US Bancorp Analyst Day Notes

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This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

Richard K. Davis – Chairman, Chief Executive Officer, President,

“And at this company, we welcome the new world of competition. You may say, “How will you do now that some of these other banks are getting their legs back, now that they’re beginning back into the forward view of things and not on their heels trying to fix things?” We welcome them because that’s the pace by which we will measure ourselves…Bring on the competition. It helps us know that we are doing the right things and that the world deserves a country with even better banks.”

“we’re not an investment bank, so that’s not part of it. We’re not an insurance company, and that’s not part of it. And you can see that in the green Consumer and Small Business Banking and the light blue Wholesale Banking and Commercial Real Estate, we are significantly directed toward those 2 businesses in terms of size.”

” Our Wealth Management, having along with it Securities Servicing, particularly Corporate Trust, is a unique opportunity for this company and a unique contributor to our bottom line. And add that to our Payment Services, which is significantly more than just credit card issuing, and you start to get into the magic of this combination of diversified earnings.”

“One of the reasons we’re not big on looking to double the size of the bank or pick up a bank of our size in another part of the country where we’re not is because we would much rather double down on where we already are, be more relevant, be more scaled and be more successful than necessarily to be exactly the same market positions we have in 25 other states. It’s overrated to think that a customer in Raleigh, North Carolina well along bank with you because you are in Seattle, Washington. That’s very rare. What they do care about in Seattle, Washington is that you’re everywhere and you’re ubiquitous in and around in Seattle, Bellevue and Tacoma, and wherever they go, work or live, you’re where they’d you to be. That’s what matters.”

“Technology, we love it because it makes our employees more capable. It makes our company smarter. We do not like technology because we think it replaces any part of the human side of the banking. It just accentuates it.”

“this is a business of people. That was the video. If the people who do the job of the bank are proud to do it under that banner, proud to be bankers, training is almost secondary to their ability to convey remarkable experiences.”

“I promise you that amongst the things you’ll hear today, our ability to inculcate that level of religious leadership uniqueness will be as core and centered to the success we will deliver in the next 3 years as other things have been to our recent success in the past many.”

“banking actually is only a business of everybody else’s business. We don’t build it, fix it, make it, move it, acquire it, change it, paint it or name it. Our entire balance sheet virtually is everybody else’s balance sheet. Our loans are somebody else’s obligations. Our deposits are somebody else’s money. We could pay for moving things around and protecting it, but basically, everything we do is somebody else’s. But all we do is risk manage.”

Andrew Cecere – Vice Chairman and Chief Financial Officer

“3 attributes. You think about risk, growth and return.”

“We have diversification from a business perspective and from a sources of revenue perspective…At any point in time, anywhere between 45% and 55% of our revenue comes from the balance sheet, from net interest income, and 45% to 55% from the B side of the equation.”

“2 slices of that pie that are very different from our peer group. The first is the payment slice, which is very large in comparison to our peer group, over 15%, compared to 3% per our peer group. Why is that important? Well, that is a very annuity-based, very low volatility business, very consistent and predictable in the sources of revenue. What it is small in our bank, what is tiny, is that orange slice, trading investment banking.”

“2 things that drive us to this low ratio: one is structural and one is cultural. First, from a structure standpoint. We have a single processing platform. We have on e consumer loan system, one commercial loan system, one credit card system, one trust system. Think of the advantage that offers you. Every night, when you have to run your platform, the overnight desk processing, we do it in one place. Many of our competitors do it in the 10, 15 or 20 places. Think about if you’re changing a product or pricing or a characteristic, we do it in one place, think of the efficiencies that drives. Now one of the reasons we’re able to do that is, we fully consolidate every single acquisition. 4 weeks ago, we just consolidated our last corporate trust acquisition into our platform. Every bank we buy, every merchant processing platform, every credit card deal and every corporate trust deal, goes on our platform. It’s an investment at x0 to get that done, but it pays in the long run. And we have operating scale in all our businesses, which we talked on that — you’re going to hear a lot more about this, but if you think about the corporate trust business and the ability to take someone else’s corporate trust business at an efficiency ratio of 60-plus and put it in our platform with an efficiency ratio of 30, that’s a huge advantage that offers to our company.

Now the second part of this is the cultural piece of it, which is the business line reviews. Richard touched on this. But if you had a business, if you had a company, if you had a small entity, how would you run that business? You would run it by understanding where you are every month. You get your managers around the table and run through the numbers. You wouldn’t hire a consultant to come and tell you how to do it, you try to do it yourself. And I maintain we’re just big enough, or perhaps we’re just small enough, the Canadians would be able to do that. As Richard mentioned, we get together every month with 64 business lines, understanding the revenue opportunities to make sure the expense is consistent with the revenue, what’s going on from a competitive standpoint, how is pricing, what are our opportunities, what’s going on in credit. And that is a huge, huge advantage, in terms of being able to look around corners, to react in advance of the occurrence and to adjust your investment, consistent with the opportunity. And we’re going to continue to do that. Just to give you a perspective, if our efficiency ratio was at the median from our peer group, our 16% ROE would be 9.9%. So this single component is a very tremendous driver and a significant driver to our high returns.”

Richard K. Davis – Chairman, Chief Executive Officer, President,

“when people want to try to get a 90-day turn or they want to get some impressive high-level numbers, credit is a place you can do that by taking advantage of additional risk, taking some structure challenges, making decisions on things like lease residuals that you will not know for years, we will not look at for years, but it would be a mistake to do because it would not be a prudent way to run a company for a long period.”

P. W. Parker – Chief Credit Officer and Executive Vice President

“we’re a relationship bank and that means you get better credit selection upfront. You know your customers a lot better. And most importantly, it also means that it builds a great annuity stream, so we get to cross-sell all our products and services into our relationship clients.”

“we’ve also used the word prudent. I like the word prudent because it means that you’re actually thinking about what you’re doing, you’re evaluating it. That’s what we do, we evaluate the risk.”

Howell D. McCullough – Chief Strategy Officer and Executive Vice President

“in 2007, Richard sent a message to the organization, and the message was: we’re going to focus on customers, we’re going to make investments, we’re going to grow revenue.”

“What can we do to deepen the relationship that we have with our customers? ”

“the last area I want to talk about as it relates to innovation is really business model innovation. And from my perspective, this is probably the biggest opportunity in the industry. When you think about the shifts in customer preference and behavior, when you think about the new technologies that are available, it’s actually an opportunity to change the experience and change the customer expectations around interacting with the bank.”

” How does a millennial think about working for a bank, what are the things that we can do to help them in the workplace…how do they enter the bank, what’s the experience that they are looking for and as they grow older and their life experiences change, how do we graduate them through that process to keep them with the bank and deepen the relationship? And it’s actually something that we’re executing against today.”

Richard K. Davis – Chairman, Chief Executive Officer

“Our R&D, our laboratory is in no less impressive for a financial institution than you would expect from a pharmaceutical company or a medical device company or a technology company. We are no longer going to be fast followers. We want to be leaders in a space that particularly aligns itself with changing customer patterns.”

“our efficiency ratio is actually higher than it would be if we weren’t spending the kind of money to learn and test and pilot and evaluate.”

John R. Elmore – Vice Chairman of Community Banking & Branch Delivery

“we have a tremendous amount of employees who have never lived in a rising interest rate environment. So we’re spending a lot of time training them on what the dynamics of that will be like”

“we’re also training people to be better full-service bankers as opposed to, perhaps, just being able to deliver on a particular product or service.”

“lient advocacy has been a significant cultural change for us. It’s been a process of us putting the total focus around the customer, of us being an advocate for the customer, of us understanding their needs and doing everything we can to accelerate their success”

“one of the things that we require today is our branch managers will spend 40% of their time outside the branch, getting to meet the various businesses in their particular geography, getting to meet the civic leaders, being involved in that particular part of the business, as well as just being inside the 4 walls.”

“our approach, as a community banking model, is we want to be as local as anybody that we compete against.”

Joseph C. Hoesley – Vice Chairman of Commercial Real Estate

“The differentiation between commercial banking and Corporate Banking is commercial banking are clients under $500 million in revenue and Corporate Banking is clients with $500 million and over in revenue.”

“We’ve made a conscious decision here, I think, to not compete with a crazy loan structure. But we can compete because of who we are with the cost structure and that means that we will not lose business because of a cost structure”

“we can compete because we generate a low cost of funds structure and we can offer that to our clients.”

“Again, we offer a lot more to the client out there today than just pricing, but it is competitive today”

Richard B. Payne – Vice Chairman of Wholesale Banking

“once we extend credit, we then sell our other noncredit services against that commitment…A very few of our relationships are credit-only. In fact, they are not credit-only relationships. They’re not things that we seek. And I think the big change in Wholesale Banking over the last 20 years has been that Treasurers and CFOs know if they are — if you are extending credit to them, you are almost immediately looking for the other opportunities in ancillary business.”

“we have been increasing the importance of our bank to our existing customers by taking larger credit commitments so we have been up-tiering ourselves”

“The third line of revenue that increases is when you add new products. So in our case, it’s been high-grade bonds and municipal securities.”

“In that map are all the growth opportunities that we need to look at for the next 3 or 4 years. We’ve got to maximize the potential from those growth opportunities. We don’t need any new products. We don’t need any new offices other than the one in Texas. What we need to do is execute against the customers in that customer base that are waiting there for us to become more important to them and prospects that are waiting for us to convert them into customers.”

“imagine for a moment you’re with us on a customer call and we’re going into the office of a Treasurer to pitch a treasury management product. We always start with a pitch book that has 5 or 6 pages that are the 5 or 6 page — 5 or 6 pages out of Andy’s presentation. They start with our bond ratings. They talk about our return on equity. They talk about our return on assets. They talk about our credit history and they talk about our efficiency ratio. And it’s important to talk about this one more time because not only does that have an impression on the people that we are trying to sell the product to and sets the stage for what we’re going to do, it gives the people on our side of the table tremendous confidence to be sitting there, representing an institution that has those sorts of industry-leading metrics. And it creates the conversation that it’s much more powerful than if we just came in and said, “We want to talk to you about your wholesale lock box.” So we start every conversation with that. I’ve actually been around for a while, as you may notice. 20 years ago, CFOs, Treasurers, CEOs and Boards of Directors did not care what banks’ bond rates were. They cared today, all the way up to the board.”

“If you were a Fortune 1000 company, if you were a large nonprofit company and you were being touted inside that company as an additional bank, you, as a Treasurer, the CFO, have to represent the CEO and the board that as a counterparty, you, the CFO, are bringing in a very strong back and I’m not saying that it’s quite like the old days when nobody got fired by buying IBM. But it’s almost like that and that nobody is going to get questioned for bringing in U.S. Bank when people look at our bond ratings and our performance metrics, so very powerful and also very much appreciated by our distribution network.”

Joseph C. Hoesley – Vice Chairman of Commercial Real Estate

“through this cycle, probably 2010 and on, that things were changing. Our clients have changed. Our clients went through — quite frankly, many went through hell, the tough economic time, there’s a lot of indecision, the banking business was changing, huge regulatory requirements on the banks today”

“We thought we were pretty good, but we took it upon ourselves to say we need to change and we need to deliver something different to the client, be ahead of the market when the market comes back, be more in line with the, as we say, the first call from the client.”

Terrance R. Dolan – Vice Chairman of Wealth Management & Securities Services

“when we end up looking at the profile of this business, it’s 40% of it represents Wealth Management, 60% represents the Securities Services businesses that I just talked about, Corporate Trust, Fund Services, et cetera.”

“We like these businesses because they are fee-based businesses. In fact, 76% of the revenue associated with Wealth Management, Securities Services are fee based…In addition, they’re capital efficient business”

“with respect to Securities Services business. And that is that the barriers to entry are very high because we have this businesses and because we have commanding position with respect to these businesses, it’s going to be very difficult for our competitors to be able to break in.”

“within Securities Services operating scale is critical. If you’re going to be successful in this particular business, operating scale is very important. ”

“When you end up looking at our Securities Services businesses, where you need scale, we definitely have it, and we’re #3 with respect to our fund servicing business, we end up looking at registered products. We’ve grown that market share from 17% to 24% during the last 5 years.”

“When you end up looking at Corporate Trust, we’re #1 or #2 across each of the 3 major product lines that we’re involved in, and we’re involved in all of them.”

“what distinguishes U.S. Bank and our Corporate Trust business from our competitors in this particular space? Well, it’s all the assets of U.S. Bank that really make a difference. We have a vast wholesale and commercial banking business that helps to deliver with our building deeper relationships access to the issuers.”

“given our alternative investment servicing capability and our access to investment managers, we believe that there’s a real opportunity to cross sell between fund services and Corporate Trust.”

Pamela A. Joseph – Vice Chairman of U S Bancorp Payment Services

“his is our electronic payment businesses. Our retail payments, which is our consumer and small business credit, debit card and prepaid card businesses. Corporate payments, which is our corporate travel, our purchasing, our fleet cards, as well as our freight payables business. And then finally, our on merchant acquiring business, which is where we actually process payment transactions on behalf of about 1 million merchants.”

“We’ve seen very good spend from the high spenders, the transactors, as we refer to them. So they are spending a lot. Our spend metrics are good, but they pay us back every single month.”

“Our balance growth is so-so. Mainly, that’s because we’ve had middle class that’s been very cautious. They are spending, but they really aren’t carrying balances.”

“corporate payments has struggled a little bit this year. We actually can say that the federal government has actually slowed down their spending. And we’ve seen our federal government business, which is about 30% of our corporate payments business, actually decline”

“Our international processing platform allows us to put all of our customers, no matter what country, no matter what geography through one back end.”

“In our card business, we have the only platform against our largest competitors that allows us to do multibank processing. So again, nobody we compete with has the ability to do multiple banks at one time and provide issuing to multiple banks.”

“we do business with 3,300 banks right now. We provide them with some type of service. [indiscernible] Card issuing, merchant acquiring, sometimes ATM processing, again, we resell our services to other banks.”

“In our merchant-acquiring business, we are very focused on the international space. we’re seeing very good growth opportunities internationally.”

“And in December, we announced the purchase of a company, FSV, that was #2 in the payroll card space. We like this particular company and we went after this company because they had their own in-house processing platform. And it was very, very important for us to be able to have our own processing platform. Up into the point of this purchase, we were outsourcing our business”

Question-and-Answer Session

“I don’t think we need to be in more places in order to be better at what we do. But we do need to keep building up the rest of the national franchise is where I think we can build on the wholesale and the corporate and trust areas. So we really don’t think we need a big deal. Now we’re going to keep M&A going, particularly in payments and in trust. Small bank deals would not be out of the question, but they’ll be in locations where we already are or we can get the scale that will be improved.”

“So I’ll go first because I’m very firm on this opinion. But until interest rates are believed to be moving upward, the general population of our customers believe there’s no reason to move quickly and take any action now. And if there’s anything about QE1, QE2 and QE3, it’s not the bond buying, this should be interesting, it’s the fact that they started to telegraph for the first time and they would precision the second and third time at some date-specific moment when rates would start to move up. And so I can’t even say how many CEOs today in our company are not hearing from their CFOs down the hall, hey, boss, rates are record low. They’ve been longer than they’ve ever been. I don’t know when they’re going up, but they’re probably moving up. Let’s start getting involved. Let’s buy it, build it, acquire it, add to it, whatever. And they’re not. And I talked to the Fed about this particularly and they understand that but they also are protecting other things like inflation. And as a result of that, they’re not trying to be perfect, but their trying to telegraph. And as long as that telegraphing is perceived as perfect by our customers, which it is, there’s really no catalyst for that. So I believe that while rates stay low, inflation will be in check as well. But until they start to move up, which will be the signal of a healthy economy, we will not see that kind of robust use of lines.”

“treasury management is going to be so old-fashioned in a couple of years. It’s going to be corporate payments and that’s going to mean a whole lot more technology like you see today for mobile banking.”