For most bank management teams, positive operating leverage, where revenues grow faster than noninterest expenses, is a key target. For
On Wednesday,
"It's probably more likely a positive operating leverage in the second half of 2024 versus the first half, given some of the margin pressures," Chairman and CEO Andrew Cecere said on a conference call with analysts. "That is still our objective. My expectation is once we get more to a normalized revenue level that we will continue to manage expenses below revenue growth and continue to tick down that efficiency ratio into the 50s."
More specifically,
The Minneapolis-based U.S. Bancorp reported fourth-quarter net income of $847 million Wednesday on revenues of $6.8 billion. Revenue grew 6% year over year, but operating expenses, which totaled $5.2 billion for the three months ending Dec. 31, jumped 29%. The imbalance helped push U.S. Bancorp's efficiency ratio, a measure of how much banks spend producing each dollar of revenue, north of 60% in 2023. Commercial banks typically aim for a result closer to 50% — a level U.S. Bancorp achieved regularly in the past, according to Wells Fargo Securities Analyst Mike Mayo.
"The real question is when do you get back to your historical efficiency ratio," Mayo said on the conference call. "I mean, 61% core efficiency in the fourth quarter isn't exactly like legacy U.S. Bancorp, and that's up 300 basis points year over year."
Other analysts were less skeptical. "Our takeaway … is that last year's dislocation is largely in the rearview mirror, and 2024 should represent a return to normalcy for the company," Piper Sandler Managing Director Scott Siefers wrote Wednesday in a research note.
For his part, Cecere predicted the efficiency ratio would fall as U.S. Bancorp moved closer to positive operating leverage. "I think we're going to get to the positive operating leverage," Cecere said. "We are planning on it, and we will continue to drive that efficiency ratio down, certainly into the high 50s at the beginning, and continue to deliver positive operating leverage to get it even lower. That's our objective."
Beyond revenue and expenses, industry observers have focused on asset quality, with many predicting a normalization trend where problem loans tick up to rates reported before the COVID-19 pandemic, when the Federal Reserve pushed interest rates to historic lows and held them there well into 2022.
That appears to be the scenario U.S. Bancorp is forecasting. It reported an annualized net charge-off ratio of 0.49% for the quarter ending Dec. 31, up five basis points on a linked-quarter basis. Terry Dolan, U.S. Bancorp's vice chairman and chief administrative officer, said he expected additional increases in 2024.
"When we look at net charge-offs and the trajectory, I would expect that we would expect that it will continue to kind of normalize," Dolan said on the conference call. "Our expectation is that for full year 2024 we'll probably be in kind of in the mid-50s in terms of the net charge-off rate."
U.S. Bancorp reported total average loans of $373 billion on December 31, down about 1% from three months earlier. However, Chief Financial Officer John Stern said on the conference call that lending is likely to accelerate in 2024 as the company's pipeline builds. Average deposits totaled $503 million, down about 2% on a linked-quarter basis, though the company attributed the drop to a decision to allow some noncore time deposits to leave the bank. Core consumer deposits grew about 1% during the quarter.
While U.S. Bancorp did not include any projections in its fourth-quarter earnings report, Stern predicted that net interest income, which totaled $4.1 billion, would remain level or increase slightly in 2024, while operating costs would remain level and fee income would see a mid-single-digit increase.
Bottom-line quarterly earnings of $847 million were down sharply both from Sept. 30 and year over year, but included the impact of a $734 million Federal Deposit Insurance Corp. special assessment.
