Is U.S. Bancorp ready to turn the corner after years of rising costs?

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David Paul Morris/Bloomberg

U.S. Bancorp has reached the point where the investments it has made in recent years will start to pay off in the form of rising profits and receding expenses, executives said Thursday.

During the super-regional bank's first investor day in five years, CEO Andy Cecere and his management team — including Gunjan Kedia, the newly appointed president and presumptive next CEO — drove home the message that revenues are poised to outpace spending, which ratcheted up due to acquisition, integration, technology and business-expansion costs.

In a series of presentations in New York City, members of U.S. Bancorp's management team said those investments are now baked into the company's run rate, which means that expenses will moderate and profits will rise. That earnings momentum, in turn, will result in positive operating leverage in the second half of this year and beyond, and increase the company's overall returns, while still allowing it to invest when necessary, the executives predicted.

"That's the objective of the company and that's the position we're in today," Cecere said in comments to investors and analysts. "We are at an inflection point."

How quickly U.S. Bancorp is able to realize higher profits and lower costs remains to be seen. For the second quarter, the bank reported year-over-year declines in net interest income and total net revenues. Notably, noninterest expenses also declined from the year-ago period.

The market seemed skeptical about the company's plan forward. The stock price was down about 2% for the day.

In support of its path forward, U.S. Bancorp laid out its latest profitability targets. Over the next two to three years, the Minneapolis-based bank aims to achieve a return on assets of 1.15% to 1.35% and a return on tangible common equity in the high-teens. It set an efficiency ratio target of mid- to high-50s.

The last time U.S. Bancorp provided such targets, in 2019, some of those goals were higher. The bank's long-term return on assets target, for instance, was 1.35% to 1.65%. The target for return on tangible common equity was 17.5% to 20%, and its efficiency ratio goal was low-50s.

U.S. Bancorp President Gunjan Kedia

To achieve the new goals, there will need to be improvement in some areas. For example, in the second quarter, U.S. Bancorp's return on assets was 0.97%, and its efficiency ratio was 61%, both significantly worse than the targeted ranges.

On the other hand, the company's return on tangible common equity last quarter was 18.4%, which is consistent with the guidance it laid out on Thursday.

U.S. Bancorp is a different company than it was in 2019, when it last hosted an investor day. It had about 3,000 branches then versus only 2,200 today. And it had four business lines, not three as it has now.

But the company's scale has increased over the last five years, growing from $482 billion of assets to roughly $666 billion today.

Back in 2022, U.S. Bank's parent company got a major size boost from its acquisition of MUFG Union Bank. The deal, which greatly increased the bank's presence in California, added about one million new retail customers, 700 corporate customers and 190,000 business banking clients.

Externally, the impacts from the pandemic, higher interest rates, inflation and a more intense regulatory regime have changed the environment in which the bank operates, Cecere noted.

"To say that a lot has changed in an understatement, for sure," Cecere said.

The key to achieving the company's latest financial targets will be leveraging the "interconnectedness" of U.S. Bancorp's business lines — consumer and business banking, payment services and the segment known as wealth, corporate, commercial and institutional banking, Kedia said.

"If [U.S. Bancorp] is able to leverage the interconnectedness of its businesses, these [new] targets should be achievable," analyst Gerard Cassidy of RBC Capital Markets, wrote in a note.

In the shorter term, U.S. Bancorp is sticking with its third-quarter and full-year guidance. For all of 2024, the company expects its net interest income to be $16.1 billion to $16.4 billion, while it is projecting full-year adjusted expenses of $16.8 billion or less and adjusted fee income that rises by mid-single-digits.

Also on Thursday, U.S. Bancorp announced the resumption of share repurchases, which were halted in September 2021 when the company announced plans to acquire MUFG Union. The newly authorized $5 billion buyback plan is slated to begin during the first quarter of next year with an anticipated $100 million repurchase program, Chief Financial Officer John Stern told investors.

The dividend will also increase to 50 cents per common share, up 2% from the second quarter.

The company did not provide details Thursday about its succession plan. Kedia, who was appointed president of the company in May, is widely assumed to be the CEO-in-waiting, though the company has not commented publicly on whether that's the case. Both Cecere and his predecessor served as president before being named CEO.

Mike Mayo, an analyst at Wells Fargo Securities, was blunt in his questioning, at one point asking "who's the next likely CEO" during a question-and-answer session.

Cecere, who has worked at U.S. Bancorp for 40 years and hasn't hinted at when he plans to retire, didn't bite. Instead, he said the company has "a very robust and thoughtful succession planning process."

"The board meets on this almost every meeting, discusses it and has really good strategies around how to do this with the objective of making sure the company is best positioned for the long term as well as the medium term," he said.

"It's the board's decision," he added.


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