Q4 2023 US Bancorp Earnings Call
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.
You would like to ask a question. Please press Star then one on your telephone if you wish to withdraw your question. Please press star one again.
This call will be recorded and available for replay beginning today at approximately eight a 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. Please go ahead.
Thank you Sarah and good morning, everyone today, I'm joined by our Chairman President and Chief Executive Officer, Andy So Sherry, our Vice Chair and Chief Administration Officer, Terry Dolan, and our senior Executive Vice President and Chief Financial Officer, Jon 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 and supplemental analyst schedules are available on our website at U S Bank Dot Com. 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 two of today's presentation. Our earnings release, our Form 10-K and in <unk>.
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. Thanks, George Good morning, everyone and thanks for joining our call I'll begin on slide three in the fourth quarter, we reported earnings per share of 49 cents, which included 50 cents per share.
Andy: Notable items that Jon will discuss in more detail.
Andy: Excluding these notable items earnings per share totaled 99 cents in the fourth quarter.
Andy: For the fourth quarter on an adjusted basis net revenue totaled $6 $9 billion and for the full year, we generated record net revenue of $28 $3 billion.
Andy: We demonstrated strength across our fee businesses, which helped to offset pressure on net interest income.
Andy: Turning to slide four total loans were lower on a linked quarter basis by 1.1%, reflecting slower demand, particularly in corporate lending and continued focus on lending opportunities that meet our return hurdles.
Andy: Average deposits declined compared with the third quarter as our strong funding position allowed us to be more disciplined on deposit pricing, while maintaining our liquidity profile.
Andy: Credit quality continued to normalize towards pre pandemic levels this quarter and we further strengthened our balance sheet by adding $49 million to our loan loss reserves.
Andy: As of December 31.
Andy: Book value per share increased 14.7% from a year ago, and our common equity tier one capital ratio ended the year at nine 9% an increase of 20 basis points. This quarter. This ratio was 150 basis points higher than when we completed the acquisition of Union Bank in the fourth quarter of 2022.
Andy: Supported by our strong capital accretion this year the board approved an increase to our quarterly common dividend in December to <unk> 49 per common share.
Andy: Slide five provides provides key performance metrics.
Andy: On an adjusted basis, we delivered 19, 6% return on tangible common equity in the fourth quarter and 21.7% and return on tangible common equity for the full year.
Speaker Change: Let me now I'll turn the call over to John who will provide more details on the quarter as well as forward looking guidance.
John: Thanks, Andy turning to slide six we reported diluted earnings per share of 49 cents for the quarter or <unk> 99 per share after adjusting for notable items.
John: Notable items totaled $1 $1 billion on a pretax basis or $780 million net of tax representing a 50% reduction per diluted common share, including an FDIC special assessment charge of $734 million offset by a benefit from tax settlements in the quarter.
John: Other notable items this quarter included merger and integration costs of $171 million charitable contribution to fund our community benefits plan of $110 million and our balance sheet optimization charge of $118 million.
John: 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.
John: Slide seven provides a more detailed earnings summary for the quarter.
John: Turning to slide eight we continue to manage the balance sheet prudently as we saw reduced loan demand this quarter and the competition for deposits remained heightened at system wide liquidity declined.
John: Total assets ended the year at $663 billion.
John: Average loans declined one 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 one 9% linked quarter, given our strong deposit balances in the third quarter, we moderated our deposit pricing somewhat in the fourth quarter, even as we group consumer deposits by 1%.
John: During the quarter, we rebalanced a portion of our securities portfolio, which provided risk weighted asset relief and improved our overall earnings trajectory.
John: The average yield on total investment securities portfolio increased two 9% to nine 7% for the fourth quarter, a 55 basis point increase compared to a year earlier.
John: As of December 31, the ending balance and the total investment securities portfolio was $161 billion during the quarter effective duration on the available for sale portfolio declined to less than three years as unrealized losses net of tax improved by approximately $2 billion given the movement in rates and repositioning.
John: Turning to slide nine 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 278%.
John: The three basis point decline in the net interest margin reflected 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.
John: In the first quarter of 2024, we expect net interest income on a fully taxable equivalent basis to be in the range of 4.0 to $4 $1 billion.
For the full year 2024, we expect net interest income on a fully taxable equivalent basis to be consistent with our annualized fourth quarter 2023, net interest income level of approximately $4.14 billion to.
John: To up slightly.
John: Slide 10 highlights trends in noninterest income noninterest income as adjusted increased 12, 1% on a year over year basis, driven by new account growth and deepening relationships across the business.
John: Year over year payment service revenue benefited by continued strength in consumer and business spending activities, while increases in trust and investment management fees in commercial product revenue were driven by underlying market activity, a full fourth quarter with Union bank and core growth.
John: Turning to slide 11, noninterest in noninterest expense as adjusted decreased by 1.0% on a linked quarter basis, driven by lower compensation related expense that was partially offset by strategic investments in marketing and business development.
John: Slide 12 highlights our credit quality performance.
Asset quality metrics trended in line with expectations and key metrics continued to normalize towards pre pandemic levels.
John: Our ratio of nonperforming assets to loans and other real estate was 0.40% at December 31, compared with 0.35% at September 30th and 0.26% a year ago.
John: The fourth quarter net charge off ratio of 0.49% increased five basis points from a third quarter level of 0.44% and was higher when compared to fourth quarter 2022 level of 0.23% as adjusted.
John: Turning to slide 13, we increased our common equity tier one ratio to nine 9% as of December 31 the.
John: The combination of earnings accretion net of distributions and balance sheet optimization actions resulted in a 20 basis point increase linked quarter Bal.
John: 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, we expect earnings to be in the.
John: We expect earnings to be the primary driver of capital accretion with limited reliance on balance sheet capital related actions.
John: As of December 31, 2023, our common equity tier one capital ratio remains above our regulatory capital minimum by 290 basis points. Let me now hand, it back to Andy for closing remarks. Thanks, John I'll end my prepared comments on slide 14.
Andy: 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 million and run rate cost synergies related to the Union bank by year end as we had targeted. Additionally, we accomplished our goal of creating the accelerating the accretion of CET one capital.
Andy: And received full relief from category two commitments, we made in conjunction with the Union Bank transaction.
Andy: Entering 2024, we are positioned to continue to deliver industry, leading returns on tangible common equity are appropriately reserved for macroeconomic uncertainties and remain confident in our strategy for future growth and expansion.
Andy: 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.
Speaker Change: 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 will now open up the call for Q&A.
Speaker Change: Thank you at this time I would like to remind everyone.
Speaker Change: Your question please.
Speaker Change: Number one on your telephone.
Speaker Change: Thank you Pat.
Speaker Change: Well pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Scott.
Scott: <unk> with Piper Sandler Your line is open.
Scott: Thanks, everybody good morning.
Speaker Change: Let's see.
Speaker Change: Okay.
Speaker Change: I was hoping you could maybe provide a little more context around the.
Speaker Change: And I thought for the full year it sounds like if I did.
Speaker Change: The math correctly, we're expecting somewhere between <unk>, five and <unk> 6 billion for the full year, maybe just some thoughts on how the margin and NII should traject I would presume maybe a little more downward pressure on NII given day count in the first quarter, but it does at the trough there and then sort of grow throughout the year or would there be other factors that would cause that.
Speaker Change: Maybe to bleed through.
Speaker Change: A middle of the year, and then start to inflect back up or maybe just any thoughts there.
Speaker Change: Sure Good morning, Scott. Thank you.
Speaker Change: Just maybe just two.
Speaker Change: Reiterate what was mentioned in the first quarter, we will see net interest income between 4.0 and $4 1 billion as we think about the full year for 2024, it's going to be consistent with our annualized fourth quarter number 2023 level of $4, one $4 billion to up slightly and.
Speaker Change: We're using the fourth quarter actuals are really because that we feel that it says some of more appropriate starting point given their balance sheet has now passed 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 how we are thinking about that as we we do believe that DDA and.
Speaker Change: And low cost deposit churn into higher cost deposits are going to abate over time.
Speaker Change: By the end of this quarter will be nine months past the last fed hike as an example, we continue to see loan spreads improve in various categories led and on the commercial side of things loan and investment portfolio.
The churn continues to to occur our loan pipelines.
Speaker Change: <unk> continued to strengthen over this quarter.
Speaker Change: Certainly stronger than we've seen in the past couple of quarters, and we think that loan demand should be improve just given that the fed is likely going to be in a cutting.
Speaker Change: Mode over time.
Speaker Change: The counter to that of course is that deposit pricing is going to be competitive, especially with Q T running.
Speaker Change: Form in the background so.
Speaker Change: While I'll say that first quarter NII projection is going to be slightly lower.
Speaker Change: Then the fourth quarter. These broad factors are really going to be supportive of NII growth as we especially as we think about the second half of the year.
Speaker Change: Okay perfect. Thank you and then maybe just a quick question on capital glad to hear that.
Speaker Change: Some of those balance sheet optimization efforts are beginning to sunset.
Speaker Change: Maybe one do you have.
Speaker Change: You all estimate the sort of fully loaded common equity tier one ratio to be now and maybe the balance between building and potentially returning capital going forward.
Speaker Change: So I mean right now as you know we're at nine 9% on CET one.
Speaker Change: With the improvement in rates the impact of the OCI on the investment portfolio.
Speaker Change: Securities is about 2.2 percentage points and so you are at seven 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 accrete capital in the area of 20 to 25 basis points per quarter.
Speaker Change: We will have burned 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.
Okay.
Speaker Change: Alright, Thank you very much.
Speaker Change: Seven.
Speaker Change: Your next question comes from the line of Ebrahim <unk> of Bank of America. Your line is open.
Good morning.
Ebrahim: Hey, good morning, just maybe.
Ebrahim: John following up on the NII question one.
Sorry, if I missed it.
Waterlase.
Ebrahim: Assumptions did you have in your NII outlook, and then just talk to us about sensitivity or <unk>.
Ebrahim: Worse than six Scott just how we should given 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 the cash.
Speaker Change: Sure absolutely.
Speaker Change: So in terms of our current projections, we have for interest rate cuts by the fed started in the second quarter.
Speaker Change: Of this year.
Speaker Change: Now whether or not that's two cuts or six cuts it's.
Speaker Change: It's not going to be a material driver to our outlook. We have worked hard to get our net interest income.
Speaker Change: Sensitivity to be more more or less in a neutral position and so we feel like.
Whether the cuts are or how they are positioned are not going to be a material driver to the change.
Speaker Change: Now the outlook excuse me.
Speaker Change: That's helpful and I guess, just the second question I'm not sure. If you lead 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 the Orleans fee revenues and particularly on payments. If you can call out expectations on what you assume for the year. Thank you.
Speaker Change: Sure, Yes, I'll call it a couple of things on payments.
Speaker Change: And some of the other fee categories. So as we think about payments certainly.
Speaker Change: In terms of merchant processing, we've put a lot of investment in there there's a lot of technology advancements.
Speaker Change: <unk> advancement that we've made in terms of connections and certainly some <unk> synergies and so we continue to expect high single digits in terms of a revenue growth. There. The same would be said for corporate payments, we think high single digits, given the amount of <unk> growth and client growth and all that sort of thing that we see and then on the car.
Speaker Change: Side of things, we've seen a very nice.
Speaker Change: Margin expansion <unk> certainly helps in 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 have had really very nice growth in the commercial products side, we've had.
Speaker Change: Particularly in 2023, we would expect high single digits, there, but given the strength we've had in foreign exchange derivatives.
Speaker Change: The fixed income capital markets loan syndications, all been performing very well for us.
Speaker Change: Our trust and investment management fee also should experience growth led by our institutional service.
Speaker Change: Businesses in 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 service charges we have.
Speaker Change: We exited our ATM cash servicing business in that.
Speaker Change: It was a business we decided to exit just given the high level of capital related to it in terms of intensity and investment and so that will impact us by about $30 million to $35 million per quarter, starting in the first quarter.
Speaker Change: Thank you so much.
Okay.
Speaker Change: Your next question comes from the line of John <unk> with Evercore ISI. Your line is open.
Speaker Change: Okay.
John: Good morning.
John: Good morning.
John: <unk>.
John: Thanks for the color so far on the guidance I guess similarly.
John: Can you walk through your.
John: Within the NII expectation that you provided can you walk through your expectation for loan growth.
John: The year and how you expect that trajectory I know you cited demand weakening and then same thing on the deposit front.
John: Maybe give us your expectation of how you think growth can look like.
John: On the on an overall basis, maybe Albert managers, I mean, the noninterest bearing mix.
Could.
John: Traject from here thanks.
Speaker Change: Sure. So a couple of things there so I'll start on the loan growth side I do believe.
Speaker Change: Our expectations is that we will see.
Speaker Change: <unk> growth in the commercial side of course that was a little bit weaker this last quarter as we experienced paydowns, particularly as clients were accessing capital markets and things of that nature, but we've seen really a good pipeline build and that we expect utilization utilization to pick up.
Speaker Change: And things of that variety. So we feel like that along with credit cards will be good sources of growth for us.
Speaker Change: As we as we think about loan growth going forward on the deposit side. As a reminder, we will probably be lower in the first quarter, we seasonally lose deposits just as we kind of go through the year end.
Speaker Change: Process and just given the mix of our businesses deposits end up being a little bit lower in the first quarter, but then we see more or less stabilization, but there might be some headwind when there, particularly depending on qt and how the fed draining of liquidity out of the system will impact the numbers there and then.
Speaker Change: Going into year Niv comment.
Speaker Change: We've seen of course rotation out of <unk> into other interest bearing products that continues but starts to wane as we as we go throughout the year and again as I mentioned, we're going to be nine months by the end of this quarter past the last fed hike and that gives us some signals that will that will begin to abate.
Speaker Change: Okay. Thank you for that and then I guess.
Speaker Change: If you could help us just think about how we should think about the magnitude of operating leverage thats reasonable as you look at next year.
Speaker Change: I know, we do have some color on how youre thinking about NII fees, and then put that against your efforts to keep expenses.
Speaker Change: Stable, but I guess can you just maybe frame it a range of operating leverage that you think is reasonable as we look at.
Speaker Change: Next year.
Speaker Change: Good morning, Jon This is Andy.
Andy: Start with this and John can add on so as I said in my prepared remarks, we're going to benefit from the cost efficiencies of the union deal to a total of $900 million.
John: And that is fully reflected now and into the run rate starting this quarter.
John: So we are achieving those benefits because of the benefits of technology investments, we've made digital investments operational investments in our risk platform and so that is the benefit of the investments we've made and we would expect to continue to invest in the business and those capabilities and payments and technology modernization. So we are also very cognizant and <unk>.
John: <unk> expenses very closely we still have opportunities in terms of efficiencies in personnel and operations and 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.
John: That when we start to see that margin growth that John talked about as well as a 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 Change: Great. Thanks, Andy.
Speaker Change: You bet.
Speaker Change: Your next question comes from the line of John Mcdonald with Autonomous Research. Your line is open.
John Eamon McDonald: Morning, John.
John Eamon McDonald: Hi, Good morning, I was wondering if you could give a little color on what you saw this quarter and credit quality.
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, what we should be thinking about thank you.
John Eamon McDonald: Yes. Good morning, John This is Terry Dolan, so I'm going to take those question related.
Credit quality. Your first one was really related to nonperforming assets and some of the things that we saw in the fourth quarter.
John Eamon McDonald: At the end of Glen across the portfolio are generally pretty stable.
John Eamon McDonald: Did see a couple of idiosyncratic.
John Eamon McDonald: Loans that went into nonperforming status.
The.
The bulk of those were kind of union legacy sort of credits so continuing to kind of work through that but I would also say that both of those are fairly well collateralized.
John Eamon McDonald: So we don't necessarily see a lot of charge off content.
Related to those idiosyncratic.
John Eamon McDonald: Credits when we look at net charge offs in the trajectory.
John Eamon McDonald: I would expect that or we would expect that it will continue to kind of normalize credit card is kind of getting closer to pre pandemic levels.
John Eamon McDonald: But you know that we will continue to move up a little bit.
John Eamon McDonald: Our expectation is that for full year 2024 will probably be in kind of in the mid <unk> in terms of the net charge off rate.
Speaker Change: Okay. Thanks, Terry and then John or Andy just on the fee revenues, John ticked off on the fee revenues.
Speaker Change: A number of high single digit kind of potential growers from 24.
Speaker Change: 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 2003 was about $10 8 billion of fee revenues is that something you can grow off of that just trying to contextualize total revenue last year was around 28 billion.
Speaker Change: Should we think about the ability to grow revenues on fees and maybe total revenues this year.
Speaker Change: So I mean, we had as you.
Speaker Change: As you mentioned.
Speaker Change: Some of the fee numbers there.
Speaker Change: Core fee perspective, we do expect to grow.
I ticked off some of the areas in terms of payments commercial products trust in on sort of thing.
Speaker Change: Other end.
Speaker Change: Some of the service charges the components there.
Speaker Change: Of course in terms of mortgage that will be probably somewhat somewhat in the flat range.
Speaker Change: And.
Speaker Change: In terms of other other we had a little bit of a.
Speaker Change: High number in terms of the fourth quarter related to the tax credit.
Speaker Change: Related impact finance.
Speaker Change: Syndication fees and things like that so all of those things and we expect kind of that mid single in terms of the fee fee components going going forward for this year.
Speaker Change: Okay kind of a mid single from that 10 eight.
Speaker Change: Adjusted base.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Erika Najarian of UBS. Your line is open.
Erika Najarian: Hi, good morning.
Erika Najarian: I was hoping my first.
Erika Najarian: Good morning. My first question is for you Andy.
Andy: Clearly you went through it in terms of some capital consternation in 2023.
Andy: Now you are sitting here with nine nine <unk> no longer has to be a category two bank early and all the color that we're getting from Washington is that.
Andy: <unk> will be at least delay it is not often significantly yes.
Andy: You think about may be just one more hurdle ahead over the near term in terms of the DFAST how are you.
Andy: Are you thinking about.
Andy: Our USB proper CET one ratio is in terms of.
Andy: The minimum looking forward Q.
Andy: Sure maybe capital is a little bit tighter, but youre also growing and do you feel like you are now on offense in all of the sort of the balance sheet.
Andy: Management that was designed to optimize capital is fully behind you.
Speaker Change: Yeah, 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.
Speaker Change: As we talked about were added a nine 9% CET one ratio today.
Speaker Change: A couple of years ago, our target was between eight five and nine so we're above that target, but we're also cognizant of the rules that are coming both from the perspective of Basel III end game, which is still uncertain as you've talked about as well as our CCAR and how that will evolve over time so.
Speaker Change: We will continue to accrete the 'twenty to 'twenty five we'll continue to burn down the OCI when we get clarity on the capital rules, both Basel III in 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 refined that and then we'll get into what the math is around buying.
Speaker Change: Baxter at that time.
Speaker Change: Got it.
Speaker Change: And one follow up question for you John and thank you for giving US some of the components of the.
Speaker Change: NII.
Speaker Change: Just wondering.
John Eamon McDonald: You mentioned Q T. R. You are you generally expecting deposits to be down in total deposit CD down even if it will be a next set of data and also.
John Eamon McDonald: How quickly do you think the deposit betas on the way down can react to each fed rate cut.
Speaker Change: Sure so.
The first part of your question in terms of Qt.
Speaker Change: We do anticipate Q T to be throughout the year and so that's going to on an whole put pressure on deposits throughout the year in terms of balances.
Speaker Change: And so we don't expect a lot of growth overall deposits.
Speaker Change: But we have we have ways to manage through that of course theyre talking through various ways to change the qt, but that just remains to be seen.
Speaker Change: Terms of deposits performance on the way down.
Speaker Change: Dissipate commercial and wholesale type balances will go down just as fast as they would come up on the retail side, it's going to be more of an article it will take some time for that to turn but those are our expectations.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Mike Mayo with Wells Fargo. Your line is open.
Mike Mayo: Hey, good morning.
Mike Mayo: Awesome.
Mike Mayo: Oh.
Are you guiding for flat positive or negative 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 efficiency ratio I think you talked about this at a presentation in December I mean, 61% core efficiency in the fourth.
Mike Mayo: Quarter isn't exactly like legacy U S Bancorp, and that's up 300 basis points year over year.
Mike Mayo: Earlier last decade, where 55% and going back further than you were in the low <unk> is that just.
Mike Mayo: Aspirational target now or is that a real target over the next two years.
Mike Mayo: Our cell and along those lines.
Mike Mayo: I guess you had all the savings are going to get from Union Bank, So where does the rest come from here.
Speaker Change: Yes, Mike.
Mike Mayo: It's probably more likely and positive operating leverage in the second half of '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 a normalized revenue level that we will continue to manage expenses below revenue growth and continue to tick down that efficiency ratio into the 50 <unk>. That's the way we're planning.
Speaker Change: When you when you say into the <unk> I mean is it.
Speaker Change: Can you get back to 55% of that in your planning horizon, even going out a few more years and it looks like the payments business is.
Speaker Change: Recasting of stride here.
Speaker Change: And along those lines I didn't see the slide anymore on.
Speaker Change: The payments business combined with small business banking youre going to grow small business relationship by 15% to 20% in the revenues by 25% to 30%.
Speaker Change: Slide for that and I know you got Lucky you got Union Bank deal you had the issues of last March and April and it's OK. Your capitals back the deals done and now we're back to kind of U S Bancorp business as usual.
Speaker Change: So I'm just trying to look for some color on that.
Speaker Change: If you come to square a banking or is that still a goal and how those revenues might help you improve that efficiency.
Speaker Change: Sure Mike and it is still a goal we do think this combination of payments in business banking and fighting that comprehensive product set and capabilities to help people run their business as a key strategic priority continues to be and I think the key categories that John mentioned are also a key driver of revenue, including payments commercial products Trust and investment.
Speaker Change: And those are all areas that we expect continued growth on 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 2024, 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 50 high <unk> at the beginning and continue to deliver positive operating leverage to get it even lower that's our objective.
Speaker Change: Alright, thank you.
Speaker Change: Yes.
Speaker Change: Your next question comes from the line of Matt O'connor with Deutsche Bank. Your line is open.
Matt O'connor: Good morning, Matt pilot.
Matt O'connor: Just to clarify the flat expense guidance for 'twenty. Four is also the adjusted level of 23 of 17.0.
That's correct yes.
Matt O'connor: Okay, and I assume that includes any expense benefit from the exited about ATM.
Matt O'connor: Cash business that you referenced earlier.
Speaker Change: Correct, yes.
Okay, and then just stepping back like any other.
Speaker Change: Kind of small.
Businesses or segments that you're kind of reevaluating for.
Speaker Change: Not so much as kind of the regulatory proposals, which we will see how they finalized but there's other areas that youre stepping back and whether it's in mortgage given our small market there or other parts of.
Speaker Change: The business portfolio that youre, looking either to exited or to potentially lean into.
Speaker Change: It's a bit different in Europe, and can say six months ago.
Speaker Change: Well I can I can start and Andy can can chime in I think.
Speaker Change: We commented on the ATM business, I mean, youre constantly evaluating certain things, particularly in the light of an a.
Speaker Change: Regulatory change.
Speaker Change: A lot of common letters have been submitted in terms of the Basel III end game at the end of the day, it's not going to materially drive whether we exit or.
Speaker Change: Businesses or enter new businesses that sort of thing, it's just going to be a combination of a continual investment as Andy mentioned in terms of what we need to do in chart toward achieving positive operating leverage in managing around regulatory actions. Those are some of the comments I'd throw out there I think I agree John and the only thing I'd add is that the.
Speaker Change: <unk> in the competitive dynamic is something that causes us to be more aggressive or less aggressive in certain categories. Maybe the example, I'll give you as auto lending which has asked.
Speaker Change: For us is not growing right now and thats because of the spreads and the returns are just not at our levels that we wanted to put on the books. So those are areas that we're going to not get out of or closed down, but just not emphasize in terms of growth at the levels of returns that we're seeing right now.
Speaker Change: Okay.
Speaker Change: And credit card.
Speaker Change: Obviously seeing the normalization of losses with you guys and throughout the industry.
Speaker Change: And also very strong growth. So if we adjust losses kind of on a lag basis. They are above a few years ago.
Speaker Change: At what point do you tighten up credit card in and say.
Speaker Change: We can slow growth at this point of cycle or do you think theres still quite a bit of runway of growth are healthy growth.
Yeah, well I mean, it is an area that we think that there continues to be a nice growth in that particular space. It is an area, though that certainly as we have looked at.
Speaker Change: The economic uncertainties, and all sorts of things the pressure on consumers, especially.
Speaker Change: Given the inflationary pressure.
Speaker Change: Pressure weeds.
Speaker Change: On the margin around the edges, we do make adjustments to underwriting and tighten that up where we need to.
Speaker Change: Well when you end up kind of thinking about the overall or.
Speaker Change: Credit performance or credit card.
Speaker Change: Business, we still think it's a very nice business, we focus on prime Super Prime sort of customers.
Speaker Change: And even through this cycle I think that's going to perform very well.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Gerard Cassidy with RBC capital markets. Your line is open.
Gerard Cassidy: Good morning, and incrementally and John Good morning drag warning.
Speaker Change: John you touched on in answering a question about commercial loan growth that some of your customers were accessing the capital markets and things of that nature can you guys share with us.
Speaker Change: We read a lot and see a lot of about the private credit markets have really become quite active and aggressive in making loans to corporate and commercial customers.
Speaker Change: Are you guys seeing that competition number one and also isn't any different than.
Speaker Change: Past years or has it intensified and then simultaneously.
Speaker Change: Any of these private.
Apollo Blackstone et cetera are these customers of yours and if they are how do you balance the competition versus handling their needs.
Speaker Change: Sure. This is John <unk>. So in terms of on the commercial side when I comment that go into the capital markets, it's more or less the public markets. So.
Speaker Change: Taking bond issuance and the public investment grade market, we tend not to see them or compete on.
Speaker Change: On the private credit side of things, it's just not a structure or type of loan type in terms of our client base that we we tend to run into so it's more or less.
Speaker Change: I cant say its increased or decreased versus that because we just don't see those names we compete in.
Speaker Change: In the commercial space with our with our peer banks more or less in that particular venue in terms of.
You mentioned in terms of client.
Speaker Change: The reaction, we have great relationships with a number of different.
Speaker Change: Names in terms of.
Speaker Change: Investment services capital markets activities.
Other or other sorts of categories. So we do have some very nice relationships with with those institutions.
Speaker Change: 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 Change: Yes.
Speaker Change: I think the last thing I would just add is that depending upon where the capital rules and up on what sort of where the emphasis is or isn't you.
Speaker Change: You could see more or less moving into the private.
Capital sort of markets.
Speaker Change: They tend to have.
Speaker Change: More flexibility in terms of structure they take on more brisk in all sorts of things.
Speaker Change: <unk> may not be where we compete but certainly from an industry standpoint private credit continues to be an area of focus.
Speaker Change: Thank you Terry.
Speaker Change: Just if we step back for a moment and look at.
Speaker Change: Beyond Basel III and game, maybe we do get the final proposal in the middle of this year or later this year, we get through the next DFAST.
Speaker Change: U S. Bancorp has always had a hallmark of having one of the highest ROE tce's amongst the regional banks, obviously, probably going to maintain that but you also were very disciplined in 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 the <unk>.
Combination of both and Andy do you see that coming on the horizon, maybe 2025 once we get all the rules that we know who your CET one ratio needs to be what's your outlook there.
Andy: Yes, Gerard we do achieve a high return on tangible comment I mentioned, 19%, 20% fourth quarter first full year of 24.
Gerard Cassidy: And as we think about going forward I would expect us to continue to lead the pack in terms of that return, which is key to generating capital to key to returning capital and again once we get clarity on their roles as I mentioned earlier in both the Basel III end game as well as the CCAR process.
And determine our target capital levels, we will returned the differentiator through dividends or buybacks has been in our history.
Speaker Change: Very good I appreciate it. Thank you. Thank you.
Your next question comes from the line of Ken Houston with Jefferies. Your line is open.
Ken Usdin: Hey, Thanks, good morning.
Ken Usdin: 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, so what types of products or tweaks or youre already being able to make on the deposit pricing front end and then where did those those higher cost deposits.
Ken Usdin: Flow out of from a business perspective. Thanks.
Speaker Change: Sure. Thanks, Ken.
Speaker Change: Comment was really around.
Speaker Change: In terms of the fourth quarter.
Speaker Change: What we saw maybe just stepping back a bit in the third quarter, we grew deposits quite a bit and part of that was we were just getting through the Union Bank acquisition. We wanted to make sure we were maintaining strong relationships with those clients and it really all clients as we're going through those times.
Speaker Change: In the fourth quarter, given where loan demand when and where.
Speaker Change: Where we had a little bit of excess deposit. So we made decisions really just tactically to two.
Speaker Change: Go away from non deposit non relationship or less relationship based and specifically on time deposits declining and things of that nature. So I think that's just going to be the ebb and flow of things of just how we manage it going forward depending on loan growth, depending on our profile and depending on the relationships. So that's really what that comment was intended for.
Speaker Change: And importantly, John on our core consumer deposits, we are continuing to see growth. There as you mentioned that we had in the slides yet we continue to expect core deposit growth in 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 Change: Got it and as a follow up to that <unk> point is everything from <unk> now fully baked whether it's the cost actions and structure and also that's.
Speaker Change: We're kind of making sure you're buttoned up as a starting point.
Speaker Change: Is that based on loans and deposits gotten to a steady state as well.
Speaker Change: Yes.
Speaker Change: Okay. So we just move forward with everything and listened to the Guy comments you gave earlier, okay got it. Thanks exactly it's all all in all the core now yep.
Speaker Change: Yeah.
Speaker Change: Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: Your next question comes from the line of Sal Martinez with HSBC. Your line is open.
Saul Martinez: Hey, good morning, guys.
Saul Martinez: On the payment side.
Saul Martinez: You just add.
Saul Martinez: Add a little bit more detail about how youre feeling about.
Saul Martinez: Your payment strategy.
Saul Martinez: How youre doing and how much.
Saul Martinez: The upside opportunity is there obviously you are growing nicely on the issuing side the merchant acquiring side.
Saul Martinez: Sort of mid single digit growth in revenues and volumes I think you said high single digit next year.
Saul Martinez: As you guys know the banks and seeded a lot of share to software companies to integrated service providers.
Saul Martinez: 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 having relationships both on the retail and commercial side and then obviously you kind of have that that two sided network that a lot of <unk> one.
But obviously banks have struggled in this area. So just maybe if you could just give us sort of.
Saul Martinez: An overview of how you're doing and.
Saul Martinez: How you feel the opportunity set is evolving.
Yes, so first of all.
Saul Martinez: 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 two things number one is our tech led initiative, which is now up over 30% of our activities related to tech land. So that is integrating our merchant processing capabilities into the software that people used to run their businesses and number.
Saul Martinez: Two 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're not just providing one single service, we're integrating banking services deposit lending capabilities Treasury management, together with payments and money movement into one comprehensive offering that helps people again run their business, particularly small businesses.
Saul Martinez: <unk> and <unk>.
Saul Martinez: Ease into the process of payment activity in a comprehensive way together with the software they are using to run their company. So those are the initiatives, 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 thats true merchant processing corporate payments.
Saul Martinez: Well as retail issuing.
Speaker Change: Okay got it that's helpful. Maybe just follow up on deposits.
Speaker Change: You mentioned the migration you expected migration.
Speaker Change: Out of noninterest bearing deposits to sort of run its course, just when and where do you see that I think noninterest bearing.
Speaker Change: 5% of totaled one is how much more room is there in <unk>.
On deposit costs I think the cumulative beta if my calculations right.
Speaker Change: Now, 49% how much more room is there for that to increase sort of what's embedded in your guidance for NII.
Speaker Change: Sure. So in terms of the Niv 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 and it.
It certainly could drift a little lower but we.
Speaker Change: We are at a point where.
Speaker Change: From a core standpoint, particularly.
Speaker Change: On the commercial and small business side, where youre starting to get into places where.
Speaker Change: Companies have to run operating accounts and over time, you're going to have account growth and things of that variety. So I think there'll be conducive to supporting niv going forward, but there will be some leftover churn.
Speaker Change: I alluded to earlier in the call in terms of beta as you mentioned 48, and a half or so percent is our beta right now.
Speaker Change: I think it.
Speaker Change: It can creep up as we've kind of talked about.
Speaker Change: But it's going to depend on when the fed cuts is going to be kind of that that.
Speaker Change: Focus point in terms of how much it will go from here and so.
Speaker Change: How what level is hard to predict but we will.
There'll be pressure until the fed starts cutting.
Speaker Change: Okay.
Speaker Change: Okay got it thanks.
Speaker Change: There are no further questions at this time, Mr. Anderson I will turn the call back over to you.
Anderson: Thanks, Sarah and thank you for listening to our earnings call. Please contact the Investor Relations Department. If you have any follow up questions.
This concludes today's conference call. We thank you for joining you may now disconnect.
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