ZIP code of where we're at today. So those would be probably the key areas that we look at.

Yes. And Stephen, following up what we talked about a moment ago with the pandemic, could it be that we could come through a credit cycle where the commercial loan losses tend to be less than prior periods because the companies themselves are better, again, due to what that tough period we went through?

Yes. And I think companies, in general, are just more nimble, not just in how they manage the business, but how they manage the balance sheet as well. So we certainly see that where there's much more -- they're much faster reactions to changes in the marketplace and adjusting the balance sheet and the capital stack as a result.

Yes. One of the other topics that we've discussed over the last day-or-so is the regulatory outlook. It's really changed. There's the expectation that the Basel III endgame proposal will come out hopefully later this month. What's your guys' view of what's going on and how it affects U.S. Bancorp? And then second, we've also seen a very active M&A market. And what's your view on the bank depository acquisitions that are going on as well?

Sure. So on your -- on the regulatory question, we're -- first of all, we're just pleased with the direction that the regulators are going. They are more focused on large financial risks. And I think that's to be applauded. We're -- we have great relations with regulators. We are always talking to them about our products and where we are at. We're very interested in how this rule set comes out later this -- as a category 2 pending bank that we're approaching $700 billion, we're interested in how they're approaching tailoring, how they're approaching indexing. Some of the comments on MSR is really good to hear since that's somewhat of a constraint for us. So these sorts of things are really positive that we expect to see. The other thing I might add is there's other things -- other topics that have been brought up, credit card caps, CCCA. These are risks out there for us, but they're -- they have to be congressionally approved. So that's kind of the -- so we think low likelihood, but we are always preparing for those sorts of things. And then finally, you asked about M&A. I would just say there's no change in our stance. We are very focused on our organic growth strategies that are in front of us.

Got it. We're running out of time here. So maybe for the final question for both of you. If investors take away 1 core message from our discussion today about the future for U.S. Bancorp, what would you want it to be?

So for the wholesale businesses, I'd say we have a unique and exceptional set of products that generate consistent and differentiated fee growth. Our products are distinct. We operate at scale. And a lot of those products are very difficult to replicate. So the one thing I want them to take away is, as our WCIB lending book continues to grow and we expand our products through organic product expansion and the addition of BTIG, there is a huge opportunity for us to continue to expand on that differentiated fee growth going forward.

And I'd just add, our franchise is -- got a great -- it's hard to replicate, and we've got a differentiated set of products, as we've talked about. We've made tremendous progress in our financial targets that we've laid out in our Investor Day. Now we're not satisfied with that. We want to be more consistent, we want to grow and extend our lead in some of those areas where our ranges are, and we feel the strategies we're super focused on and really excited about our opportunity set in front of us.

Great. And with that perfect time, we've run out. So please join me in a round the applause thanking John and Stephen.

Yes. Thank you.