U.S. Bancorp’s first-quarter earnings results showed strong credit quality, as consumer card delinquencies slipped year over year even with the current state of macroeconomic uncertainty.
Management also pointed to the diversification of the bank’s revenue streams as a benefit in today’s operating environment, where U.S. Bancorp sees long-term potential in its payments-focused businesses and embedded money movement.
In remarks to analysts during the company’s conference call following the earnings release Wednesday (April 16), CEO Gunjan Kedia said: “Importantly, our credit quality and capital levels are strong. This quarter, our net charge-off ratio improved modestly and we continued to build capital. We are in an environment of intense market and economic volatility … and we are prepared for a variety of possible scenarios.”
“We have an opportunity to do better with our payments businesses,” Kedia said during the call. Money movement capabilities are critical to anchoring client relationships, and we are committed to building a vibrant payments franchise.”
Within that segment, the company notched $925 billion in trailing 12 months payments volumes, representing a 4% compound annual growth rate through the past two years. Payments-related average loans were 6.1% higher, compounded, through the same time frame, to $42 billion.
“We have a greater focus on the affluent customer,” Kedia said during the call.
The merchant payments services business will be transformed through “greater interconnectivity across the bank [and] a strategic shift to a tech-led operating model that is more consistent with the buying behavior of consumers today,” she said. “Tech-led represents over one-third of total merchant processing revenue, and most of our revenue generation is now concentrated in our five targeted verticals,” including retail, services, travel, entertainment and healthcare.
Merchant processing fees were up 3.5% year over year.
On a day of broad market losses, U.S. Bancorp shares slipped 2% Wednesday.
Chief Financial Officer John Stern said during the call that the first-quarter net charge-off ratio of 0.59% improved one basis point linked quarter. The earnings supplementals indicated that overall 90-day delinquency rates were 0.2%. Within the card portfolio, delinquencies up to 90 days stood at 1.3% of card loans, down from 1.4%.
Asked by analysts on the call about consumer spending trends, Kedia said: “We saw a modest pullback in consumer spending early in the year, and that was very weather-related. And it has stabilized… We are watching the downward trend in consumer sentiment but not seeing that in our spend patterns. Our mix does tilt toward the more affluent customer and toward non-discretionary everyday spend patterns. So that could be an explanation, but we are seeing steady consumer spend patterns in the first quarter.”
Later, in discussing the merchant-facing business, Kedia said: “It’s an important organic growth opportunity … the [merchant payments services] business is about 5% of our overall bank, but a very important differentiator for us. It’s a very competitive space, and the reason to think about focusing on the five verticals is you can build stronger deck-led value propositions for each of the verticals… And the more we have focused our acquisition efforts and our organic growth efforts on those verticals, the deeper and the better execution we have. And today, about 90% of our revenue focus is on those verticals.”
