US Bancorp (NYSE: USB) delivered strong third quarter earnings, with diluted earnings per share of $ 1.30 on total sales of nearly $ 5.9 billion. Both figures exceed analysts’ estimates. The results are good, although loan growth continues to be moderate.
But beyond the numbers, my biggest profit conclusion came when management disclosed more information on how the bank will further integrate its payments business into commercial banking, a big part of its strategic vision and something that could be a major driver of revenue over the next few years.
The opportunity for further integration
US Bancorp, which has $ 567 billion in assets, did a solid assessment with a differentiated business model that includes a strong traditional banking operation and a more specialized payments business that contributes about a quarter of the bank’s overall profits. US Bancorp’s payments business serves a range of customers. The unit has retail payment solutions offering credit, debit and prepaid cards. It also serves companies in the hospitality and airline industries with its global merchant acquisition technology, as well as companies and businesses in the aviation, fleet, transportation and travel industries with services company card and payment.
As management invested heavily in its payments capabilities, analysts and investors wondered how US Bancorp could do more with the payments industry. During the bank’s third-quarter earnings call, management said it sees a great opportunity among its 1.1 million merchant bank customers, which it defines as those with top-line sales. business is less than $ 25 million. He believes this segment, which currently uses traditional banking products such as loans, bank accounts, lines of credit, etc., will be ripe for a payment product. Management also believes that payment service customers could be a target for cross-selling more traditional banking products.
As you can see, 72% of merchant banking customers do not have a payment product, while half of payment customers do not have a banking product. U.S. Bancorp CEO Andrew Cecere said he believed the bank could change the left chart of corporate banking customers to at least a 50-50 split. He also said he believed the bank could grow small business relationships by 15-20% and “related revenues by 25-30% over the next few years.”
When asked how he plans to do it, Cecere said the bank plans to roll out a product that helps corporate banking customers better run their businesses by running all aspects of their business, from debts and receivables to payroll and banking, all on one dashboard. US Bancorp also has buy-now, pay-on-pay (through a subsidiary) capabilities that it is testing and can deploy to its merchant customers to help them expand their capabilities.
The other recent exciting news in this area is that US Bancorp recently acquired the US banking operations from the Japanese bank. Mitsubishi UFJ Financial Group. The subsidiary, which is called Union Bank, has 190,000 merchant bank customers not included in the number of 1.1 million above. Not only are these customers good candidates for payment products, the acquisition gives US Bancorp greater scope in California, the state with the most small businesses in the country.
Why it matters
As I mentioned above, US Bancorp has a high valuation. At Thursday’s prices, the bank is trading at around 250% of tangible book value, which a bank would be worth if it were immediately liquidated. The payments industry is so important because not only does it set US Bancorp apart from its peers, but it is also a major way for the bank to generate revenue in the years to come and further improve shareholder value. In my opinion, the continued integration of the payment business and commercial banking shows shareholders that there is a lot of value left in the stock.
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