U.S. Bancorp Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 17, 2024

There are 14 speakers on the call.

Operator

Hello, and welcome to the U. S. Bancorp Fourth Quarter 2023 Earnings Conference Call. Following a review of the results, there will be a formal question and answer session. If you wish to withdraw your question, please press star 1 again.

Operator

This call will be recorded and available for replay beginning today at approximately 8 am 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. Please go ahead.

Speaker 1

Of our earnings call, I will

Speaker 2

now turn the call over to Sarah. Thank you, Sarah, and good morning, everyone. Today, I'm joined by our Chairman, President and Chief Executive Officer, Andy Cecere of our Vice Chair and Chief Administration Officer, Terry Dolan and our Senior Executive Vice President and Chief Financial Officer, John Stern. With their prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation as well as our earnings release of our 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. Of factors that could materially change our current forward looking assumptions are described on Page 2 of today's presentation, our earnings release, of our Form 10 ks and its subsequent reports on file with the Securities and Exchange Commission. 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 thanks for joining our call. I'll begin on Slide 3. In the 4th quarter, we of earnings per share of $0.49 which included $0.50 per share of notable items that John will discuss in more detail. Excluding these notable items, earnings per share totaled $0.99 in the 4th quarter.

Speaker 3

For the 4th quarter, on an adjusted basis, net revenue totaled $6,900,000,000 and for the full year, we generated record net revenue of $28,300,000,000 we demonstrated strength across our fee businesses, which helped to offset pressure on net interest income. Turning to Slide 4. Total loans were lower on a linked quarter of the quarter, reflecting slower demand, particularly in corporate lending and continued focus on lending opportunities that meet our return hurdles. Average deposits declined compared with the 3rd quarter as our strong funding position allowed us to be more disciplined on deposit pricing, while maintaining our liquidity profile. Credit quality continued to normalize towards pre pandemic levels this quarter and we further strengthened the balance sheet by adding $49,000,000 to our loan loss reserve.

Speaker 3

Of the financial results, tangible book value per share increased 14.7% from a year ago and our common equity Tier 1 of capital ratio ended the year at 9.9%, an increase of 20 basis points this quarter. This ratio is 150 basis points higher than when we completed the acquisition of Union Bank in the Q4 of 2022. Supported by our strong capital accretion this year, of the Board approved an increase to our quarterly common dividend in December to $0.49 per common share. Slide 5 provides key performance metrics. On an adjusted basis, we delivered 19.6% return on tangible common equity in the 4th quarter and 21.7% on return on tangible common equity for the full year.

Speaker 3

Let me now turn the call over to John, who will provide more details on the quarter as well as forward looking guidance.

Speaker 4

Of the call, we reported diluted earnings per share of $0.49 for the quarter or $0.99 per share after adjusting for notable items. Notable items totaled $1,100,000,000 on a pre tax basis or $780,000,000 net of tax, representing a $0.50 reduction per diluted common share, including an FDIC special assessment charge of $734,000,000 of

Speaker 5

the quarter, offset by a benefit from tax settlements in the quarter.

Speaker 4

Other notable items this quarter included merger and integration costs of $171,000,000 of the charitable contribution to fund our community benefits plan of $110,000,000 and a balance sheet optimization charge of $118,000,000 This quarter, we opportunistically restructured a portion of our investment securities portfolio, which we expect will enhance our net interest income trajectory, while also strengthening our capital and liquidity positioning. Slide 7 provides a more detailed earnings summary for the quarter. Turning to slide 8, we continue to manage the balance sheet prudently as we saw reduced loan demand this quarter and the competition for deposits remained heightened

Speaker 6

of system wide liquidity declined.

Speaker 4

Total assets ended the year at $663,000,000,000 of our earnings call, we will now begin to review our financial results. Average loans declined 1.1% on a linked quarter basis as growth in credit card loans supported by consumer spending and low payment rates was more than offset by weaker commercial loan demand. Average deposits declined 1.9% linked quarter. Given our strong deposit balances in the 3rd quarter, we moderated our deposit pricing somewhat in the 4th quarter even as we grew consumer deposits by 1%. During the quarter, we rebalanced a portion of our securities portfolio, which provided risk weighted asset relief and improved our overall earnings trajectory.

Speaker 4

Of the year, the average yield on total investment securities portfolio increased to 2.97% for the 4th quarter, of a 55 basis point increase compared to a year earlier. As of December 31st, the ending balance on the total investment of our securities portfolio was $161,000,000,000 During the quarter, effective duration on the available for sale portfolio declined to less than 3 years as unrealized losses, net of tax, improved by approximately $2,000,000,000 given the movement in rates and repositioning. Turning to slide 9. Net interest income on a fully taxable equivalent basis declined 3.0% linked quarter, driven by a modest decline in the net interest margin of 2.78%. The 3 basis point decline in the net interest margin of market dynamics including deposit pricing pressure and unfavorable shifts in the deposit mix, partially offset by better earning asset spreads and improved total funding mix.

Speaker 4

In the Q1 of 2024, we expect net interest income on a fully taxable equivalent basis of our financial results to be

Speaker 5

in the range of $4,000,000,000 to $4,100,000,000

Speaker 4

For the full year 2024, of our financial results, we expect net interest income on a fully taxable equivalent basis to be consistent with our annualized Q4 2023 of net interest income level of approximately $4,140,000,000 to up slightly. Of Slide 10 highlights trends in non interest income. Non interest income as adjusted increased 12.1% on a year over year basis, driven by new account growth and deepening relationships across the business. Year over year payment service revenue benefited by continued strength in of consumer and business spending activities, while increases in trust and investment management fees and commercial product revenue were driven by underlying market activity, of a full 4th quarter with Union Bank and Core Growth. Turning to slide 11, noninterest of expense as adjusted decreased by 1.0 percent on a linked quarter basis, driven by lower compensation related expense that was partially offset by strategic investments in marketing and business development.

Speaker 4

Slide 12 highlights our credit quality performance. Of asset quality metrics trended in line with expectations and key metrics continued to normalize toward pre pandemic levels. Our ratio of non performing assets to loans and other real estate was 0.40% at December 31st compared with 0.35 percent at September 30 and 0.26 percent a year ago. Of the 4th quarter net charge off ratio of 0.49 percent increased 5 basis points from a 3rd quarter level of 0.44 percent and was higher when compared to a Q4 2022 level of 0.23% as adjusted. Turning to Slide 13, we increased our common equity Tier 1 ratio to 9.9% as of December 31.

Speaker 4

Of the company's earnings accretion, net of distributions and balance sheet optimization actions resulted in a 20 basis point increase linked quarter. Balance sheet optimization activities continue to have a low to neutral impact on earnings and provided additional risk transfer benefits. As we move into 2024, of the call, we expect earnings to be the primary driver of capital accretion with limited reliance on balance sheet capital related actions. Of the financial results, as of December 31, 2023, our common equity Tier 1 capital ratio remains above our regulatory capital minimum by 290 basis points. Let me now hand it back to Andy for closing remarks.

Speaker 3

Thanks, John. I'll end my prepared comments on Slide 14. 2023 was a turbulent year for the industry. However, we achieved a great deal, including our successful conversion of Union Bank in late May and the realization of $900,000,000 in run rate cost synergies related to Union Bank by year end as we have targeted. Additionally, we accomplished our goal of accreting the accelerating the accretion of CET1 Capital and received full relief from Category 2 commitments we made in conjunction with the Union Bank transaction.

Speaker 3

Entering 2024, we are positioned to continue to deliver of our 3 leading returns on tangible common equity, our appropriate reserve for macroeconomic uncertainties and remain confident in our strategy for future growth and expansion. We are seeing positive momentum across our fee based businesses as we deepen our most profitable client relationships and continue to target flat expense growth in 2024 even as we strategically invest in key areas and further execute on revenue growth opportunities with Union Bank. Let Let me close by thanking our employees for their continued dedication to supporting the needs of our clients, communities and shareholders in what was a meaningful year for the company. We'll now open up the call for Q and A.

Operator

Thank you. Of our numbers on our telephone keypad, we'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Scott Siefers with Piper Sandler. Your line is open.

Speaker 7

Of the call, I was hoping you could maybe provide a little more context around the of NII thoughts for the full year, it sounds like if I did the math correctly, we're expecting somewhere between $16,500,000,000 $16,600,000,000 for the full year. Maybe just some thoughts on how the margin and NII should project. I would presume maybe a little more downward pressure on NII given day count in the Q1, but does of the trough there and then sort of grow throughout the year or would there be other factors that would cause NII maybe to bleed through, of say, middle of the year and then start to inflect back upward. Maybe just any thoughts there?

Speaker 4

Sure. Good morning, Scott. Thank just maybe just to reiterate what was mentioned, in the Q1, we'll see net interest income between $4,000,000,000 $4,100,000,000 As we think about the full year for 2024, it's going to be consistent with our annualized 4th quarter number in 2023 level of $4,140,000,000 and up slightly. And we're using the 4th quarter actuals really because that we feel that's a more appropriate starting point given our balance sheet has now passed of all the capital actions that took place during the 2023 calendar year. And so some of the color around that and some of the drivers related to of how we are thinking about that is we do believe that DDA and low cost deposit churn into higher cost deposits are going to abate over time.

Speaker 4

By the end of this quarter, we'll be 9 months past the last Fed hike as an example. We continue to see loan spreads of various categories led on the commercial side of things, loan and investment portfolio, asset churn continues to occur. Of our loan pipelines have continued to strengthen over this quarter, certainly stronger than we've seen in the past couple of quarters. And we think that loan demand should be improved just given that the Fed is likely going to be in a cutting mode over time. And The counter to that, of course, is that deposit pricing is going to be competitive, especially with QT running in some form in the background.

Speaker 4

While I'll say that Q1 NII projection is going to be slightly lower than the Q4, these broad factors Really going to be supportive of NII growth especially as we think about the second half of the year.

Operator

Okay,

Speaker 7

perfect. Thank you. And then maybe just a quick question on capital, glad to hear that some of those balance sheet optimization efforts are beginning to sunset. Maybe 1, do you have of what you all estimate the sort of fully loaded common equity Tier 1 ratio to be now and maybe the balance between just Building and potentially returning capital going forward.

Speaker 4

Yes. So I mean, right now, as you know, we're at 9.9% on CET1. With the improvement in rates, the impact of the AOCI on the investment portfolio securities is about 2.2 percentage points. And so you're at of 7.7 as we think about that on a fully loaded basis. So if you think about it on a go forward basis, we're going to create capital in the area of 20 to 25 basis points per quarter.

Speaker 4

We will have a burn down on that securities book of about 30% or so relative to where it is by the end of 'twenty five, just to give you some context, so all that kind of adds up to building our capital to where we think it needs to be for the appropriate time given regulation and the timing of that.

Speaker 8

Okay,

Speaker 7

perfect. All right. Thank you very much.

Speaker 4

You bet.

Operator

Your next question comes from the line of Ebrahim Poonawala of Bank of America. Your line is open.

Speaker 9

Good morning.

Speaker 4

Good morning.

Speaker 9

Just maybe John following up on the NII question. 1, Sorry if I missed it. What rate could the assumptions did you have in your NII outlook? And then just talk to us about sensitivity. Are 3 cuts worse than 6 cuts?

Speaker 9

Just how we should given of market expectations around this probably is going to change week by week. I'm just trying to test the resiliency of your NII outlook if we get more or less rate cuts.

Speaker 4

Sure. Absolutely. So, in terms of our current projections, we have 4 interest rate cuts by the Fed starting in the second quarter of this year. Now whether or not that's 2 cuts or 6 cuts, it's not going to be a material driver to our outlook. We have worked hard to get our net interest income sensitivity to be more or less in a neutral position.

Speaker 4

And so we feel like Whether the cuts are how they are positioned are not going to be a material driver to the change of the outlook.

Speaker 9

That's helpful. And I guess just a second question. I'm not sure if you laid out any outlook for fee revenue growth for the year in terms of if you can just talk to in terms of what you expect overall in fee revenues and particularly on payments, if you can call out expectations on of what you assume for the year there? Thank you.

Speaker 4

Sure. Yes, I'll call it a couple of things on payments And some of the other fee categories. So as we think about payments, certainly in terms of merchant processing, we've put of the year, there's a lot of technology led advancements that we've made in terms of connections and certainly some MUV of synergies. And so we continue to expect high single digits in terms of revenue growth there. The same would be said for corporate payments.

Speaker 4

We think high single digits given the amount of T and E growth and client growth and all that sort of thing that we see. And then on the card side of things, we've seen a very nice of margin expansion, MUB certainly helps and holiday sales have been or certainly helpful this past quarter, but we see that extending and so we think mid single digits from that standpoint. I would also reiterate, we've had really of very nice growth in the commercial product side, we've had particularly in 2023, we would expect high single digits there, given strength we've had in foreign exchange, derivatives, the fixed income capital markets loan syndications all been performing very well for us. Of our trust and investment management fee also should experience growth led by our institutional service of businesses and Corporate Trust and Fund Services and certainly in Wealth Management, some of the fees associated with that. The one thing I would point out though in terms of of service charges, we have exited our ATM cash servicing business and that was a business we of the exit just given the high level of capital related to it in terms of intensity and investment.

Speaker 4

And so that will impact us by about $30,000,000 to $35,000,000 of the quarter, starting in the Q1.

Speaker 9

Thank you so much.

Operator

Your next question comes from the line of John Pancari with Evercore ISI. Your line is open.

Speaker 6

Of the callers thanks for the color so far on the guidance. I guess similarly Can you walk through your within the NII expectations you provided, can you walk through your expectation for of loan growth for the year and how you expect that could traject. I know you're excited demand weakening. And then the same thing on the deposit front, you can maybe give us your expectation of how you think growth can look like on an overall basis and maybe how the net interest I mean, the non interest bearing mix could traject from here? Thanks.

Speaker 4

Sure. So a couple of things there. So I'll start on the loan growth side. I do believe our expectations is that we will of CE growth in the commercial side, of course, that was a little bit weaker this last quarter as we experienced pay downs, particularly as of clients were accessing capital markets and things of that nature. But we've seen really a good pipeline build in that.

Speaker 4

We expect utilization to pick up and things of that variety. So we feel like that along with credit cards will be good sources of growth for us as we think about loan growth going forward. On the deposit side, as a reminder, we'll probably be lower in the Q1. We seasonally of deposits just as we kind of go through the year end process and just given the mix of our businesses, deposits end up of being a little bit lower in the Q1, but then we see more or less stabilization. But there might be some headwind there, Particularly depending on QT and how the Fed draining of liquidity out of the system will impact the numbers there.

Speaker 4

And then going into your NIB comment, we've seen, of course, rotation out of NIB into other interest bearing products that continues but starts to wane as we go throughout the year. And again, as I mentioned, we're going to be 9 months by the end of this quarter past the last Fed hike and that gives us some signal that will begin to abate.

Speaker 6

Great. Okay. Thank you for that. And then I guess, if you could help us just think about how we Should think about the magnitude of operating leverage that's reasonable as you look at next year.

Speaker 7

I know We do

Speaker 6

have some color on how you're thinking about NII and fees and then put that against your efforts to keep expenses Stable, but I guess if you could just maybe frame it, the range of operating leverage that you think is reasonable as we look at next year?

Speaker 3

Good morning, John. This is Andy. So let me start with this and John can add on. So as I said in my prepared remarks, we're going to benefit from the of cost efficiencies of the union deal to total $900,000,000 and that is fully reflected now and into the run rate starting this quarter. So we were achieving those benefits because of the benefits of technology investments we've made, digital investments, operational investments, our risk platform.

Speaker 3

And so that is the benefit of the investments we've made, and we would expect to continue to invest in the business in those capabilities and payments and technology modernization. So we are also very cognizant in managing expenses very closely. We still have opportunities in terms of efficiencies in personnel, in operations and the activities around technology that will allow us to more efficiently deliver the services we have. So I would expect as we get towards the second half of the year, that when we start to see that margin growth that John talked about as well as the fee normalization that we would have opportunity for positive operating leverage and we're going to get again that is our long term objective as always and we have levers to pull.

Speaker 6

Great. Thanks, Andy.

Speaker 3

You bet.

Operator

Your next question comes from the line of John McDonald with Autonomous Research. Your line is open.

Speaker 3

Good morning, John. Good morning.

Speaker 10

Hi, good morning. I was wondering if you could give a little color on what you saw this quarter in credit quality on the NPA movement, particularly in commercial? And then also, John, maybe just some thoughts on the potential charge off trajectory as you see things migrate from NPA into charge offs this year, of what we should be thinking about. Thank you.

Speaker 1

Yes. Good morning, John. This is Terry Dolan. So I'm going to take this question related to of credit quality, your first one was really related to nonperforming assets and some of the things that we saw in the 4th quarter. If you end up going across the portfolio, generally pretty stable.

Speaker 1

We did see a couple of idiosyncratic of loans that went into nonperforming status, Both of those were kind of union legacy sort of credits, so continue to kind of work through that. But I would also say that both of those are fairly well collateralized. So we don't necessarily see a lot of charge off content related to those idiosyncratic credits, 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. Credit card is kind of getting closer to pre pandemic levels, But that will continue to move up a little bit. Our expectation is that for full year 2024, we'll probably be kind of in the mid of 50s in terms of the net charge off rate.

Speaker 10

Okay. Thanks, Terry. And then John or Andy, just on the fee revenues, John ticked off on the fee revenues, a number of high single digit kind of potential growers in 2024. Of How do we think about kind of the ability to grow total fee revenues and what kind of base should we use for that? It looks like maybe the adjusted base for 20 of $3,000,000,000 was about $10,800,000,000 of fee revenues.

Speaker 10

Is that something you can grow off of that? Just trying to contextualize, total revenue last year was of around $28,000,000,000 how should we think about the ability to grow revenues on fees and maybe total revenues this year?

Speaker 4

Yes. So I mean we had As you mentioned, some of the fee numbers there. From a core fee perspective, we do expect to grow. I ticked off some of the areas in terms of payments, commercial products, trust and all that sort of thing. Other and of some of the service charges components there.

Speaker 4

Of course, in terms of mortgage, that will be probably somewhat in the flat range. And in terms of other, we had a little bit of a high number in of the Q4 related to tax credit, related impact finance, of syndication fees and things like that. So all those things and we expect kind of that mid single in terms of the fee components going forward for this year.

Speaker 10

Okay. Kind of a mid single from that 10.8 adjusted base.

Speaker 8

Mhmm.

Speaker 11

Okay. Thank you.

Operator

Your next question comes from the line of Erika Najarian of UBS. Your line is open. Hi, good morning. Good morning, everybody. Good morning, everybody.

Operator

Good morning. My first question is for you, Andy. Clearly, you went through it in terms of some capital consternation in 2023. And now you're sitting here with 9.9 CET1 no longer have to be a Category 2 bank early and all the color that we're getting from Washington is that Basel's rear endgame will be at least delayed, if not softened significantly. As you think about maybe just one more hurdle ahead over the near term in terms of the DFAST, how are you thinking about of where U.

Operator

S. Base proper CET1 ratio is in terms of the minimum, looking forward to a future where maybe capital is a little bit tighter, but you're also growing. And do you feel like you're now on offense and all the sort of the balance sheet management that was designed to optimize capital is fully behind you.

Speaker 3

Yes, Eric. As John mentioned, I think our balance sheet optimization efforts are behind us. Our focus on capital accretion will be from earnings as we go into 2024 and forward. As we talked about, we're at a 9.9 percent CET1 ratio today. A couple of years ago, our target was between 8.5% and 9%.

Speaker 3

So we're above target, but we're also cognizant of the rules that are coming both from the perspective of Basel III Endgame, which is still uncertain as you talked about, as well as CCAR and how that will evolve over time. So we will continue to accrete the 20 to 25. We'll continue to burn down the AOCI. When we get clarity on the capital rules, both Basel III and CCAR will then determine what the proper capital target will be. My expectation Is it will be above the 9% that we were a few years ago, but we'll define that, refine that and then we'll get into what the math is around buybacks at that time.

Operator

Got it. And one follow-up question for you, John. Thank you for giving us some of the components of the NII. I'm just wondering, as you mentioned QT, are you generally expecting deposits to be down, total deposits to be down even if DDA mix shift abates? And also, how quickly do you think the deposit betas on the way down can react to each Fed rate cut.

Speaker 4

Sure. So, the first part of your question in terms of QT, we do anticipate QT to be throughout the year. And so that's going to on hold put pressure on deposits throughout the year in terms of balances. And so we don't expect a lot of growth overall in deposits, but we'll we have ways to manage through that. Of course, they're talking through various ways to change the QT, but that just remains to be seen.

Speaker 4

In terms of deposits performance on the way down, I anticipate commercial and wholesale type balances will go down just as fast of the call, on the retail side, it's going to be more of an arc. It will take some time for that to turn, but those are our expectations.

Operator

Thank you. Your next question comes from the line of Mike Mayo with Wells Fargo. Your line is open.

Speaker 3

Hey, good morning. Hi. Hi.

Speaker 5

So I wasn't are you guiding for flat, of positive or negative operating leverage or none of the above for 2024. And more generally, I mean, the real question is, when do you get back to your historical of efficiency ratio, I think you talked about this at a presentation in December. I mean, 61% core efficiency in the 4th quarter Isn't exactly like legacy U. S. Bancorp and that's up 300 basis points year over year.

Speaker 5

And earlier last decade, you were of 55% and going back further, you were in the low 50s. Is that just an aspirational target now or is that a real target over the next 2 years or so. And along those lines, I guess you have all the savings you're going to get from Union Bank. So where does the rest come from here?

Speaker 3

Yes, Mike, it's probably more likely a positive operating leverage in the second half of twenty twenty four versus the first half given some of the margin pressures that we talked about. That is still our objective. My expectation is once we get more to our normalized revenue level that we will continue to manage expenses below revenue growth and continue to take down that efficiency ratios into the 50s. That's the way we're planning.

Speaker 5

When you say into the 50s, I mean, is it can you get back to 55%? Is that in your planning horizon, even going out of a few more years and it looks like the payments business is recasting its stride here. And along those lines, I didn't see the slide anymore on the payments business combined with small business banking, you're going to grow small business relationship by of 15% to 20% and the revenues by 25% to 30%. I don't see any slide for that. And I know you got look, you got the Union Bank deal, you had the issues of last March April and it's okay, your capital is back, the deal is done and now we're back to kind of U.

Speaker 5

S. Bancorp business as usual. So I'm just trying to look for some color on that, if you're going to become the square banking or if that's still a goal and how those revenues might help you improve that efficiency.

Speaker 3

Sure, Mike. And it is still a goal. We do think this combination of of payments and business banking and providing that comprehensive product set and capabilities to help people run their business is a key strategic priority it continues to be. And I think the B categories that John mentioned are also a key driver of revenue, including payments, commercial products, trust and investment. And those are all areas that we expect continued growth on.

Speaker 3

The immediate pressure on net interest income is what's causing us not to get positive operating leverage in the short term, But it is something that I believe and as John mentioned will abate and start to grow into the second half of twenty twenty four. And so I think we're going to get to the positive operating leverage. 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.

Speaker 5

All right. Thank you.

Operator

Your next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is open.

Speaker 3

Of Good morning, Matt. Hi. Good morning.

Speaker 8

Just to clarify, the flat expense guidance for 2024 is also the adjusted level of 23

Speaker 3

of That's correct.

Speaker 8

Okay. And I assume that includes any expense benefit from the exit of the ATM Cash business that you referenced earlier?

Speaker 3

Correct.

Speaker 5

Yes.

Speaker 8

Okay. And then just stepping back like any other of kind of small businesses or segments that you're kind of reevaluating for, not so much kind of the regulatory proposals, which We'll see how they finalize, but just other areas that you're stepping back and whether it's in mortgage, given the smaller market there or other parts of of the business portfolio that you're looking either to exit or to potentially lean into that's a bit different than you were thinking say 6 months ago?

Speaker 4

Well, I can start and Andy can chime in. I think we commented on the ATM business. I mean, you're constantly evaluating of certain things, particularly in the light of regulatory change. Clearly, a lot of common letters have been submitted in terms of the Basel III endgame. At the end of the day, it's not going to materially drive whether we exit or businesses or enter new businesses, that of the quarter, it's just going to be a combination of continual investment, as Andy mentioned, in terms of what we need to do toward Achieving positive operating leverage and managing around regulatory actions.

Speaker 4

Those are some of the comments I'd throw out there.

Speaker 3

Yes, I think I agree, John. And the only thing I'd add is that the environment and the competitive dynamic is something that causes us to be more aggressive of the results, maybe the example I'll give you is auto lending, which is for us is not growing right now and that's because of the spreads and the returns are just not at our levels that we want to put on the books. So those are areas that we're going to not get out of or close down, but just not emphasize in terms of growth at the levels of of returns that we're seeing right now.

Speaker 8

Okay. And then, the first thing in credit card, we're obviously seeing the normalization of losses with you guys and throughout the industry, and also very strong growth. So if we adjust losses kind of on a lag basis, of the year, they are above a few years ago. At what point do you tighten up credit card and say, We should slow growth at this point in the cycle or do you think there's still quite a bit of runway of call it good growth or healthy growth?

Speaker 1

Yes. Well, I mean, it is an area, Matt, that we think that there continues to be a nice growth in that particular space. It is an area, though, that certainly we have looked at the economic uncertainties and all sorts of things, the pressure on consumers, especially given the inflationary sort of pressure, we on the margin, around the edges, we do Make adjustments to underwriting and tighten that up where we need to. But when you end up Kind of thinking about the overall credit performance of credit card business, we still think it's a very nice business, we focus on prime, super prime sort of customers. And even through this cycle, I think it's going to perform very well.

Speaker 8

Okay. Thank you.

Operator

Your next question comes from the line of Gerard Cassidy with RBC Capital Markets. Your line is open.

Speaker 12

Good morning, Andy. Good morning, John.

Speaker 3

Good morning, Gerard. Good morning.

Speaker 12

John, you touched on In answering your question about commercial loan growth that some of your customers were accessing in Capital Markets and things of that nature. Can you guys share with us, we spread a lot and see a lot about the private credit markets have really become quite active and aggressive in making loans to corporate and commercial customers. Are you guys seeing that competition, number 1? And also, Is it any different than past years or has it intensified? And then simultaneously, are any of these private of Apollo, Blackstone, etcetera, are these customers of yours?

Speaker 12

And if they are, how do you balance the competition versus handling their needs?

Speaker 4

Sure. This is John Gerard. So in terms of on the commercial side, when I comment going to of capital markets, it's more or less the public market, so taking bond issuance in the public investment grade market. We tend not to see them or compete on the of private credit side of things, it's just not a structure or type of loan type in terms of our client base that we tend to run into. So it's more or less, I can't say it's increased or decreased versus it because we just don't see those names.

Speaker 4

We compete in the commercial space with our peer banks more or less in that particular venue. In terms of, you mentioned in terms of client interaction, we have great relationships with a number of different names in terms of of Investment Services, Capital Markets activities, other sorts of categories. So we do have some very nice relationships with those institutions.

Speaker 3

Yes, our Corporate Trust and Global Fund Services, Gerard, as John mentioned, businesses, they Support a number of large private credit funds in the industry and where they are customers and clients of ours that we continue to serve.

Speaker 1

Yes. And I think the last thing I would just add is that depending upon where the capital rules end up and what sort of where the emphasis is or isn't, you could see more or less moving into the private capital sort of markets. They tend to have More flexibility in terms of structure, they take on more risk, all sorts of things. Again, may not be where we of but certainly from an industry standpoint, private credit continues to be an area of focus.

Speaker 12

Thank you, Terry. Just if we step back for a moment and look at beyond Basel III Endgame, maybe we do get of the final proposal in the middle of this year or later this year, we get through the next DFAST. U. S. Bancorp has always at a hallmark of having one of the highest ROTCEs amongst the regional banks, obviously, you're probably going to maintain that.

Speaker 12

But you also were very disciplined in of giving back the excess capital every year to shareholders in buybacks and dividends, generally, if I recall correctly, around 75% to 80% of total earnings In a combination of both. Andy, do you see that coming on the horizon maybe 2025 once we get all the rules set, we know where your CET1 ratio needs of what's your outlook there?

Speaker 3

Yes, Gerard, we do achieve a high return on tangible comment. I mentioned 19% to 20% 4th quarter 1st of full year 2024. And as we think about going forward, I would expect us to continue to lead the pack in terms of that return, which is of key to generating capital to key to returning capital. And again, once we get clarity on the rules, as I mentioned earlier, in both the Basel III endgame as well as the CCAR process and determine our target capital levels, we will return the difference either through dividends or buybacks has been our history.

Speaker 12

Very good. Appreciate it. Thank you.

Speaker 6

Thank you.

Operator

Your next question comes from the line of Ken Usdin with Jefferies. Your line is

Speaker 11

open. Hey, thanks. Good morning. Just to follow-up on the deposit side, you mentioned in your prepared remarks about Starting to moderate pricing a little bit and you also talked about roll off of higher cost deposits. Just wondering if you can amplify both of those comments.

Speaker 11

So What types of products or tweaks are you already being able to make on the deposit pricing front? And then where did those higher cost deposits flow out of from a business perspective. Thanks.

Speaker 4

Sure. Thanks, Ken. The comment was really around in terms of the 4th quarter and just what we saw, maybe just stepping back a bit. In the Q3, we grew deposits quite a bit. And part of that was we were just getting through the Union Bank acquisition.

Speaker 4

We wanted to make Sure, we were maintaining strong relationships with those clients and really all clients as we're going through those times. In the Q4, given where loan demand went and where we had a little bit of excess of deposits, so we made decisions really just to go away from non deposit or non relationship or less relationship based and specifically in time deposits declining and things of that nature. So I think that's just going to be the ebb and flow of things of of how we manage it going forward depending on loan growth, depending on our profile and depending on the relationship. So that's really what that comment was intended for.

Speaker 3

And importantly, John, on our core consumer deposits, we are continuing to see growth there as you mentioned as we had in the slide.

Speaker 4

Yes. We continue to expect core deposit on the consumer side and that has been something we've been the team has been very focused on and we feel that we've had great success there.

Speaker 11

Got it. And as a follow-up to the UB point, is everything from UB now fully baked, whether it's the cost actions and structure and also that's the build that kind of making sure you're Funded up as a starting point, have that base of loans and deposits gotten to a steady state as well?

Speaker 9

Yes.

Speaker 11

Okay. So we just move forward with everything and listen to the guide comments that you gave earlier. Okay, got it.

Speaker 4

Exactly. It's all in the core now. Yes.

Operator

Your next question comes from the line of Saul Martinez with HSBC. Your line is open.

Speaker 13

Hey, good morning guys. Maybe on the payment side, if you could just add a little bit more detail about how you're feeling about of your payment strategy and how you're doing and how big the upside opportunity is there. Obviously, You're growing nicely on the issuing side, the merchant acquiring side, sort of mid single digit growth in revenues and volumes. I think you said high single digit next year. I mean, as you guys know, the banks have ceded a lot of share to software companies, to integrated service providers.

Speaker 13

And just how do you feel it's going in terms of integrating your commercial banking and payments offering. And it does because it does seem like you have a major advantage in terms of of having relationships both on the retail and commercial side. And then obviously, you kind of have that 2 sided network that a lot of the Fintechs But obviously banks have struggled in this area. So just maybe if you can just give us sort of an overview of how you're doing and how you feel the opportunity set is

Speaker 3

Yes. So first of all, the high single digits on merchant processing is a function of the investments we've made and the initiatives we have underway. And I would highlight 2 things. Number 1 is our tech led initiative, which is now up over 30% of our activities related to Tech Lead. So that is integrating our merchant processing capabilities into the software that people use to run their businesses.

Speaker 3

And number 2 is this whole integration of banking and payments that we talked about earlier. And the advantage I do believe that we have is that we are not just providing one single service, we're integrating of Banking Services, Deposit Lending Capabilities, Treasury Management, together with Payments and Money Movement into one comprehensive of Opry that helps people again run their business, particularly small businesses and helps them ease into the process of payment activity in a comprehensive way together with the software they're using to run their company. So those are the initiatives that we have underway and that continues to be a huge focus and one that I do think differentiates us a little bit because of the capabilities we have in payments and that's true of merchant processing, of corporate payments as well as retail issuing.

Speaker 13

Okay, got it. That's helpful. Maybe I'll just follow-up on deposits. You mentioned that the migration you expect the migration out of non interest bearing deposits to sort of run Of course, just when and where do you see that? I think non interest bearing was about 17.5% of total deposits.

Speaker 13

How much more room is there? And just on deposit cost, I think the cumulative beta of my calculation is right, is around 49%. How much more room is there for that to increase sort of what's embedded in your guidance for NII.

Speaker 4

Sure. So, in terms of the NIB, I think we've talked Quite a bit about it, and I would just I mean, we're at a certain percentage that you mentioned, and we're going to be around that area. It certainly could drift a little lower, but We are at a point where, from a core standpoint, particularly, on the commercial and small business side where you're starting to get into places where companies have to run operating accounts and over time you're going to have account growth and things of that variety. So I think they'll be conducive to supporting of NIB going forward. But there will be some leftover churn as I alluded to earlier in the call.

Speaker 4

In terms of beta, as you mentioned, 48.5% or so of the quarter, I think it can creep up as we've kind of talked about, But it's going to depend on when the Fed cuts is going to be kind of that focus point in terms of of how much it will go from here. And so, how what level is hard to predict, but there'll be pressure until the Fed starts cutting.

Speaker 13

Okay. Got it. Thanks.

Operator

There are no further questions at this time. Mr. Anderson, I turn the call back over to you.

Speaker 2

Thanks, Sarah, and thank you for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.

Operator

This concludes today's conference call. We thank you for joining. You may now disconnect.

Powered by Quartr
Earnings Conference Call
U.S. Bancorp Q4 2023
00:00 / 00:00