U.S. Bancorp Plans to Restart Buybacks as BTIG Fuels Capital Markets Growth

Key Points

• U.S. Bancorp expects to restart share buybacks after pausing them last quarter, but it remains slightly below its capital target. Once it reaches that target, the bank aims to return 70%–75% of total capital through dividends and repurchases.
• The BTIG acquisition is expanding U.S. Bancorp’s capital-markets business: the combined operation generates about $2.5 billion in annual fees, and the bank wants capital-markets fees to grow from 8% to more than 10% of overall earnings.
• U.S. Bancorp estimates it has only 1.6% of its roughly $150 billion addressable capital-markets market and says it could at least double that share. It is also nearing the $700 billion asset threshold that could bring Category II status as early as the third quarter.

U.S. Bancorp NYSE: USB expects to restart share repurchases promptly after pausing them in the previous quarter, as it works to build capital and expand its capital markets business following the acquisition of BTIG, executives said at a conference.

Chief Financial Officer John Stern said the bank had paused buybacks amid heavy growth in risk-weighted assets, the addition of an Amazon small-business credit card portfolio and higher interest rates. Rates have since fallen and largely stabilized, giving the company confidence it can resume repurchases, he said.

The Minneapolis-based bank is slightly below where it wants to be on capital under fully loaded Category II requirements, Stern said. Once it reaches its capital target, the company’s goal is to return 70% to 75% of its total capital through dividends and share repurchases.

BTIG expands capital markets offering

The acquisition of BTIG filled a significant gap in equities and investment banking that U.S. Bancorp could not fill organically, said Stephen Philipson, vice chair and head of wealth, corporate, commercial and institutional banking. The transaction closed June 1.

Philipson said the combined capital markets operation generates about $2.5 billion in annual fees, including approximately $1.6 billion from fixed income. The company wants capital markets fees to account for more than 10% of the bank’s overall earnings, up from 8%, he said.

Stern said roughly half of the bank’s reported 14.9% fee revenue growth was attributable to BTIG. About 44% of U.S. Bancorp’s revenue comes from fees across its businesses, he said.

Since the acquisition closed, U.S. Bank teams have made more than 220 referrals to BTIG, while BTIG teams have made more than 130 referrals in the other direction, Philipson said. Three of BTIG’s biggest revenue days in its history occurred after the deal closed, he added.

Philipson said the strongest early momentum has come from equity issuance, share buybacks and at-the-market programs. Investment services opportunities are also emerging, although fund administration and custody contracts generally have longer sales cycles, he said.

Among the examples Philipson cited, a legacy BTIG media client referred to U.S. Bank for acquisition financing is expected to add $12 million in incremental revenue for the bank this year. He also said BTIG-sourced distribution brought $1 billion of inflows to the $200 billion First American Funds complex.

Growth plans and investment

Philipson estimated that the bank has about 1.6% of a roughly $150 billion U.S. addressable market across its capital markets products. He said the bank should be able to at least double that share over time.

One priority is expanding interest-rate derivatives, foreign exchange and repurchase agreement services to institutional clients. Philipson said U.S. Bancorp has about 1% of the estimated $40 billion market for those products and is confident it can double its share in the coming years.

The bank also sees an opportunity in equity swaps, though Philipson said that capability will take time to build. Stern said investments in products, risk management, technology and staff would remain consistent with the bank’s commitment to positive operating leverage.

Stern said the strategy has room to grow without materially expanding the balance sheet because the bank already extends credit to many of the targeted clients.

Regulatory threshold and quarterly update

U.S. Bancorp is close to the $700 billion asset threshold measured over four quarters for Category II status, Stern said. The bank will likely cross it in the first quarter, potentially becoming a Category II bank in the third quarter under current rules, he said. He described discussion of becoming a global systemically important bank as premature.

Asked about the fourth quarter, Philipson said October was a good month for fixed income, with a rally in rates supporting derivatives and bond activity while commodities remained strong. BTIG’s equity and investment banking businesses also had a solid start, he said, cautioning that one month does not make a quarter.

About U.S. Bancorp (NYSE:USB)

U.S. Bancorp is the parent company of U.S. Bank, a financial services provider serving consumers, businesses, institutions and government entities across the United States. Its history traces to 1863, when one of its predecessor institutions, First National Bank of Cincinnati, was established.

U.S. Bank offers consumer and business banking, lending, payment services, wealth management, investment services and corporate trust services. Its products include checking and savings accounts, credit cards, mortgages, commercial loans and digital banking solutions.

Headquartered in Minneapolis, Minnesota, U.S.

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