U.S. Bancorp Sees Embedded Payments and Stablecoins as Growth Drivers

U.S. Bancorp’s third-quarter earnings results, released before the markets opened Thursday (Oct. 16), indicated that growth in deposits, improved credit metrics and embedded payments were all drivers of results.

The company is also looking ahead to stablecoins, with pilot programs on track over the near term.

“We are generating organic growth through distinctive interconnected solutions,” U.S. Bancorp CEO Gunjan Kedia said during a conference call with analysts. “We are maintaining our expense discipline through sustainable process automation. And we are executing on a payments transformation with greater focus and strategic investments.”

Consumer deposits now represent over 52% of total average deposits, up more than 2% year over year, according to an earnings presentation. Additionally, there has been growth over the past several quarters for the card issuing and merchant processing businesses.

Improving Credit Quality

“As expected, nearly all key credit quality metrics, including nonperforming assets and net charge-offs, improved both sequentially and on a year-over-year basis,” U.S. Bancorp Chief Financial Officer John Stern said in his own remarks during the call.

Overall average deposits were $511.8 billion in the most recent quarter, compared to $508.8 billion a year ago, per the presentation.

“We are feeling very confident in the broad-based strength of the fees,” Kedia said of embedded payments and fee income during the call. “…We have made a lot of progress over the last 12 months on creating an operating model that creates interconnectivity between our product sets. So, the fees are lifting each other… What we track internally on payments, for example, is new card acquisitions that we can measure today that have grown nicely from past trends.”

Fee income should increase in the mid-single digits, she said.

Stern said later during the call that the merchant business had a “strong quarter given success in our key verticals that we’ve been talking about, as well as some of the embedded finance and tech-led type of strategies.”

“Our view on credit right now is favorable,” he also said. “We see strong spend trends and credit trends… The spend levels have been very good. The loss rates … have come down meaningfully this quarter.”

The company also provided insight into its commercial loans tied to non-deposit financial institutions (NDFIs), where $45 billion of the loan book has been tied to those entities, at about 12% of the loan book.

Stern said that “mortgage warehouse lending and subscription lines and auto ABS are very different items. We just wanted to show the categories that we have. I think the point that … we’re trying to make is that our risk disciplines and how we think about the diversification of the book is something that we spend a lot of time on.”

Looking Toward Stablecoins

“We are working on stablecoins in two very distinct areas,” Kedia said during the call. “The first is around the capital markets and investments part of it, where the business model is very clear, and it’s very favorable to us. So, this is custody and safekeeping of the collateral underlying stablecoins or custody and safekeeping of cryptocurrency assets. These are products that we introduced some time back, have reintroduced with the shift in the supervisory environment, and are quite confident in our ability to just provide those products.

“The other side is stablecoins as a payment rail, where the client demand is more muted, although there are a lot of discussions. And there our efforts are twofold. One is to just be ready to onboard and offboard a stablecoin into the banking system, and we are working on that in conjunction with the industry consortiums. And then the second is just being ready to provide stablecoin services as a payment vehicle should that market take off within our client base.”

The company will look to pilot stablecoin transactions this year through partnerships, she added.

U.S. Bancorp shares were up 1.7% in early trading Thursday.

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