Okay, great. Thank you, everybody, for joining us this morning. I'm going to read a disclosure. For important disclosures, please see Morgan Stanley Research at disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay, those are my disclosure announcements. This morning, we are delighted to have with us today from U.S. Bancorp, Gunjan Kedia, CEO and President of U.S. Bancorp. Thanks so much for joining us, Gunjan.
It's a pleasure.
John Stern, Vice Chair and Chief Financial Officer.
Good morning. Thank you. Great to be here.
Thanks so much. We have a lot to get through this morning, but I would like to kick off with strategy, Gunjan.
Sure.
You've been a very visible member of the management team at U.S. Bancorp for many years, and formerly took over as CEO at the beginning of this year, right? I suppose I should say the beginning of this quarter.
That's right.
Okay. You've worn many hats, both inside and outside U.S. A. I would just like to kick off by asking how you think your background, varied and diverse background that you have, is going to shape the way that you run U.S. B CEO.
Good morning again, Betsy. This is my first conference after I officially assumed my role. Thank you for hosting. It's a pleasure to have this conversation. As you said, I joined U.S. Bank about eight and a half years back. I've been here a fairly long time. Before that, I was at two very large banks, and before that, ten years in consulting, where you see a lot of other companies up close. As I look at U.S. Bank, I see its high quality, exceptional franchise value, the diversified businesses we have, the prudent risk management culture for the downside of a bank, and the people aspect of the franchise is beautiful. I see its value in a very clear way.
I've been there also long enough that I see places where we have not executed with as much urgency as we could have to really capture the potential of our businesses. As I step into the role, and I'm really honored to be leading this iconic company, I'll lead to preserve the strengths of the franchise and the company that all of you are quite familiar with, but bring a sharper focus on consistent bottom line results, progress towards our medium term targets that we shared at the Investor Day, and just elevate the level of urgency with which we execute. That's the leadership balance.
Okay. All right. Let's talk about those strategic priorities. Where can you unpack what you just said a little bit and help us understand where there are opportunities to lean in?
Yes, wonderful. Thank you. I have been very vocal about three major priorities. They are very short term focused, and we do marching towards our medium term targets. The first is stabilizing our expense growth. Betsy, you've been covering us for a long time. You know, we made a very strategic decision almost ten years back to lean in very heavily to catch up on our digital capabilities. It was strategically important in 2017. It had been ten years since the iPhone had been introduced at that time, and the consumer expectations had truly elevated to a different level, and we needed to meet that moment. It's now been enough time that we need to harvest some of that benefits and stabilize the expenses. That allows us to deliver positive operating leverage.
That's a big commitment we have made, and it allows us to continue to fund into organic growth. We have four signature programs with expenses and well underway. I would say last quarter we presented our sixth stable quarter of expenses. Those programs are well underway. That's priority number one, stabilizing our expenses. The second is organic growth. I'll just leave payments aside for a second. We have a different vision for payments. I'll speak to it in a minute. Organic growth is really focused on 15 million clients who truly love us. Our client loyalty, our client satisfaction is very strong, but only 40% of these clients consume multiple products, and our products are very good. It's a simple premise that we should deepen these relationships. We have made progress on that. We were at 36% five years back.
We are at 41% this year. There is a lot of headroom here, and it goes through many, many fee-based products that we can deepen our client franchise with. The third is payments. We have this view that most consumers who enter the financial services today do it with a payments mechanism. It is either a P2P payments vehicle, or it is your first card, or it is some form of even cash payments. The young consumer will engage with us through a payments vehicle. We are embedding payments in every single relationship, every single product, and that is the payments transformation. That is the third priority.
This 15 million clients that you're talking about is in the consumer sleeve. Is that right?
It's consumer, small business, and corporate. Obviously, the numbers are largely in the consumers.
Sure. Okay. And then just digging in on the valuation here. U.S. Bank stock used to trade with a premium valuation, and it's not trading with the same premium that it used to command. How do you anticipate earning that premium back?
The quality and the fundamental business model should trade at a premium. It's discounted because of skepticism around our execution. It's a very addressable path to regaining our premium valuation. Why? It's a very high return franchise. Not accidentally, we make a lot of decisions to lead our businesses for higher returns instead of chasing after sort of really low margin growth, for example. It's also a very diversified franchise. Over a business cycle, you see the value of our fee businesses. Some of them are anchored by GDP and population growth, like our mortgage business. Some of them are propelled by capital markets growth, like our trust and investment fees. Some of them are consumer spend, like our payments business.
If you look at the general cycles of an economy, we have curated a portfolio that performs with various stages of an economy, and we are very high in terms of fee growth relative to most of our peers. We will bring back our expense discipline. You'll see us be leading the way in terms of efficiency ratio again. That's not because we are just squeezing the investments out. You know, we are a very, very large franchise that's largely in the U.S. and a little bit in Western Europe. There's a simplicity aspect that makes us confident that we'll be leading this franchise at a mid-to-high efficiency ratio. You put all of that together, and just a little bit of growth creates a real valuation premium here. That's the plan and the path.
All right. I'm going to get back into digging through some of the payment opportunities in a little bit, but I'd first like to turn to where we are today with the macro, how you're seeing the expectation of tariffs roll through your customer set, and is there any color you can give us on how much you've got in C&I that you've got a sharp eye on with regard to tariffs? How are your customers responding to what you anticipate here is going to happen? Yeah, why don't we start with that?
John.
Yeah, I mean, I think just in terms of the overall macro on tariffs, you know, the areas we're watching from a C&I perspective, areas like automotive, areas like building materials, areas like capital goods, those are the main parts of it. Broadly speaking, corporations are going through this, and they're acknowledging this environment that we're in. You know, there was probably a bit of a slowdown or a pause or, you know, kind of a wait and see approach, but we're starting to see that thaw a bit, particularly as it relates to larger ticket matters, as it relates to M&A and things like that. In fact, we've seen our utilization rate be relatively increased in the first quarter that has maintained here in the second quarter. That's good.
On the payment side of the equation, where we see money movement, there's been a lot of resilience in the small and medium sized businesses, a lot of resilience in the consumer side that's been constructive for us. The one area we are watching is corporate and government T&E. We are seeing slowness in those areas. Other than that, we are observing our clients manage through this. They're seeing pricing actions being put on their cost of goods, and they're trying to figure out, can I raise prices? And if I can, do I do that on one product? Do I spread it out over multiple? There is a lot of strategy that our clients are kind of wading through right now.
Betsy, I would add, you know, to John's comment, after Liberation Day, the first focus was on whether this would be a credit event. We would say at this point, we are not feeling it's going to be a credit issue. It's the uncertainty around big CapExes. It's a loan growth postponement type of a thought process rather than any of our clients feeling like the tariff impact will be consequential from a credit standpoint.
Okay, great. As we think about how the quarter is going and with most of the quarter behind us, just wondering if there's anything that's changed in your quarterly or annual outlook since you last spoke with us.
Sure. Yeah, no change to our Q2 guidance or our full year guidance. We continue to hold that as is. Maybe to give a little bit of color, though, on the quarter as we're seeing it unfold, we had talked about net interest income being in a range of $4.1 billion-$4.2 billion with rate cuts being pushed out. We would expect to be on the lower end of the range in that. But offsetting that, we have a lot of positive bias on the fee side of the equation. We're seeing good core growth in terms of areas like our trust and investment management fee, which houses our global corporate trust and fund services. We're seeing good growth in our treasury management and tax credit and syndications, which flow into other revenues. We're seeing those sorts of things right now, but no change on our expenses.
Those are very well managed. Our positive operating leverage of 200 basis points or more for this year or for this quarter and for the full year, as well as the revenue of 3-5% for the full year on a year over year basis.
Okay. The fixed asset repricing, that's coming in positive, right, with this deeper curve. Is that fair to say?
Yeah, that's fair to say. You know, I mean, we've talked and articulated about our fixed rate assets helping us achieve our net interest margin expansion over time. We still have a lot of confidence in that, and that's just going to continue to occur. You know, if I think about our investment portfolio, we have $3 billion of securities that roll off a quarter. We generate anywhere from 150 to 200 basis points in terms of replacement when that rolls off. On the loan side, we have about $5 billion to $7 billion of loans that roll off at 150 to 200 basis points as well. You know, given some competition and things like that, it's probably more on the lower end at this particular juncture, but that is certainly all that is helping us from a net interest income expansion standpoint.
Your net interest margin to 2.72 last quarter, you're looking for that to expand to.
Yeah, we talked about going to 3% over the medium term, which we would define as 2026 to 2027. The speed in which you get there is, you know, the three things we talked about, fixed asset repricing, remixing our book, as well as deposit stabilization. Betsy, what I would say is that to the extent that the curve is inverted, which it is on the short end, then it's a little bit slower versus if the curve is upward sloping, then that's more helpful for us in terms of expansion on the margin side.
Okay, great. Thanks so much, John. Gunjan, back to you. I do want to dig into payments, please, and some of the other fee lines too, but let's start with payments. Clearly U.S. B has a unique payments franchise that's a key strength. There have been some growth opportunities that, frankly, some of the investors are thinking you could do more there. Can you share your insight on how you're looking to accelerate the growth rate in payments?
Yeah, and just let me give you some sort of context setting numbers here. Payments is about 25% of our revenue. The bigger part of it is the card issuing business for consumer, for small business, and for corporate. There, we have a very, very strong product set, and our positioning, which a lot of people ask me about, is right in the middle of some large banks that are super prime and some sort of specialty players that tend to be more on the subprime angle. Our positioning is right in the middle of people who revolve because our credit card business is a very important source of loan growth for us. And NII, I know we talk always about payments being a fee business, but it's almost $42 billion in loans for us from that business and a balance of the spenders.
Now, on the spend category, we have traditionally focused on non-discretionary, high affluent spend, and it stabilizes the downside because that's where you see the least volatility of consumer spend. The strategy going forward to lift the growth rate is to elevate the sales and marketing efforts we are putting around brand building and client acquisitions and really creating products that leverage the rest of our franchise because there's about 40% penetration of the card business in our consumer franchise, lots of upside still with the Union client base that we brought in two years back. The product mix is shifting towards a more spend category affluent client base. You will see us maintain our loan growth, which is absolutely tracking to slightly better for the industry.
Our fee growth has been traditionally about 100 basis points lower than the industry, and our new products are focused on that gap. That is the plan with the card issuing business. The merchant business is about 6% of our revenue. It is a very unique property to us. We like the business a lot. Strategically, the reason to be in that business is not a standalone sort of fee source, but it is a very important product to introduce to a small business when they first open. Let me just think about what happens to someone who is setting up a barbershop. You know, what do they need? They need a core bank account, and they need a basic merchant offer. We want to be there right with them. Small businesses love their banks.
Service after service will say, given a choice, they will consolidate their business with us because at some point they're going to need a line of credit and credit from us. Their psychology is very consistent with our growth, and that's the vision we have that our MPS business will anchor our small business franchise, which is very large. This business has a lot of misunderstandings. I've heard it does not grow, it's unprofitable, and it's going to need a lot of investments. All of the investments, the big surge is behind us. It does benefit from very healthy investments because it's a very fast-paced business. It's in the run rate now for us. We feel very good about it. It's actually a very profitable business.
If anything, we have found through our analysis, I've just been focused on this MPS since I sort of stepped into my role last year. It's running at a 10-15% margin higher than most of our competition. The trade-off is lower growth, and our transformation is to move us from being a commodity acquiring business, which is what it was in 2000 when we acquired NOVA that became MPS, to a more software-led business where the growth is higher, and we are about 37% of the way there. That's sort of what the revenue mix is. This is a slow transformation. We are very committed to the transformation, and I would say that, see, this business has very little downside for us, but potentially a lot of upside for us.
That's why we are focused on it, and you see the growth rates sort of inching up as the transformation unfolds. It is the, you know, the software-led, it's a very cryptic term, but what it is really is the upfront software that runs your GL, that runs your tax payments, integrates all the way back to your acquiring business, and that makes it very specific to the vertical that you are serving rather than generic to any business. The five verticals that we have selected are very large verticals. We have unique capabilities in healthcare. We have unique capabilities in retail and services, and travel and entertainment have been sort of bellwether sectors for us. These are some choices. We are walking away from some business that is large volume, almost no revenue. We are walking away from some businesses that are outside of these verticals.
Once the transformation sort of takes hold, you'll see not a breakneck growth rate, but a healthier growth rate, still a healthy margin business, and strategically very important to a small business story.
This transformation is about increasing the growth rate of the merchant acquiring business.
Business, right.
The transformation is executed through software enabling such that verticals.
The value is very specific. For example, groceries is a vertical that has a very unique sort of software-led model. It is quite complex because of food stamps, coupons. We have decided that that is something we can do from an acquiring standpoint. We do have large clients we do that for, but we are not doubling down on the software-led part of it. Whereas healthcare, healthcare as an industry loves banks because they have enormous HIPAA compliance issues. They have a lot of regulatory data privacy issues. They like a bank provider instead of sort of a standalone, and we integrated all the way back with our balance sheet services. We have been very intentional about saying where can we play. These five sectors are massive sectors. These are not small sectors.
That has been the transformation we have had underway, almost going on five or six years now and just picking up the pace of that transformation now. Thank you for allowing me to talk about that business. I feel it is one of the more misunderstood businesses within our portfolio and worth the dialogue and worth the effort.
One last question, well, two last questions on this. One is on the fact that you have an issuing business, as you indicated, and a merchant acquiring business. I wonder, have you ever thought about.
The connectivity?
Maybe also having a network piece, maybe renting a piece of VISA or Mastercard or something like that so that you can have all of that and be setting pricing to merchants more directly through.
It would require a fairly substantive shift to the market dynamics of how things work. I do not know if we would have enough of a scale to shift it to a payables and a receivables business because an issuing is a payables business and a merchant is a receivables business. Being interconnected, it is a complex piece. Betsy, I have got plenty of very attractive, easier to execute growth opportunities. It is not a priority right now to try and do. What we do have that we bring the two sides together is the backend because they are all transaction processing business. In today's environment, the fraud monitoring, the transaction monitoring, the real-time payments, there is so much that you have to do on both sides. Over the last five or six years, we have really consolidated what I would say the plumbing and the guts of both businesses.
That gives us a lot of operating leverage, but not on the front end or the pricing side.
Excellent. Okay, thanks so much. Then on commercial product revenue, where capital markets comes through, can you talk a little bit about how that is shaping up given the fact that we have had some volatility this year?
Yeah. So just to step back, with the premise of that business, it's one of our highest organic growth focus areas is we have about a $250 billion balance sheet that we deployed towards our corporate and commercial clients. It's a very sizable support structure for their businesses. Our clients truly tell us that they would give us more fee businesses because they appreciate us being in their bank group. So we are taking that feedback and we are growing out capabilities where we have the scale and the capabilities. So we have chosen to deepen on the fixed income loan, capital markets, derivatives, FX, and commodities type of businesses, and we have let go equity trading and investment banking. You know, we got out of that business 20 years back. So it's a very focused play. It's not a technology play.
You have to hire talent, and we're just building out capabilities to deepen the relationship there. You know, John, I'll let you comment on what this year is looking like.
I mean, in terms of the, I was going to add this to the investment that we've made over the years into those platforms, I think about, you know, foreign exchange, you know, our commodities and building out the other trading desks and things like that. You know, the market, and so those have all been very positive things that we've been able to incorporate in terms of investment that we make in. In terms of how capital markets are shaping up, there's been some bumps in some of the things earlier in the quarter, but things are shaping up nicely. We feel like it's on a good track.
We've got a bit of an inflection happening.
Yeah, I think so.
Okay. And then Gunjan, as the GENIUS Act, we're looking further ahead here, but as the GENIUS Act makes its way through Congress, it seems like banks will be able to do more with crypto clients or crypto assets. How are you thinking about that with all the digitization that you've done? How is the organization set up to provide services there or enable digital?
You know, we are quite a large custodian. We have about $11 trillion in assets under custody and administration. We were very early to introduce cryptocurrency custody offering. They were geared not towards the payment side of cryptocurrency, but the investment thesis. It was really on the request of some institutional clients that wanted to hold a small fraction of their portfolio and invest in that asset class and would rather have custody with a bank rather than sort of a fintech. The product did not really take off because the regulatory regime at that point was very uncertain for large institutional investors. That product is back in, and we are very able to provide it. The bigger conversation right now is around the payment side with stablecoin, and that is what we are studying and watching.
You know, standing up your own stablecoin will be something we can do with partnerships. We have enough pilots going on. The other role we could play is as the institutions that hold the collateral that backs it, either USD in forms of deposits or treasury, which we can custody as well, or a whole surround sound of systems that are trust-based products like escrow services that are yet to be figured out. The market infrastructure decisions around that are quite consequential, and the GENIUS Act is just getting started with some of those questions. We will see. You know, there are a lot of big numbers that are being thrown out, and of course, I have disaggregated them to understand it.
You know, the headline number sometimes says that the transaction volume with stablecoin is beginning to reach VISA Mastercard type of volumes, but underneath that, 90% of it is just cryptocurrency to cryptocurrency trading volume. It isn't really yet commonplace. It would also be, I think, more consequential to large wholesale cash managers that do cross-border payments rather than someone like us, where most of our work is sort of consumers within the world of U.S. So that's a long way of saying we are watching it, and there's a lot to be sorted out before the role we play solidifies in our mind.
Right. Because just one other question on that is that we do have clearinghouse real-time payments, which enables real-time payments domestically.
The value proposition against stablecoins and real-time for the domestic everyday transactor is less compelling than cross-border, small-ticket cross-border payments, for example, where the economics become viable, but that's also where the market infrastructure gets a lot more complex. That is why, again, I say, Betsy, you know, for a profile of our payments franchise, we'd probably be second or third horizon figuring it out versus a large wholesale cross-border cash transaction type of a business, like a wholesale cash transaction type of a business, which we just do not have much of.
You also, with your payments business, are servicing other financial institutions.
Yeah.
Right?
Yeah.
So.
I mean, if stablecoin progresses, the ability to accept it in various forms will be sort of required of most banks, I would guess. That would be innovation that we are not, that we are studying, and that's not something that we can stand up once the rulemaking gets clearer. All of the clearinghouse, they're all thinking about that as well.
Okay. Moving on to other ways that you are leveraging your digital infrastructure, and that's through the partnerships that you have with State Farm and Edward Jones, where you're leveraging your digital capabilities to roll out your products to a broader scale than just your branch footprint enables. Can you speak to how much growth you anticipate delivering through these partnerships, and is there an opportunity to do more partnerships?
Yeah. Yeah. We are in 26 states, and with the Union Bank acquisition in 2022, our footprint has become very attractive because of the California West Coast that rounded out our sort of north of the country type of footprint in the Southwest. It is a very expansive branch footprint today. What is interesting, Betsy, to remind ourselves is that about two-thirds of our total business is operating in a fully national capacity today, which is our wealth and institutional business and our payments business. The brand difference is quite relevant. Where we have branches, we see almost a 15%-20% higher brand recognition than where we do not have branches.
A lot of our focus with the national bank expansion and the partnership expansion is introducing future customers to our brand, which gives us optionality to build out branches over time because, you know, we are building out new branches in new areas. For example, Arizona has been a big focus for us. Nevada has been a big focus. These are within our footprint, but we could deepen our branch presence there. With that context, how do partnerships fit in? You know, when we did the State Farm partnerships, we had access to all of their insurance agents that could represent our product for those people who needed it. Edward Jones has 19,000 financial advisors, and they are present in a lot of rural markets that have become very unbanked over time.
Their premise is that through our digital capabilities and their human touch, we can bring banking to a lot of rural communities without the CapEx required. How do the economics work? We have actually built out a partnership platform. With very little incremental benefit, we are standing up Edward Jones later this year. We revenue share with them, but we avoid a lot of the upfront CapEx. As you know, a branch roughly takes five to seven years to break even on your investments. Here we are in business day one, and it does not preclude us from eventually following up with our own branches in the areas that we want. We think of it as quite an interesting optionality for introducing a brand to potentially having a revenue driver and not losing anything in terms of ability to open branches.
We have a lot of interest. We have a lot of interest from other financial advisory-like firms who do not want to become banks, who want to round out their. But we want to do a good job. Let's see, you know, let's stand up Edward Jones, see how that goes. We are very open to more conversations around that.
Importantly, the platform is the reusability of the technology is really impressive. It allows us to do that with very little cost. The Ed Jones, just as a matter of starting this in the third quarter, fourth quarter will be fully rolled out.
We love these platforms because we are so used to the Elan platform on payments, for example. You know, Elan is a white-label, fully third-party-enabled platform to provide white-label credit cards to smaller banks. One thousand two hundred banks get very meaningful fee income out of our platform. This is something we are quite interested in developing scale in an unusual capital light way. The credit card side is very mature. We have been doing this for a long time, and our vision is that perhaps that model becomes very real on the banking side as well.
When should we start to see the benefits of this impacting your operating leverage? Is that this year and into next? Is Edward Jones?
Early next year. It stands up in a limited rollout way, starting with the third quarter. We'll have some insights into the model.
The other key driver of your operating leverage that you are looking for this year, 200 basis points, right, for the full year. Can you speak to key drivers there and the legs to those drivers?
Yeah. I mean, you know, we are looking for operating leverage of 200 basis points or more this year. You know, the expense areas that we're focused on really come in AI automation type areas, real estate, and organizational simplicity. Those are really the areas that we're focused on right now. I can go into details about that, but the crux of that is we've been very focused on managing our expenses and taking that discipline very seriously. We've had the six straight quarters of straight expense being flat. We can take the savings from all these different programs and invest it in things like the digital platforms that we just talked about, things like our payments platforms and things of that variety. That allows us, and the $2.5 billion tech budget that we set out for us is already embedded in our run rate.
What we're really focused on is do we have the right resource allocation holistically, OpEx, CapEx, and people in the right spots for all these initiatives.
Lastly, on capital, we have a new administration with an outlook for some changes coming in the near term, seems like. Gunjan, can you help us understand how you are anticipating utilizing your capital as you roll through the next several years?
You know, we are building capital still just because we have a CAT2 transition at some point in the future, not until 2027, just we want to be ready for it, which we will be sometime next year. We are building capital. After that, our business model generates a very healthy amount of capital build. Betsy, you'll remember we were at a very depleted level of capital in 2022 because we had just bought Union Bank. We went into the banking failures, and we have built up our capital very rapidly over the last two years. We will then have this decision on how do we balance loan growth, how do we balance share repurchases, how do we think about investments into our business. We have a very thoughtful process to think about that.
As things unfold and as we actually have some clarity around capital rules with now Governor Bowman's confirmation, that decision will become very real for us, and we'll communicate that.
Just lastly, with the multiple low relative to history, what do you think investors are missing as it relates to your current valuation?
Thank you for this dialogue, and I'll close it out with you. I would say that the skepticism around our execution has overclouded the quality of the underlying franchise that is U.S. Bank. It's not inappropriate. I accept and acknowledge that we do need to execute with urgency and consistency, and that is our commitment that we are taking that mandate very seriously. What I would like to just remind investors, especially with the long term, is that our execution is showing very rapid improvement, and the expenses are a proof point of that. It's really the underlying franchise, a very high return, a very diversified, fee-intensive businesses. The quality of fees is very good. It's not consumer fees that have regulatory pressures. It's trust and investments. It's payments. It's mortgage. It's capital markets. It's a very high-quality fee franchise.
We are a very good stock for the downside. It is a very good franchise, and John and I are very committed to shifting the narrative around execution, and we believe that brings the multiple back.
Excellent. Thank you so much for joining us this morning, Gunjan and John.
Thank you. It's a pleasure.