美國合眾銀行 (USB) 2013 Q3 法說會逐字稿

Welcome to U.S. Bancorp's third-quarter 2013 earnings conference call.

Following a review of the results by Richard Davis, Chairman, President and Chief Executive Officer, and Andy Cecere, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session.

(Operator Instructions).

This call will be recorded and available for replay beginning today at approximately noon EDT through Wednesday, October 23 at 12 o'clock midnight EDT.

I will now turn the conference call over to Judy Murphy, Director of Investor Relations for U.S. Bancorp.

Thank you, Tiffany, and good morning to everyone who has joined our call.

Richard Davis, Andy Cecere, and Bill Parker are here with me today to review U.S. Bancorp's third-quarter 2013 results and to answer your questions.

Richard and Andy will be referencing the slide presentation during their prepared remarks.

A copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at USBank.com.

I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty.

Factors that could materially change our current forward-looking assumptions are described on page 2 of today's presentation, in our press release, and in our Form 10-K and subsequent reports on file with the SEC.

I will now turn the call over to Richard.

Thank you, Judy, and good morning, everyone.

Thank you for joining our call.

I will begin with a review of U.S. Bank's results with a summary of the third quarter's highlights on page 3 of the presentation.

U.S. Bank recorded net income of $1.5 billion for the third quarter of 2013 or $0.76 per diluted common share.

Total average loans grew year over year by 5.7% and 1.9%, or 7.6% annualized on a linked-quarter basis.

We experienced strong growth in total average deposits of 5.5% of the prior year and 2% or 8% annualized over a linked-quarter basis.

Credit quality remains strong.

Total net charge-offs decreased by 16.3% from the prior quarter while total nonperforming assets declined linked quarter by 2.8%.

We generated significant capital this quarter.

Our estimated Tier 1 common ratio under Basel III rules issued in early July was 8.6% at September 30 while our Basel I Tier 1 common equity ratio was 9.3% and our Tier 1 capital ratio was 11.2%.

We returned 77% of our earnings to our shareholders during the third quarter through dividends and the repurchase of over 17 million shares of common stock.

Slide 4 provides you with the five quarter history of our performance metrics and they continue to be among the best in the industry.

Return on average assets in the third quarter was 1.65% and return on average common equity was 15.8%.

Moving to the graph on the right, you can see that this quarter's net interest margin was equal to the prior quarter at 3.43%.

Our efficiency ratio for the third quarter was 52.4%, slightly higher than the previous quarter.

As we have stated in the past, our goal is to maintain an efficiency ratio in the low 50s by continuing to manage expenses in relation to revenue trends and while continue to invest in and grow our business.

Turning to slide 5, the Company reported total net revenue in the third quarter of $4.9 billion, a 5.6% decrease from the prior year and a 1.2% decrease from the second quarter.

The decline in revenue year over year was largely driven by lower mortgage banking revenue as well as decreases in net interest income and other income which included a one-time gain in 2012.

The linked quarter variance in revenue also reflected the pullback in mortgage banking activity.

Average loan and deposit growth is summarized on slide 6. Average total loans outstanding increased by over $12 billion, or 5.7% year over year and 1.9% linked quarter accelerating from the 1.2% linked quarter we experienced in the second quarter.

Overall, excluding covered loans, our [run-off] portfolio, average total loans grew by 7.5% year over year and 2.2% linked quarter.

Once again the increase in average loans outstanding was supported by strong growth in average commercial loans which grew by 10.9% year over year and 2.2% over the prior quarter.

Total average commercial real estate also increased over the prior quarters with average loans growing by 5.1% year over year and 1.6% linked quarter.

Residential real estate loans continue to show strong growth of 19.9% year over year and 4.8% over the prior quarter.

Within the retail loan categories, average credit card loans and auto loans and leases were higher both year over year and linked quarter.

While average home equity loans and lines continued however to decline as pay downs more than offset new loan originations.

We continue to originate and renew loans and lines for our customers.

New originations excluding mortgage production plus new and renewed commitments totaled approximately $47.9 billion in the third quarter equal to the prior quarter and higher than the $45.1 billion originated in the third quarter of last year.

Total average revolving commercial and commercial real estate commitments continue to grow at a faster pace than loans increasing year over year by 9.9% and 3.2% on the linked-quarter basis.

Line utilization, however, edged down slightly again this quarter to approximately 24%.

Given early industry indicators, our linked quarter average loan growth of 1.9% signifies that we are continuing to gain market share.

Our expectation is that linked-quarter average loan growth in the fourth quarter will once again be at the high end of our previously stated range of 1% to 1.5%.

Total average deposits increased by over $13 billion or 5.5% over the same quarter of last year and by $5 billion on a linked-quarter basis with growth in low-cost interest checking, money market and savings deposits particularly strong on a year-over-year basis.

Turning to slide 7 and credit quality.

Total net charge-offs in the third quarter decreased by $64 million or 16.3% from the second quarter of 2013 while nonperforming assets excluding covered assets decreased by $41 million or 2.1%.

The ratio of net charge-offs to average loans outstanding in the third quarter declined to 0.57% from 0.70% in the second quarter.

During the third quarter, we released $30 million of reserves equal to the second quarter and $20 million less than in the third quarter of 2012.

Given the mix and quality of our portfolio, we currently expect net charge-offs and nonperforming assets to remain relatively stable in the fourth quarter.

Andy will now give you a few more details about our third-quarter results.

Thanks, Richard.

Slide 8 gives you a view of our third quarter 2013 results versus comparable time periods.

Our diluted EPS of $0.76 was 2.7% higher than the third quarter of 2012 and equal to the prior quarter.

The key drivers of the Company's third-quarter earnings are summarized on slide 9.

The $6 million or 0.4% decline in net income year over year was the result of a decline in net revenue offset by a decrease in expense and a lower provision for credit losses.

Net interest income declined year over year by $69 million or 2.5%, the result of a 2% increase in average earning assets offset by a 16 basis point decrease in the net interest margin.

The $6.1 billion growth in average earning assets year over year included increases in average total loans and investment securities.

Offsetting a portion of the growth in these categories was a $5.4 billion reduction in average other earning assets primarily due to the deconsolidation of a number of community development entities in the second quarter and a $3.5 billion reduction in average loans held for sale reflecting lower mortgage origination activity this quarter versus the same quarter of last year.

The net interest margin of 3.43% was 16 basis points lower than the third quarter of 2012 primarily due to lower rates in investment securities and loans partially offset by lower rates and deposits and a reduction in higher cost long-term debt.

Noninterest income declined by $219 million or 9.1% year over year primarily due to mortgage banking revenue reflecting lower origination in sales revenue partially offset by higher servicing related revenue and a favorable change in the valuation of mortgage servicing rights net of the hedge.

Also contributing to the decline in noninterest income year over year was a reduction in other income which largely reflected a 2012 gain from the sale of a credit card portfolio.

Lower commercial products revenue and a reduction in corporate payments revenue, the result of lower government-related transaction also contributed to the decline.

As a reminder, corporate payments represents approximately 25% of our total payments revenue and approximately 40% of the corporate payments revenue is government-related while about 55% of the government revenue is related to defense spending.

Defense spending was down about 19% year over year, an improvement over the second quarter's rate of decline while the remaining portion of the government spend was essentially flat to last year.

A number of key categories helped to offset these unfavorable variances including retail payments, merchant processing, trust and investment management fees, and investment product fees.

Noninterest expense declined year over year by $44 million or 1.7%.

The majority of this favorable variance was the result of a decrease in professional services expense primarily due to the reduction of third-party foreclosure settlement related costs.

In addition, compensation in marketing expenses declined year over year.

These favorable variances were partially offset by higher benefits expense primarily pension related and higher costs associated with our tax advantaged investments.

Net income was lower on a linked-quarter basis by $16 million, or 1.1% as a result of a 1.2% decrease in revenue and a slight increase in expense partially offset by lower provision for credit losses.

On a linked-quarter basis, net interest income was higher as average earning assets increased by $3.1 billion and net interest margin came in as expected, stable for the second quarter at 3.43%.

The increase in average earning assets was the result of a growth in loans and securities partially offset by a reduction in average loans held for sale.

On a linked-quarter basis, noninterest income was lower by $99 million or 4.3%.

Again, this unfavorable variance primarily reflected the decline in mortgage banking revenue as well as other income which was lower linked quarter as a result of reduced equity investment income, retail lease revenue and a small merchant processing gain recorded in the second quarter.

Partially offsetting the decline in these revenue categories was an increase in deposit service charges and seasonally higher corporate payments revenue.

On a linked-quarter basis, noninterest expense was essentially flat, up by just 0.3% largely due to other expense which included higher costs related to tax advantaged investments.

Turning to slide 10, our capital position is strong and continues to grow.

Based on our assessment of the final rules of the Basel III standardized approach released in July, we estimate that the Basel III Tier 1 common equity ratio at September 30 was 8.6%, equal to the ratio at June 30.

At 8.6% we are well above the 7% Basel III minimum requirement and above our targeted ratio of 8%.

In the third quarter, we returned 30% of our earnings to shareholders in the form of dividends and 47% through the repurchase of over 17 million shares of stock for a total return of 77%.

Of note, our tangible book value per share rose to $13.82 at September 30 representing an 8.4% increase over the same quarter of last year and a 2.5% increase over the prior quarter.

Finally, slide 11 provides updated detail on the Company's mortgage repurchase related expense and the reserve for expected losses on repurchases and make-whole payments.

The rep and warranties repurchase reserve was $176 million at September 30 while the outstanding repurchase and make-whole request balances at September 30 was $114 million.

I will now turn the call back to Richard.

Thanks, Andy.

And turning to slide 12.

In September, we hosted our 2013 Investor Day in New York City.

The theme of this year's conference was extending the advantage which followed our 2010 Investor Day theme of positioned to win.

During the presentations, our senior management team spent time reviewing what we had accomplished since 2010 which included our added distribution and sale, our expanded products, services and capabilities, and our gains in market share as well as how we have positioned the Company to capitalize on future growth opportunities.

In other words, how we are extending the sustainable competitive advantage that our Company has created through carefully investing in our diversified business model, by maintaining prudent risk management, by focusing on operating integrity and compliance, by sustaining strong capital and liquidity, and by providing superior returns for our shareholders.

U.S. Bank's performance metrics for the third quarter will once again be among the best in the industry.

We will continue to build our Company to perform in the future as we have in the past and remain focused on producing consistent, predictable, and repeatable results for the benefit of our customers, our employees, our communities and our shareholders.

That concludes our formal remarks.

Andy, Bill and I would now be happy to answer questions from our audience.

(Operator Instructions).

Erika Najarian, Bank of America Merrill Lynch.

Good morning.

Good morning, Erika.

Hi, Erika.

My first question goes with the theme of extending the advantage.

As I'm sure you are aware larger banks are banks just larger than you have to comply with these new supplementary leverage ratio rules.

And particularly as it relates to the 100% capital that they have to hold against unfunded lending commitments, do you think that could be an opportunity for a bank with your scale and size if the SLR does pass as proposed?

Erika, this is Andy.

You know while we are not bound by that supplementary ratio, our ratio in fact would be above the 6% that we currently have.

So it is given the simple structure of our balance sheet and the fact that most of our deposits or most of our funding is deposit-oriented, it is not a major factor for us and so to that extent it could be an advantage.

Got it.

And just a question on your Basel III disclosure, could you give us what your Basel III Tier 1 common would be under the advanced approach?

It is interesting.

We have a situation where our standardized approach is a lower ratio than our advanced approach.

Said another way, standardizes our binding constraint because the advantage that we get from our simple high-quality credit portfolio is more than the negative we get from increasing of our capital due to operational risk.

So our capital ratio actually would be higher under the advanced approach; therefore, our return would be actually a little bit better.

Got it.

Thank you.

Betsy Graseck, Morgan Stanley.

Ken Usdin, Jefferies.

Hi, thanks, good morning.

Richard, I was just wondering if you could elaborate a little bit on your expectations for keeping the loan growth rate about the same pace and help us think about the constitution of it.

It seemed like this quarter you had resi mortgage pick up the slack a little bit.

And so I am just wondering what you are seeing in terms of people's appetite out there but also your appetite for retaining certain types of loan production?

Thanks, Ken.

You know, mortgage had a strong quarter but actually across the board we were very pleased especially in some of the auto and consumer areas that have in the last couple of quarters not had this kind of lift.

So I like the way it came about this quarter which gives me confidence to say that we will still be in that 1% to 1.5% range and probably in the high end of that unless something occurs that we all know about in Washington that precludes a lot of things.

In that case I will tell you we have got some opportunities for continued growth because of the following.

In the last couple of years, U.S. Bank continues to be invited into more syndicated deals and at a higher position by far than we used to be and in some cases it is a lead position.

And that is a big turnaround from what we might used to have expected a few years ago.

And likewise as you know, one of the biggest sources of lending right now in line benefits are refinancing and customers re-striking their balance sheet.

And so when they come up to that renewal point and we get invited into deals we weren't before or get invited to upsize into deals we have been in, that is a big driver for us and that continues to happen at higher levels and I expect it to continue to happen even more so in the next couple of quarters.

I might add that we are a flight to quality bank so even when there is any kind of question in the economy about what might be otherwise negative, we tend to get the benefits that accrue to that on the lending side as well as on the deposit gathering side where you might expect people to come for that safety.

The other thing, Ken, is that besides that we are adding a lot of new customers.

We have been talking about it for years.

We really are honest to God adding new customers and I have always struggled to explain that market share after a while it does I think continue to be real when it is consistent and repeatable and it is happening for us.

And I think the number of new customers are at more substantial levels than they might used to have been because we get invited in as the lead bank or a substantial position.

So I think everything we have is repeatable and sustainable and that is why I am quite confident.

The market itself is not growing naturally so I think it has to be market share.

And you know finally, we are doing it on price.

If we need to be competitive, our cost of funding is advantaged over every single other bank we compete with.

We are not afraid to use a little bit of that but also I will tell you we will not go into structure, we will not take risk on underwriting and we are not going to be in harm's way in some of those areas that I think the OCC particularly is going to be watching closely.

Okay, great.

And my second question, Andy, you have been talking about getting to this point of margin stability and we certainly saw that pick up in the investment securities yields.

I am just wondering how you see the different parts in securities and then loans which are still trending down on a yields basis?

How much -- how are you reinvesting I guess on the securities book and then also how close are we to the bottom of the loan yield side?

So, Ken, we are investing about half and half floaters and fixed on the security side.

We are keeping the duration short understanding that rates will go up and we continue to maintain an asset sensitivity in our balance sheet.

With regard to the loan side, I think we are seeing loan spreads stabilize.

There are certain pockets particularly in the middle market and maybe on the smaller end that we have some aggressive players that cause a little bit of a compression on spread.

But as Richard mentioned, we have a funding advantage and we could always compete on price.

My expectation for the fourth quarter margin is relative stability again.

However, I do want to note one item with the government issues that we are facing, we are seeing an influx of deposits and quite a strong influx.

And that while it doesn't impact net interest income, does cause our net interest margin to go down a bit.

So that could impact it by a basis point or two but absent that, I would see relative stability.

(inaudible) flight to quality.

Great.

Thanks a lot, guys.

(Operator Instructions).

Dan Werner, Morningstar.

This is kind of more of a forward-looking thing.

On the corporate payments business and the government shutdown, could you comment on how that has impacted fourth quarter so far?

And if those revenues are significantly lower, will they be made up once the government shutdown ends?

Yes, I will just go on quickly.

As we tried to characterize this particular earnings call, I think people might have thought we had a bigger position as the government affects our corporate payments and I think you heard us walk through, Andy walk through the percentage of the percentage of the percentage and by the way, that is only 20% of the total Company's revenue.

So it is really about a 1%-ish kind of an impact to our total revenue.

But it is an impact and I will tell you it started out looking like sequester and the pull out of a war situation and that has been the last probably six to eight quarters.

Right now it looks like the continuation of a sequester and what continues to be now a government shutdown.

Once and if those things get behind us, it will start to pick back up but not to the original levels until which time we get into a stronger purchasing pattern by some of the government agencies and well beyond whatever the sequester will end up to be.

So I think this quarter will continue to be stressed for all the reasons we have been talking about limited in Washington and a little bit worse than they have been in the last few quarters.

But once and when that gets passed, Dan, we expect this thing to start to float back up and we will see a sustainable recovery as the government agencies start to spend and particularly the Department of Defense gets its budget back and knows what it's rules are going to be in the case going forward.

Do you want to add some color to that?

I think that is right, Richard.

All right.

Thank you.

There are no further questions at this time.

I would now like to turn the call back over to Judy Murphy.

Thank you for listening to our call.

Richard, do you have any --

I just want to tell you that we are quite pleased with the follow-up we had from the Investor Day a couple of weeks ago.

We do our very best to telegraph to you all exactly what (technical difficulty) going on and I think the results you read this morning were exactly what we suggested.

We have a really good play at this Company.

We see the balance sheet continuing to grow.

We have good margin protection.

We have got good compliance and operating integrity and as you worry about surprises, I think in this case sustainable, predictable, repeatable is working pretty well and we are going to continue to deliver on those consistent methods that we have in the past.

We are always available for questions but we appreciate the following you of our Company.

Thanks, Richard.

And thanks everyone for listening to the call and of course as usual if you have questions, please feel free to call Sean or I in Investor Relations.

Thank you.

This concludes today's conference call.

You may now disconnect.