U.S. Bancorp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2023

There are 16 speakers on the call.

Operator

Welcome to

Speaker 1

the U. S. Bancorp Second Quarter 2023 Earnings Conference Call. Following a review of the results, there will be a formal question and session. This call will be recorded and available for replay beginning today at approximately 11 o'clock a.

Speaker 1

M. Central Time. I will now turn the conference call over to George Anderson, Senior Vice President and Director of Investor Relations for U. S. Bancorp.

Speaker 2

Thank you, Brad, and good morning, everyone. With me today are Andy session. Our Chairman, President and Chief Executive Officer Terry Dolan, our Vice Chair and Chief Financial Officer and John Stern, Senior Executive Vice President and Head of Finance. During initial prepared remarks, Andy and Terry will be referencing a slide presentation. A copy of the presentation, our earnings release and supplemental analyst schedules are available on our website at usbank.com.

Speaker 2

Please note that any forward looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current Forward looking assumptions are described on Page 2 of today's presentation, our press release, our Form 10 ks and in subsequent reports on file with the SEC. Following our prepared remarks, Andy, Terry and John will take any questions that you have. I will now turn the call over to Andy.

Speaker 3

Thanks, George. Good morning, everyone, and thank you for joining our call. I'll begin on Slide 3. The 2nd quarter was highlighted by our successful conversion of Union Bank and a meaningful increase in our common equity Tier to 9.1%, 60 basis points higher than the Q1, driven by earnings accretion and balance sheet optimization actions. Earnings per share totaled $0.84 in the 2nd quarter, including $0.28 per share of notable items.

Speaker 3

Excluding the impact of notable items, earnings per share was of $1.12 Slide 4 provides reported and adjusted income statement results and other key metrics. Our 2nd quarter results were supported by new customer growth and deepening relationships across our business lines as well as continued disciplined expense management. Net interest income was lower compared with the Q1, primarily due to pressures on deposit pricing. However, momentum in fee income businesses continue strong. One of the strengths of our business model is our diverse and stable funding that includes a mix of both consumer and operational wholesale deposits.

Speaker 3

This quarter, while our average deposit balances decreased by 2.6% linked quarter, period end deposits were higher by 3.2% or approximately $522,000,000,000 largely reflective of seasonal operational deposit flows in areas such as our corporate banking and trust businesses. Credit quality metrics remain strong versus pre pandemic levels, but are normalizing as expected. This quarter, we strengthened our balance sheet by increasing the loan loss reserve reflective of our prudent approach to credit risk management. Slide 5 provides key performance metrics. Excluding notable items, our return on average assets was 1.07% and our return on tangible common equity was 22.3%.

Speaker 3

Slide 6 provides a summary of our recently completed conversion of Union Bank. Following our main systems conversion on Memorial Day weekend, All credit card trust and investment accounts were transitioned to our platform in June. Early indications are encouraging and I'm even more confident today of the strategic and financial merits of this deal. We continue to expect meaningful revenue opportunities and our cost synergy targets remain intact. One highlight is the Union Bank Consumers are adopting our digital capabilities more quickly than expected.

Speaker 3

As of June 30, just 1 month following conversion, we've had over 500,000 enrollments in our digital product offerings and this number continues to grow. Our teams are working diligently to leverage the value of overlaying all of our products and services to Unibank customers as we continue to provide and we will continue to provide updates on our progress. I'll now turn the call over to Jerry, who will provide more detail on the quarter.

Operator

Thanks, Andy. Turning to Slide 7, our balanced mix of consumer, corporate and commercial deposits continues to be a key source of strength for the bank. As Andy highlighted, while average total deposits declined 2.6% or $13,100,000,000 on a linked quarter basis, We ended the period with $522,000,000,000 of deposits, representing a 3.2% increase in ending balances on linked quarter. This quarter, our end of period percent of non interest bearing deposits declined to approximately 20% from 25% in the Q1 due to both industry dynamics and a change we made to Union Bank retail accounts at conversion. Specifically, about half of the decline was related to an increase in deposit volumes and mix shift, while the other half primarily was primarily driven by a customer friendly product conversion decision by us.

Operator

To create a more positive customer experience, we We upgraded Union Bank customers to our interest bearing BankSmartly checking product, which offers a better checking solution as well as other benefits. This change will provide customer retention benefits without a material impact on our net interest margin. Given current interest rate volatility and the significant competition for deposits across the industry, we now expect our cumulative deposit beta to be in the mid-forty percent range by the end of this rate cycle, slightly higher than our previous expectation, but consistent with the deposit pricing dynamics in the industry. On Slide 8, average total loans this quarter were $389,000,000,000 which was flat on a linked quarter basis and up 19.9% year over year. Commercial real estate loans represent approximately 14% of our total average loan portfolio The commercial real estate office exposure representing only 2% of total loans and 1% of total commitments.

Operator

Our office exposure is well balanced among suburban, specialty and central business districts and had a weighted average loan to value ratio of approximately 55 percent at initial underwriting. Given current macro factors as well as other portfolio considerations, We increased the reserve ratio for commercial real estate office loans to 8.5%. Turning to Slide 9, we reported diluted earnings per share of $0.84 for the quarter or $1.12 per share after adjusting for notable items in the amount of $575,000,000 or $0.28 per diluted common share. Notable items this quarter included $310,000,000 of merger and integration related charges associated with the acquisition of Union Bank as well as $265,000,000 related to balance sheet optimization and capital management actions, largely driven by a provision charge of 2 $43,000,000 related to securitization of approximately $4,400,000,000 of indirect auto loans as well as an additional $4,200,000,000 sale of Union Bank Mortgage Loans. These moves enable us to more effectively position the balance sheet for profitable growth and optimize returns.

Operator

Slide 10 provides a more detailed earnings summary for the quarter. Turning to Slide 11. Net interest income on a fully taxable equivalent basis totaled approximately $4,400,000,000 which represented a 4.7% decrease on a linked quarter basis and a 28.4% increase from a year ago due to the impact of rising rates in the acquisition of Union Bank. Our net interest margin declined from 3 point 10% in the first quarter to 2.90% in the second quarter, which is somewhat lower than expected. The linked quarter decline was primarily due to the impact of maintaining higher cash levels given the debt ceiling concerns and deposit pricing pressures partially offset by higher rates on earning assets.

Operator

Slide 12 highlights trends in non interest income. Non interest income increased 8.7% or $219,000,000 on a linked quarter basis, driven by higher payment services revenue, trust investment management fees and commercial product revenues. Within payment services, revenue increased $112,000,000 on a linked quarter basis, reflecting credit card Credit card revenue growth of $62,000,000 or 17.2 percent driven by higher margins and sales volume and an increase in merchant processing revenue of $49,000,000 or 12.7 percent driven by pricing. Also noteworthy were increases in trust and investment management fees of $31,000,000 or 5.3 percent, driven by core business growth and commercial product revenue of $24,000,000 or 7.2 percent driven by strong debt capital markets activity in the quarter. Compared with a year ago, non interest income for the company increased $178,000,000 or 7.0 percent, largely driven by higher core fee income.

Operator

Turning to Slide 13, reported non interest expense for the company totaled $4,600,000,000 in the second quarter, which included $310,000,000 of merger and integration related charges. Non interest expense as adjusted decreased $52,000,000 or 1.2 percent on a linked quarter basis. Slide 14 shows credit quality trends, which continue to be strong from a historical perspective, but are normalizing as expected. The ratio of non performing assets to loans and other real estate was 0.29% at June 30 compared to 0.30% at March 31 and 0.23 percent a year ago. Our 2nd quarter net charge off ratio of 0.35 percent as adjusted increased 5 basis points from a first quarter level of 0.30 percent as adjusted and was higher when compared to the Q2 2022 level of 0.20%.

Operator

Our allowance for credit losses as of June 30 totaled $7,700,000,000 or 2 point 0 3 percent of period end loans. Turning to Slide 15, we accelerated our capital actions and ended the quarter with a CET1 capital ratio of 9.1%. The 60 basis points linked quarter increase in the CET1 ratio expected 20 basis points of earnings accretion, net of distributions and an additional 40 basis points attributable to risk weighted asset and other balance sheet optimization initiatives with low to neutral earnings impact. During the quarter, we received the results of the Federal Reserve's 2023 stress test, and we expect to be subject to the minimum stress capital buffer requirement of 2.5%, which is unchanged from last year. Despite this year's more stressful economic scenario and an additional $1,400,000,000 of merger related charges with limited recognition of cost synergies related to Union Bank.

Operator

I will provide Q3 and updated full year 2023 forward looking guidance on Slide 16. Starting with Q3 2023 guidance. We expect net interest income of between $4,200,000,000 $4,400,000,000 in the 3rd quarter. Total revenue as adjusted is estimated to be in the range of $6,900,000,000 to $7,100,000,000 including approximately $75,000,000 of purchase accounting accretion. Total non interest expense as adjusted is expected to be approximately $4,300,000,000 inclusive of approximately $120,000,000 of core deposit intangible amortization related to the Union Bank acquisition.

Operator

Our income tax rate as adjusted is expected to be approximately 23% to 24% on a taxable equivalent basis. We expect merger and integration charges of between $150,000,000 to $200,000,000 in the 3rd quarter. I will now provide updated guidance for the full year. For 2023, Net interest income is expected to be in the range of $17,500,000,000 to $18,000,000 Total revenue as adjusted is now expected to be in the range of $28,000,000,000 to $29,000,000,000 inclusive of approximately $330,000,000 a full year purchase accounting accretion. Total non interest expense as adjusted for the year is expected to be approximately $17,000,000,000 inclusive of approximately $500,000,000 of core deposit intangible amortization related to Union Bank.

Operator

Our estimated full year income tax rate on a taxable equivalent basis as adjusted is expected to be approximately 23% to 24%. We continue to expect to have $900,000,000 to $1,000,000,000 of merger and integration charges in 2023 and total merger and integration costs of approximately $1,400,000,000 consistent with earlier guidance.

Speaker 3

I will now hand it back to Andy for closing remarks. Thanks, Terry. I'll finish up on Slide 17. The strength and stability of our balance sheet remains a differentiator for our company and these metrics indicate as these metrics indicate, we are well capitalized and prepared for a potentially more challenging environment given our strong liquidity, diversified business mix and consistent and disciplined approach to credit risk management. Building capital remains a top priority as we prepare for Category 2 designation and we are confident in our ability to execute on our strategic growth opportunities and key initiatives.

Speaker 3

Following the successful conversion of Union Bank this quarter, we enter the second half of the year well positioned as a national banking franchise with increased scale, broader reach and meaningful revenue growth opportunities provided by the addition of 1,200,000 new consumer and small business customers. Across the business from consumer to wealth management and commercial to business banking, we see significant opportunities to provide legacy Union Bank customers with a broad set of our products and services and industry leading digital capabilities. Additionally, the $900,000,000 of identified cost Synergies are still expected to be fully reflected in run rate savings as we head into 2024. Let me close by thanking our employees for all that they do to help provide exceptional service that makes us a destination of choice for our clients and a valued partner to all our stakeholders. We'll now open up the call to Q and A.

Speaker 1

We will now begin the question and answer session.

Operator

We'll

Speaker 1

We'll first go to Scott Siefers with Piper Sandler. Please go ahead.

Speaker 4

Good morning, Scott.

Speaker 5

Hey. I was hoping maybe we could start out with a couple of thoughts or expand the thoughts on capital, maybe just sort of a refresher on Anticipated capital build from here, especially in light of just how quickly you just how quick the pace was in the Q2. And then ideally sort of what you're targeting presumably under Category 2 rules and when you might get there in your view?

Operator

Yes. Thanks, Scott. I think that we ended up at 9.1 CET1 at the end of the second quarter. Our expectation now through the rest of this year is that we'll be at least at 9.5% by the end of the year. And that's going to be a function of earnings accretion, net of distributions as well as some continued actions answer.

Operator

From a risk weighted asset perspective, we had originally articulated about 50 basis points of risk weighted asset Optimization over kind of the 2 year time horizon, we felt like we could accelerate that a lot because The vast majority of them were, what I would call, low to neutral impact on earnings accretion. We still have a number of different levers that we can pull, some of which we'll be able to execute on this year, Some of which is in preparation for 2024. But we feel very confident that we have a game plan in order to be able to get to at least 9.5 by the end of this year and to be in a position to be able to fully adopt Category 2 by the end of 2024, if necessary.

Speaker 5

Okay. All right, perfect. Thank you. And then maybe a question on the deposits. Appreciate all the commentary on the noninterest Just bearing runoff being, I guess, about half driven by the product change as you integrated the Union Bank customers.

Speaker 5

But just given the sort of the optics of it, just curious about any thoughts. Is that pretty much done? Or would you expect for the broader or entirety of the firm, could NIB balances still continue to flow out just in light of where interest rates are and where would you see those flushing out maybe as a percent of total deposits?

Speaker 6

Hey, Scott, this is John. In terms of the DDA mix, you illustrated that correctly, we moved about $15,000,000,000 of deposits over into The BankSmartly interest checking product. And so that gets us to about a 20% ratio. We think that that's about where we land here. It will be Plus or minus, of course, as we kind of go through the quarters.

Speaker 6

But we think that we're at a low point here.

Speaker 7

Perfect.

Speaker 5

Okay, good. Thank you very much.

Operator

Thanks, Scott.

Speaker 1

And next we go to John Pancari with Evercore. Please go ahead.

Operator

Good morning, John.

Speaker 7

Good morning. Regarding your net interest income guidance of the 17.5 percent to 18 percent, beyond the Non interest bearing mix commentary that you just provided, can you also help unpack that guidance in terms of overall deposit growth expectations as well as Maybe the margin assumption behind that and loan growth as well, if possible. Thanks.

Speaker 6

Sure. This is John again. So a couple of things I would say maybe just to provide additional context. As you saw in our results, we saw A big increase in our deposits, up 3% on a period ending basis to $522,000,000,000 And then we had with as Terry mentioned about our capital actions, we had loans drop as a start point of up 2%, given the auto and the mortgage sale that we talked about within our comments. And so as I think about those things, we will have the ability to Be a little bit more disciplined and moderate in our deposit pricing as we go forward given that deadline of thinking.

Speaker 6

In addition, I think that as we bring on new loans, those loans are coming at wider spreads, although loan growth is A little bit stalled. There's a little bit less demand for that in the near term here. And the mix here Of loans should be more favorable as we're bringing on cards and less in mortgage and auto. So those are kind of the puts and takes to how we came up with the net interest income guidance. And then I think you made a comment about deposits there as well, and I can just touch on that.

Speaker 6

I think on deposit side, we would even though we had a large seasonal uplift as typical in the second quarter from our Corporate trust and commercial businesses that bring in deposit balances. As that begins to normalize, we think we're probably in line with the industry, Which we anticipate being more of a decline, given the quantitative tightening and all the other sorts of things that are headwinds for deposits in the industry.

Operator

Yes. And the other thing I would just mention, John, you asked a question regarding NIM. Our expectation now just kind of looking at The market implied rate environment is that NIM is probably down a few basis points in the Q3 and then relatively stable through the rest of the year.

Speaker 7

Got it. Thank you. That's very helpful. And just lastly, the Confidence in your through cycle deposit beta of about 40%. It looks like we have a number of banks that are trending to the high 40s and into the 50s.

Speaker 7

Just what gives you the confidence in that through cycle beta expectation of around 40?

Speaker 6

Yes. So we're looking at we're coming our calculations show It shows at about 39% in the current beta, and we're indicating mid-40s is where we'll land. And I think it just goes back to some of the things that we talked about earlier where we did have a big flight in of deposits. We think Well, we have loans that have come down given the capital actions

Speaker 8

and so that gives us a

Speaker 6

little bit more flexibility with pricing. But of course, there'll be pressure as it relates to deposit betas just as we go through it. But all that is kind of baked into our mid-40s guide.

Speaker 7

Okay, great. Thank you.

Speaker 9

Thanks, John.

Speaker 1

Next, we can go to Ebrahim Poonawala with Bank of America. Please go ahead.

Operator

Good morning, Ebrahim. How are you? Good. How are you?

Speaker 10

Good morning. Just wanted to follow-up on this capital build. It's obviously a big topic. As we think about future RWA optimization, remind I think you mentioned some of the low hanging fruit, I guess, things that were EPS neutral. It seems like you executed on those this quarter.

Speaker 10

As we look forward to, I think you mentioned some action in the back half come into 2024. How punitive are those going to be From an EPS standpoint that we should think about, I'm assuming that's in your guidance for 2023, but give us a sense of just the EPS hit from these actions and How much more of RWA optimization that should we think about between now and let's say year in 2024?

Operator

Yes. Great question, Ebrahim. And So let me maybe unpack it a little bit in terms of the different types of actions that we are likely to take. One is an example is we're going to be kind of winding down a cash provisioning of business. So that will have very minimal impact from an earnings perspective because it's not that big of a business, but it is a Pretty significant user of capital in terms of risk weighted assets.

Operator

So that's one area and one example of how we still think that there is Low to neutral sort of opportunity in terms of enhancing or improving the risk weighted asset position. We'll continue to be focused on Reducing our MSR, our mortgage servicing right portfolio over the course of the next several quarters. That's an area that, again, it has some impact, but it's not significant. And probably more importantly, it allows us to rebalance The size of the mortgage exposure, mortgage portfolio relative to the overall size of the business. We'll continue to look at Kind of similarly, mortgage loan sales out of the Union Bank portfolio, again, that Reduces our concentration in California and should have minimal sort of impact Kind of on a go forward basis.

Operator

And then there's just a number of other things, similar sort of structures that we've done. But the other thing that we're working on between now and the end of the year, which will kind of position us well to be able to Continue to improve on a risk weighted asset basis is setting up some securitization programs related to some of our other balance sheet asset positions.

Speaker 10

That's helpful. And just one follow-up. Strategically, I think the one question is, this environment should be ideal for USB to take market share, competitors are under pressure, Clearly, your balance sheet holding up quite well. Give us a sense of just how much of a constrained capital levels are today As you think about getting new customer growth, picking up market share, adding sort of maximizing the union franchise, just how much of a Factor capital needs to accomplish all of those?

Speaker 11

Yes. Go ahead, Andy. Go ahead. So, Aaron,

Speaker 3

I wouldn't say it's a Frank, we're focused on profitable growth. We have a diverse set of business products and services that allow us to grow in a capital efficient way. I mean, I'll give you a couple of examples. The Union Bank customer base, about 80% of the consumer small businesses are single service customers. Their penetration on credit card is about half what ours is across the legacy U.

Speaker 3

S. Bank. So we have a lot of opportunities to deepen relationships in a very capital efficient way given the broad product that we have. So that is an opportunity that we're very much focused on, looking forward to and not feeling constrained.

Operator

Yes. And many of those single service, our balance sheet today, deepening the relationship will be as much focused on fee based Sort of businesses which are capital efficient as Andy said.

Speaker 10

Got it. Thanks for taking my questions.

Speaker 1

And next we'll move to Ken Usdin with Jefferies. Please go ahead.

Speaker 11

Hey,

Speaker 12

good morning guys. Hey, really good fee results this quarter. I just wanted to ask you as I'm looking at the payment slide on Page 19, it does look like The year over year growth rates did all slow versus the Q1. Can you just talk about what's going on across the payments with regards to Just where the consumer is and how you expect corporate spending to trend as you look ahead given the Potential for a slowing economy?

Operator

Yes. And of course, that's the $100,000 question is whether or not we actually move into a recession or not. But I think broadly from a macro perspective, some of the things that we're seeing is that some of the excess savings that consumers have held in the past That has come down to really pre pandemic levels at this particular point in time. So I think that manifests itself in kind of a normalization of consumer spend. So we are seeing what was very strong consumer spend starting to normalize and Soften, if you will.

Operator

I mean, yesterday was retail sales information that came out a little bit softer than maybe expected. We're seeing some of those same dynamics in the payments business, where sales, for example, In the merchant side of the equation, slower, softer sort of retail sales, but there's still a fair amount of travel Kind of sure that's taking place. So customers are certainly choosing and maybe being a little more choosy as to where they're spending their dollars. Some of the dynamics that we're seeing is, while sales have softened maybe a bit, the margins And some of the businesses have actually improved. So on the credit card side of the equation where sales have come down a little bit, the margins Actually a little stronger.

Operator

On the corporate payment side of the equation, margins continue to get stronger because T and E spend at the corporate in the commercial corporate sectors as continuing to be reasonably strong. So we continue to kind of look out the rest The year on the merchant acquiring side of the equation of revenue kind of in that High single digits sort of range on the credit card fee revenue still in that mid single digits. And on the corporate payment side of the equation, it will normalize, but it will kind of normalize in that high single digits range. That's kind of What we're seeing, what we're kind of forecasting at this particular point in time based upon consumer behavior.

Speaker 12

Got it. And one follow-up on capital. Can you just give us just so we all have the right number from your perspective where CET1 was this quarter inclusive of AFS unrealized losses and also just your view of if rates stay the same here, what that pull to par looks like as you look forward to that year end 24 point. Thanks.

Operator

Yes. So if you were to embed the AOCI into the CET1 calculation under category 2, it would have been at 6.9%. And we expect that based upon all of our capital actions to get to our kind of our target levels by the end of 2024. We have the game plan in order to be able to get there. We feel confident about that.

Speaker 12

Okay. Can you just have the AFS piece of what does pull to par by the end of the year? Because it's hard for us to understand how much the risk weighted asset part might be, but at least We can kind of track to your view of the portfolio maturity?

Operator

Yes. Do you have that John?

Speaker 6

Yes. So in terms of the Burn down between here and the end of 2024. It's about 25% or so.

Speaker 5

Okay. Got it. Thank you.

Speaker 1

Next, we can go to Erika Najarian with UBS. Please go ahead.

Speaker 13

Hi, good morning. I need to ask Question again, just because it's been such a big deal for your stock. And I'm wondering if you could indulge me in some sort of cave woman's math here. So 6.9% CET1, you have 6 quarters, to generate Capital, based on what you're earning today, you could add another 100 and 20 basis points, right, for 6 quarters times 20, and that'll get you to 8%. So given that you've mentioned both Harry and John throughout the call, some additional RWA actions, How much can RWA actions enhance that potential for 8% Fully loaded CET1 by 4Q 2024 just on earnings.

Speaker 13

How much can you add from RWA mitigation?

Operator

Yes. So maybe just kind of unpacking a little bit. We still expect, Erica, that our the benefit from Capital accretion or earnings accretion is going to be somewhere in that 20 to 25 basis points on average. And a couple of different things to kind of keep in mind, while there's a little more pressure on the revenue side of the equation. The things that will start to come into the equation is a lot lower merger and integration charges next year.

Operator

Answer. We'll be substantially done with that as well as the fact that by the end of the year, we will Really be a kind of full run rate from a cost synergy standpoint. So I think that there's a number of things just in terms of why we feel confident that, that Accretion level starts to accelerate or creep up from where we're at today. And then I think when you end up going through, John talked a little bit about the burn down being at about 25% Between now the end of the year, and that's based upon market implied. But also keep in mind, as we have said, as we have You'll put into place some hedging strategies to protect us from the upside risk that might exist if rates were to move up.

Operator

So we feel pretty good about where that is going to come in. And then the rest of it is really tied to risk weighted asset actions, many of which Back to our ability to reduce risk weighted assets in order to be able to achieve the targets that we need to hit.

Speaker 13

Let me just ask it another way again just because it feels like some of the good stuff that's going on in the company is Being ignored because of this capital question regarding category 2, based on your outlook And under a reasonable range of scenarios for the economy, do you think you could get to 8.5% to 9% fully loaded CET1 by 4Q 2024?

Operator

Yes, absolutely. Thank you.

Speaker 1

And next we go to John McDonald with Atomic research. Please go ahead.

Speaker 8

Hi, John. Thanks, Terry. Yes, just one last follow-up on that walk, starting from the 9, getting to 8.5 to 9. So is that the idea that the ACI is kind of like a 200 basis point drag today and that will shrink to And your number is something like 150 or that kind of drag by the end of next year? Yes.

Speaker 8

Okay. And does your walk include like FDIC assessment and CECL phase in things like that?

Operator

Yes.

Speaker 8

Okay. The next question was just on credit. How do you see charge off trajectory from here? I know you've said normalized 50, you won't get there for a while, but the jumping off Point is 35 basis points, I guess, this quarter. How do you see it kind of playing out from here?

Operator

Yes. It's going to continue to normalize All the different things we have been talking about and I think the industry has been talking about. Our expectation is that 35 creeps up into the kind of mid-40s by Maybe the end of the year or early next year. And then it kind of normalizes around 50 basis points once we get into 2024.

Speaker 8

Okay, got it. And does the full year guidance on expenses for this year incorporate Some achievement of merger saves in the Q4 of this year?

Operator

In terms of cost synergies or? Yes, absolutely. Absolutely. It's

Speaker 3

just to the run rate, John, of the full 900 by the end of the quarter.

Operator

Yes. So when we get into 24, we will have achieved a full run rate of $900,000,000 of cost synergies.

Speaker 8

And you will achieve most of those by the Q4 of this year?

Operator

By the end of the Q4, yes.

Speaker 8

Okay. And that's built into the guidance for the full year this year?

Speaker 11

Yes.

Speaker 5

Okay. Thank you.

Speaker 3

Thanks, John.

Speaker 11

And we

Speaker 1

can go to Chris Kotowski with Oppenheimer. Please go ahead.

Speaker 14

Yes. I think last quarter you shared that the Average duration of your securities portfolio went down from like 4.3 to 3.8 years or something like that. And I wonder if you could give us the similar trend in the Q2 and the outlook for the balance of the year and just Your philosophy in general about reinvesting maturities, is that kind of going into cash or are you Kind of maintaining the duration that you have.

Operator

Yes. The duration that we had talked about with respect to the APS portfolio was 3.8 Years and that has continued to come down a little bit, not measurably, but down a little bit from there. Our game plan, I guess, is that we're going to continue to work on shortening the duration of the AFS portfolio. Yes, and it kind of helps us derisk that. We will keep more in short term sort of securities, whether it's that or cash, but it will be kind of a combination.

Speaker 14

And on the HTM portfolio, is there a similar Kind of move to shorten duration? Or are you comfortable where it is?

Operator

Yes. Well, with respect to the HTM portfolio, that's just kind of Going to run down over time or burn down over time. We're not adding to the HTM portfolio at this particular point.

Speaker 14

Okay. All right. Great. Thank you.

Speaker 1

And we'll move to Vivek Juneja with JPMorgan. Please go ahead.

Speaker 11

In the back. Sorry, it's repetitive given the multiple calls. So I guess a couple of things. On merchant processing, any Color on why it's up only 2% year on year in terms of fees? I hear you On the travel slowing, but that's also a lower fee.

Speaker 11

What's caused such a sharp slowdown? And what Turns that around to the mid single digits, Terry.

Operator

Yes. Some of it's year over year comp and how it Kind of play out, but the biggest driver, Vivek, in the merchant processing at this particular point is the fact that the travel Airlines specifically is continuing to become a higher portion of the overall mix. That we think is starting to stabilize. In other words, most of the much of that growth has been in the airline space, but we think that, that kind of stabilizes. Airline happens to have a lower margin, and so that's the dynamic that you're seeing.

Speaker 11

Got it. Okay. And OCI, your loss seems to have gone up. Did you not get any benefits from the hedges you have put on? Or is there something else going on underneath?

Operator

Yes. I think

Speaker 6

the investment portfolio AOCI went declined or the mark Declined by about $250,000,000 linked quarter, but rates went up 50 to 60 basis points upon the points of the curve that matter to the portfolio. So It's not a totally as we talked about, there's a duration to that book. And so you would expect a lighter mark given the higher level of rates. So I I think with the hedges that we have put in place that helped mute that, it could have been higher. And we continue to add hedges across that portfolio and picker spots when we see rates fall.

Speaker 11

Thank you.

Speaker 1

And we'll go to Gerard Cassidy with RBC. Please go ahead.

Speaker 4

Hey, Gerard. Good morning, gentlemen. Terry, you've talked a bit about a normalization in net charge offs moving into 2024. Can you share with us what kind of assumptions you're using to get to that normalization rate in charge offs, both economic and just the way the Customer base may behave?

Speaker 11

You want to talk about this?

Speaker 3

From an economic standpoint, Gerard, I'll start. This is Andy. We think there's probably Fairly equal weight probability that we'll either see a soft landing or a mild recession. And if we do get a recession, our models would indicate it would be short and shallow either late this year or early in 2024. And you know there's still pricing pressure and the inflation is not solved.

Speaker 3

So we have one more rate hike by the end of the year modeled in. And then but on the other hand, as Terry mentioned, excess savings has come down significantly and consumer spending is slowing. So the Fed is getting in its desired outcome. So big picture, we think the Fed's close to being done. And as I said, sort of this probability of either shallow And soft or mild recession and or soft landing is what we've modeled in to get to those assumptions Terry's articulated.

Speaker 3

A Couple of things I

Operator

would just add maybe from a portfolio dynamic perspective. We're seeing nice growth in terms of credit card balances. And As credit card balances both increase and it normalizes, you'll start to see that ratio going up because that's a little higher mix for us. And then I think it may be somewhat lumpy, but it's kind of incorporated into it as just continuing to work through commercial real estate office space over the course of the next few years.

Speaker 4

Very good. And then I apologize if you addressed this question, but with the Expectation of the Basel III endgame capital requirements coming shortly. And this week, the disclosures that it seems like residential mortgages Maybe exposed to higher risk weighted assets. How are you guys thinking about that in terms of RWA strategies, if Mortgages do get a bigger weight and other areas are greater than expected.

Operator

Yes. Well, certainly, a lot of our actions, for For example, with respect to mortgages, and that particular business is just continuing to derisk, so to speak. So we're kind of trying to take that into consideration. Our expectation right now, Gerard, is that it's probably going to be Fairly neutral to maybe just a little bit of a benefit based upon everything that we're seeing in terms of the end game. But we really have to wait and see what the final rules say and then apply it to our specific portfolio.

Speaker 7

Thank you, Terry. Thank you, Andy.

Speaker 3

Thanks, Gerard.

Speaker 1

And next we go to Betsy Graseck with Morgan Stanley.

Speaker 3

Good morning, Betsy.

Speaker 15

Hi, good morning. Just a couple of quick follow ups. One, the asset sales that you did this quarter, was that at the beginning of the quarter or the end? I'm just trying to understand how much like revenue from that Portfolio you have in 2Q?

Operator

Yes. Most of them are completed the end of those closer to the end of the second quarter, so in the June time frame.

Speaker 15

Okay. And then the revenue outlook for the full year, is that based on June 30 balance sheet? Or is that also including the RWA actions you're planning on taking between now year end?

Operator

Both. It incorporates our capital actions in terms of what we expect to execute on between now and the end of the year.

Speaker 15

Okay, got it. All right. Okay, thank you. That's it.

Speaker 11

Betsy.

Speaker 1

Next, we can move to Mike Mayo with Wells Fargo Securities. Please go ahead.

Operator

Good morning, Mike. Good morning, Mike.

Speaker 9

Hi. Well, on the capital issue, I asked last quarter, do you think there's any chance that you Need to raise capital or cut the dividend. I'll just ask again. Or what I mean, people were doing these mechanistic analyses where Where they would take the unrealized securities losses, reduce that from tangible equity, give you no credit and then say you would need to raise capital. So now that you've met Your year end capital target.

Speaker 9

I guess, would you reiterate or to what degree would you reiterate no capital increase, no dividend cut? And in addition, if you could put in a broader context, Vice Chair of the Fed, Barr last week said that actually the economic value of equity of banks goes up because of higher value of deposits. So it seems like you signed on to a lot of the analysis that we analysts So just if you could comment on the bigger picture about your capital and the flexibility there?

Speaker 3

Yes, Mike, this is Andy. And as Terry mentioned, so we accelerated our WA actions, got to 9.1% at the end of the second quarter, Well, ahead of our 9.0 by the end of the year. We expect to be at least 9.5 by the end of the year, if not better. And we have a game plan we're comfortable with and confident enough to get to 9 under the Basel under the CAT II definition by the end of 2024. So all those things make us confident in the capital walk that we talked about and the actions we're taking.

Speaker 9

And then on the negative side, you and a lot of regional banks have continued to lower guidance on NII. And here we go again with that. And, look, I mean, rates are went up faster than you or anyone had expected. The yield curve is a lot more inverted. I guess, competition has picked up more than expected.

Speaker 9

Petition has picked up more than expected. What inning do you think you're in, in terms of this downward revision for NII? Do you think you're kind of there now? You said Q3 could be down a little bit. And as you exit the year, do you think you maintained that 3rd quarter level or what I think you said NIM would be Flat after that, but I'm not sure if you mentioned NII.

Speaker 9

So is a downward revision for NII done or 8th inning, 7th inning and what does that mean for kind of run rate going to next year?

Operator

Yes. So again, We obviously, you heard the guidance with respect to NII and NIM. We expect it to be a few basis points down in the Q3 and then relatively stable from there. Answer. Obviously, this is rate, excuse me, it's a Fed policy kind of dependent.

Operator

So we're trying to look at what the current environment looks like. But we feel like if I had to kind of put what inning are we in, where I think we're in the late innings Simply because of where the Fed is from a monetary policy standpoint. So while there may continue to be a little bit of downward pressure, we don't see it as being Significant from here. Andy, what

Speaker 3

would you add? Mike, the other thing I'd add is I think one of the benefits of our business model Is the diversity of revenue. So even in a stress environment on deposits, which you're actually right about, we have the payments revenue, the trust revenue, Commercial products revenue. And on top of all that, dollars 900,000,000 of cost synergies that we're going to act on. So we're pulling lots of levers, not just on margin.

Speaker 9

Okay. Thank you.

Speaker 11

You bet.

Speaker 1

And next we have a follow-up from John McDonald with Autonomous Research. Please go ahead.

Speaker 8

Hi, Terry, thanks. One more on the mitigation and optimization opportunity. Originally, you had talked about 50 basis points of opportunity to harness this year. Obviously, you got 40 basis points this quarter. And now it sounds like the total is more.

Speaker 8

Just trying to is there a way to size how much The more you might see out there between the remainder of this year and next year relative to the original 50 you were targeting?

Operator

Yes. Again, the 50 that we were targeting, we knew we had a high level of confidence in terms of being able to achieve it because they were Low to kind of neutral impact. And there were things that we could kind of execute on. We definitely believe that as we get into 2024, the Standing up, which obviously takes a little longer, standing above securitization programs and many of the actions that I talked about earlier Gets us to where we need to be from a capital perspective when you take into consideration the burn down, etcetera. That opportunity, I think, is Certainly, probably in line with another 50 basis points would be my guess.

Speaker 8

Okay. And when you say no impact or low impact. We did see some this quarter like in terms of the charge offs and taxes. I guess they're not run rate. Is that what you mean?

Speaker 8

But like you could have episodic 1 quarter type impact?

Operator

Yes, absolutely. We'll continue to see that as we reposition the balance sheet. But again, those impacts are all taken into consideration when we think about The net RWA impacts.

Speaker 8

Okay. And again, your target that you want to get to for the fully loaded by the end of next year is what?

Speaker 15

Well, it

Operator

will be fully adopted, it will be roughly 8.5%, 9%.

Speaker 8

Okay. Thank you.

Speaker 1

And we have no further questions at this time. I'll now turn it back to George Anderson. Please continue.

Speaker 2

Thank you for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.

Speaker 1

And this concludes today's conference. Thank you for participating. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
U.S. Bancorp Q2 2023
00:00 / 00:00
Remove Ads