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

Good morning, everyone. I'm Gerry Benson with Fidelity, and I have the pleasure of introducing U.S. Bancorp. U.S. Bancorp is a financial services company with international operations, and it's the parent company of U.S. Bank. It is headquartered in Minneapolis and the fifth largest commercial bank in the United States with $703 billion of assets at September 30. And Presenting today for U.S. Bancorp is John Stern, the Senior Executive Vice President and Chief Financial Officer. John has been with the organization since 2000 and prior to becoming Head of Finance in 2023, he helped various leadership positions within the company, including President for the Global Corporate Trust and custody business as well as Corporate Treasurer. Joining John today is Stephen Philipson, Vice Chair and Head of Wealth Corporate Commercial and Institutional Banking or CIB prior to becoming Head of WCIB in 2024 and he led the global markets and specialized finance group within WCIB. He has more than 25 years of financial experience including roles at Morgan Stanley in capital markets and fixed income trading as well as Director of the Financial Institutions Syndicate at Wachovia. Please join me in welcoming John and Stephen.

Good morning, everyone, and great to be with you here all this morning. Jerry, thank you so much for the introduction and having us here at this conference. It's great to see everyone out in the crowd. I'll just comment, obviously, on our disclaimer page in terms of forward-looking statements. You can see that for yourself. But as you know, U.S. Bank is a $700 billion company. We have $14 million consumer clients. We have nearly $1 trillion that go through our payment rails on an annual basis, and we have about $13 trillion in assets under custody and administration. All powered by the 3 key business lines that you see on this page in terms of the consumer, in terms of payments and WCIB. And that -- and obviously, you can see the map in terms of where our branches are and client centers are across the country. We certainly are focused on our key strategies. Gunjan has laid this out. And so for several quarters in a row, we've been very focused on key execution in terms of our businesses, we'll be diving into one of our businesses here later this morning. But we are very much focused on organic growth from a revenue side perspective, expense management that goes along with that as well as the payments transformation. Obviously, you can see that has translated into strong financial results. We've been very proud of the results that we have provided this year. And our goal here is, obviously, we are in -- right in the range of where we need to be from a medium-term target perspective. Our goal is to obviously be consistent about it as well as improve upon our metrics, and that's something that we certainly want to see going forward. I'm going to comment on 2 of these metrics just before I jump off this page, the first is on the fee revenue growth side. You see that we had targeted mid-single-digit growth. And clearly, we are well beyond that. Part of that, of course, that 14.9%, about half of that, of course, is the BTIG acquisition, which we're very pleased about, and we'll talk more about this morning. And certainly, we just closed. This is our first full quarter with BTIG fully integrated into the bank. The second is on the capital ratio that you see here. We're a little underneath where we want to be in terms from a fully loaded CAT II perspective. And as you know, we paused on share repurchases this previous quarter just because of unique circumstances in terms of heavy RWA growth we had at the Amazon card book that closed or the small business credit card portfolio closed in August as well as just higher interest rates had been a consideration. Since interest rates have come down and it's more or less stabilized at this level, it gives us confidence that we'll be able to start up our share repurchases in a prompt fashion. If I go on to the next page, you'll see that we have a very diverse set of businesses, and we have this fee complex that is unique to us and very strong in terms of fee generation relative to the size of revenues that we have. We have about 44% of our revenues come from the different fee categories. Clearly, you can see the different 4 categories. I won't read all those to you. I'm sure you're very familiar with it. Today, though, we're going to focus on capital market side of the equation where we've had tremendous growth. This is a business that we have grown organically for the last 15 to 20 years within our culture. It has been a very nice trajectory in terms of how we've grown and how we've gone to market. And of course, it has accelerated over the last couple of years in terms of growth with new products as well as the integration of BTIG. And so with that, I'm going to hand it over to Stephen Philipson, who is going to share a little bit more about our capital markets journey. Stephen?

Thanks, John. So I thought I'd start by just taking us back through the history of our platform and how we got into this business. So we first got in the capital markets business in its current form back during the financial crisis. We were building out a national corporate bank and saw the opportunity to build out these businesses alongside that. And we started with a very simple approach is focused on loan syndications and investment-grade bonds, where we entering credit facilities, a large corporate clients moving up in those credit facilities, proving out our capabilities on the bond side and as we became a lead lender getting to that lead line on bond deals. And we then added on interest rate derivatives and foreign exchange to focus on that as a natural addition. You're leading the capital markets activity, you build credibility, so you can lead the hedging activity as well. And that was a nice steady growth trajectory for us. And then over the past 5 or 6 years, we focus a lot more on product expansion. We saw opportunities where clients were using certain products -- certain capital markets products already. They -- and we saw if we could add the right talent to build out those capabilities our clients would give us our fair share of those products. So we expanded into things like asset-backed securities, commodities, brokered CDs. And that's provided a really nice growth trajectory in the last few years, and we have continued opportunities to expand in that product set. The one area that we knew we could not fill organically was equities and investment banking. And so with the acquisition of BTIG, we filled the last significant gap we had at that -- in the product set. Now we have meaningful scale with the $2.5 billion a year of fee business. I'd also note, fixed income is about $1.6 billion in fees. It also provides some nice tailwinds for net interest income growth with the build-out that we've had the last years in areas like subscription finance and structured credit and asset-based lending. So it is a real fulsome product set. In terms of how we've grown, a big focus has been on growing market share, getting our fair share of the wallet out in the marketplace. And as you'll see on the left side, we started that by getting into large corporate credit facilities going from participant to lead and quadrupling our share in the loan syndications market in terms of our lead managed market share. Found when we did that when we got to that lead credit position, the resulting outcome would be we generate 3x to 4x the capital markets revenue that we did when we were a participant. And you see that in the middle graph there. And just 1 example of that in the investment-grade bond market, where we went from basically nonexistent share to 2.5% lead managed market share and growing in 2025. And then BTIG has taken a very similar approach in growing market share. You can see on the right-hand side of the page, they went from in 2015 when they first started leading equity capital markets transactions, 41st in the league tables to 15th last year and 1.8% lead managed market share. What's notable about their market share growth is they've done that without balance sheet. They've done that through hustle, through relationships and intellectual capital. And we're really excited when you take the U.S. bank balance sheet, the lending commitments that we have out, plugging in this capability provides a great opportunity for continued market share growth in the equity side of the business. So in terms of where we're going, just sharing a slide that Gunjan talked to in earnings. We want to take these businesses from having capital markets fees comprise 8% of the bank's overall earnings to over 10%. And we've got a very clear path to doing that. One is continuing the core growth that has been part of both these businesses historically. The other is deepening the client base is introducing BTIG's products into the legacy U.S. Bank client ecosystem and introducing U.S. Bank's products into the BTIG client base. And then the last path is just continuing to expand our capabilities, something that we've done at both firms for many years. And following that same formula of seeking out the products our clients are using bring in the talent, adding the capability and taking our share. So in terms of deepening the shared client base, we see huge opportunities here. And since closing on June 1, have seen a continued uptick in activity. On the BTIG side, they're accessing the 47,000 U.S. bank institutional clients and introducing the capabilities that they have. And we're getting calls every day from clients who want to put us on their share buyback programs, their equity raises are looking to tap into BTIG's research and capital introductions, and it's having a meaningful lift. In fact, since we closed on June 1, three of BTIG's biggest revenue days in their history have occurred since we closed the transaction on June 1. So it just speaks to the momentum that we're seeing from tapping into the shared client base. We're also seeing the activity on the other side where BTIG clients are looking to access our fixed income capabilities. And as you can see on the bottom of the page, there's meaningful activity going in both directions, over 220 referrals into BTIG from the U.S. Bank team and over 130 referrals from the BTIG team into the U.S. bank capabilities. And this is generating real revenue and it's generating real pipeline. What you don't see on this page, what doesn't come through in the numbers is the way that we're elevating our relationship. So when you have a fixed income business, when you're providing credit and fixed income products with a client, you're typically talking to the finance staff, it's typically the CFO, the treasurer, the Assistant Treasurer. CEOs care about their share price. They care about strategic activity. Now that we have these capabilities and we can advise them on the equity part of their capital structure, we can advise them on strategic activity, working a whole new level of access and elevating the dialogue with our existing clients. The other area that I wanted to mention, even though we're talking about capital markets today, the other big opportunity that we're seeing from the BTIG acquisition is in our other WCIB businesses like investment services and wealth. So we're seeing a lot of opportunities with our fund administration clients where we're able to refer them to BTIG for trading execution for outsourced trading derivatives and similarly, BTIG is referring a lot of opportunities over to the U.S. bank side of the house in these businesses. In fund administration, we're getting introductions that we didn't have access to before a multibillion dollar fund complexes that BTIG does lots of execution and trading for and they're referring us over to talk about fund administration and fund custody and those are long sales cycles, but they're going to produce some nice tailwinds for some time to come in these businesses. And we're even seeing very near-term impacts. A good example of that is in asset management, where for our first American funds, BTIG has introduced, unlocked some new avenues of distribution. And we've actually seen $1 billion in inflows into our $200 billion First American fund complex source from BTIG. So lots of lift across these businesses. So in terms of the deepening on the capital market side, we talk about at a high level, I thought it might be helpful to provide a few real client examples that we've seen over the last several months. And the first one is a media client, a client in the media sector, rather. This is a legacy client of BTIG. BTIG has advised them for many years in equities on investment banking, it's about a $4 million a year revenue client for BTIG. So recently, they were doing an acquisition and BTIG referred them over to the fixed income team at U.S. Bank to advise on the acquisition financing. And not only were we invited into the credit facility at the lead line, along with a couple of GSIBs who've been advising them on the M&A side, we actually ended up left lead on the acquisition financing because they like the value-added advice that the U.S. Bank team had provided and beyond that acquisition financing, we're in dialogue with them around derivatives, foreign exchange, we're getting a $50 million deposit and adding some treasury management services. So it's going to go from a client that was a $4 million a year client for BTIG to one that's going to add an incremental $12 million in revenue for the bank going forward this year. The next example is what I'd call like the low-hanging fruit. This is the type of opportunity we knew was out there, and we knew it was going to be there when we plugged in this capability. And this is an example of a tech company that was a legacy U.S. bank client. So we provided credit. We were in their debt capital markets activity. We were a trustee. But when they would access the equity capital markets, we didn't have the opportunity to work with them. They didn't want to use a firm that wasn't in-house. So as soon as we closed the acquisition, we got the BTIG team in front of them, and we were elevated to a book runner on their equity capital markets activity, a lead dealer and some other equity activity that they're active in. And we went from a very lucrative relationship that was generating $9 million a year to 2x to 3x that going forward with these equity capabilities in-house. And again, this is the low-hanging fruit. We already have an example of a client where we already have the credit out to them. It was just a matter of adding this capability to make sure that we're getting and accessing that part of their wallet, that share of their wallet that we didn't have access to before having the capability. And then the last example I'd share is one of a shared relationship. So this is a client of private capital client. There was both a client of U.S. Bank and a client of BTIG pre-acquisition. On the U.S. Bank side, we have what I would call a participant level relationship. We were -- in some of their credit facilities, had some investment services business and a little bit of deposits, but we aren't really seeing a lot of their deal flow and not in the strategic dialogue. BTIG, however, had a CEO level relationship. So as soon as we closed, we started getting the incoming calls from them. I've gotten invited into 4 transactions since close on the fixed income side of the house, some lead-managed opportunities, we are now talking to them about deposits and payments capabilities at the portfolio companies. And this went from -- collectively, we're generating $4 million a year. And within a couple of months, we've already doubled that revenue stream. So this is again something that we see a lot -- we're seeing a lot of in terms of that access in the C-suite that we didn't have prior to having the BTIG team on board. So the other area beyond deepening where we see a lot of opportunities is the product expansion, continuing to add capabilities. And this is something that we have done at both firms throughout our histories and these platforms. And again, we talk to our clients, they talk about the products that we're not in where they like to see us get involved. And we look at where we can add the talent and if we add the capabilities, can we get our rightful share. So on the right-hand side of the page, you see a number of clients -- a number of products that are on our road map, some of these have already launched, some of these are in process, some of these a little bit down the road. But these are areas where we see opportunities. Our clients want us to provide these services, and we think we can get our rightful share and one example of that is on the left-hand side of the page in the macro business. So the macro business, interest rate derivatives, foreign exchange, repo. Historically, at U.S. Bank, we've only served our corporate and commercial clients in these businesses. But we have a lot of institutional clients between our institutional client group between our investment services platform and now several thousand more institutional clients with the BTIG team as well as global distribution with BTIG. So we see an opportunity to serve our institutional clients in this business and we've been adding talent and we're going to be adding more capabilities. And this is -- this business, there's a $40 billion wallet in this business. Today, we have 1% share. We're highly confident with adding these capabilities and the talent with the customer base, the client base already in-house that we can easily double our market share in this business in the years to come. And these bubbles on the right represent many opportunities like that where we're highly confident based on having done it for the last 15 to 20 years in both businesses that we can add the talent, add the capabilities and get our rightful share. So just to close, in both businesses, we've got a great track record of being able to build the capabilities and drive the revenue in these capital markets businesses. By adding BTIG and executing on the product road map, both at BTIG and legacy U.S. Bank on the fixed income side, we think we have scale and a lot of runway for growth. When you look at the equity fixed income and investment banking fee pools today, we've got a little over 1.5% of the U.S. fee pool. U.S. Bank is 3% of the U.S. banking deposit system. So there's no reason why we can't be north of 3% in these businesses, particularly when you consider that not many banks have the scale and product depth that we have and capabilities in these businesses. So we're very excited to grow them. We're very excited to demonstrate that growth, and we feel we have a lot of runway ahead of us in these businesses. Thank you.

Great. Thanks, Stephen. Maybe we could start off, I'll ask a few questions, and I'll open up to the audience. But maybe you had a great slide back there on client deepening opportunities with a number of different opportunities. Maybe we could start off on talking about which business segments are seeing the strongest early momentum in terms of referrals and mandates.

Yes. So where we're seeing the strongest early momentum is definitely the plain vanilla equity issuances, share buybacks, ATM programs for that vanilla equity capital markets capabilities, where so many of our clients were using those, and they were just waiting for us to have the capabilities in-house to be able to add that. That's where we're seeing that big lift. That's where you're seeing those record revenue days at BTIG. We're also seeing a lot, though, really good activity, as I mentioned, on the Investment Services side. And that's a longer sales cycle. A fund doesn't just change their fund administrator or custody provider overnight. But once you lock in that business, it becomes a nice annuity stream. And so I think we'll see more of a lift over time in those businesses, but incredible dialogue and unlocking a lot of interesting opportunities there.

Okay. And with all these opportunities, you have different sides of the house collaborating, there was a 10-year relationship prior to the acquisition. So maybe we can talk about like how you're training, educating, incentivizing the bankers to offer the full suite of products and cross-sell.

Yes. And that 10-year relationship was very helpful. The one item that has not even been close to being a challenge has been culture, the 2 firms just knew each other so well. So that has been very helpful. And the way we've gone about the training is we have a global learning team at U.S. Bank that created training modules on every product on the U.S. banks head on the BTIG side on both sides, really starting from pre-close started going through those trainings to understand the capabilities on both sides of the house. And there's just been incredible excitement it helps that there was really no overlap between these 2 firms. So our relationship managers and the institutional client group and commercial real estate, U.S. Bank have been so excited to be able to introduce these new -- learn about the new capabilities and introduce them to their clients. And the BTIG team has been incredibly excited. I mean we've got investment bankers trying to push corporate trust and deposits, which says something to their culture that they've been very excited to embrace the whole product ecosystem at U.S. Bank. And the incentive structure is one in which it is -- it is the same incentive structure BTIG had and was able to attract talent, but there's certainly qualitative considerations when a banker not only has brought in a bunch of M&A deals and equity deals, but it's also driving deposit flow to U.S. Bank. That's a consideration in the compensation process.

Good. So good corporate is rewarded.

Yes, absolutely.

And you also had a great slide on the new product capabilities with a number of opportunities. Maybe you can just highlight the 1 or 2 where see the most potential there?

Yes. So the macro opportunity on the fixed income side is very meaningful, and it's -- we're so excited about it because it's -- the clients are there. We have the capabilities. We just focus them on a different side of the house in terms of the clients. So very excited about that opportunity and BTIG just unlocks so much potential there with the added institutional clients that have come into the bank as well as their global distribution. So that is definitely 1 of the the most exciting opportunities we have. I would say on the BTIG side, it's probably equity swaps, which is going to take a little bit of time to build. We're a swap dealer in the fixed income market are very familiar with running and the risk management and technology and process around the swap business, but we need to build it out on the equity side, and we're excited for the opportunity when you think about areas like leverage ETFs. So in our Fund Services business, we're the #1 fund administrator in the ETF space. BTIG is also very active on the execution side with these ETFs. The 1 product, we can't offer them yet is that swap capability. So we're excited to be able to do that in the years to come.

And with -- the swap opportunity as well as others? Like have you already started the investment. And John, I don't know if you want to just like is there an incremental expense uplift here?

Yes. I mean we've -- this is an initiative that we have in the bank that's no different than other businesses that we want to make sure we're investing in. Clearly, we've been focused on operating leverage and making sure that we're very much committed to positive operating leverage. And so as the revenues have come, we've been able to increase our expense as well to invest in these businesses. And this is just an example of that. And when we think about it, it's not just the product set you have to think about the complex and the support around it. So risk management, making sure you have the right talent that is watching these sorts of activities as well as the systems and technology that's in place. And so obviously, the people that Stephen has talked about is super critical in terms of the culture that we build, how we build this out. So all that is really important, and it's in the context of how do you embed that expense within our run rate that we have. So there's nothing here that's different or unique than what we've communicated already in terms of our commitment to positive operating leverage.

Yes. And I'd just add in the markets businesses, we've made some meaningful investments in recent years. We put in a whole new operating and trading platform in our foreign exchange business. We built out a commodity platform and did that all within the corporate CapEx run rate.

Gary, we've seen our expenses, we've been managing quite intentionally in terms of making sure we have efficiencies across all the other businesses so that we can make room for all these other investments as you've probably seen in our financials, we have pretty tremendous growth in marketing and technology and that's really where we spent a lot of our excess dollars building up businesses like the capital market space.

Okay. And how do you think about bolt-on acquisitions to just accelerate the whole.

Well, I'll talk about it. I mean, in the markets business, this was the most significant gap. This was where our focus was in terms of bolt-on acquisitions. But certainly, we look at bolt-on acquisitions across products and in other areas of the business as well. We did PFM a few years ago in the asset management business and continue to -- we'll always open opportunities across the broader businesses. But for the markets businesses, this was a significant gap that we couldn't fill organically.

We're good operators on bolt-on acquisitions. We know how to close them. We know how to integrate them very well. We look at it really as an extension of organic growth in a lot of cases, capital markets, the investment services is where we look, but we can look at other pockets where we have these opportunities. We're not shy about that sort of thing. .

Okay. Let me ask one more, and then I'll open it up. And this would be to you primarily, John, just kind of thinking about like the incremental balance sheet that you think you need to deploy to support these clients and how you're thinking about that?

Sure. Yes. I think the beauty of this is that, as Stephen mentioned, there's a lot of clients we already extend credit to. And so we don't necessarily need to extend our balance sheet any further than what it is already. We think that there's a lot of room for us to grow without materially growing the balance sheet. Our view is that we'll grow our assets in the areas that we've been talking about, which is commercial loans, commercial real estate and credit cards. I don't see this strategy is really outpacing anything there, and that's just going to be something that will move forward in terms of our journey of how we grow. But at this point, we have a lot of room and opportunity within our own confines of our current balance sheet.

Okay. Great. Thank you. Why don't we open it up.

Stephen, a couple of questions for you. What percentage of the BTIG's business is back because I know they had quite a substantial -- quite a presence there. And what have you planning in terms of the revenue growth there this year eases activity in APAC and what are you planning in terms of linking that with the rest of the...

It's about roughly 5% of the revenues. The total global -- outside of the U.S. in general, is about 10% of the revenues. And we're going to continue to -- that's not where our growth is necessarily focused. There's such a huge opportunity in the U.S., but that's a huge important part of having distribution and having a platform in this business. And what we like about it is one, it has seen nice growth. 5% is probably up from a couple of percent just a few years ago. But it's also having that distribution and that market intel that allows us terrain to treat, but we're also going to leverage it for areas like fixed income where we'll be able to plug in that distribution, which has been a gap for us historically.