Q4 2024 US Bancorp Earnings Call
Welcome to the U S Bancorp fourth quarter 'twenty 'twenty four earnings conference call. Following a review of the results there will be a formal question and answer session. If you would like to ask a question. Please press Star then one on your phone if you wish to withdraw your question. Please press Star then one.
Again.
This call will be recorded and available for replay beginning today at approximately 11, a M central time.
Speaker Change: I will now turn the conference over to Georgia, Anderson, Senior Vice President and director of Investor Relations for U S. Bancorp. Please go ahead.
Georgia Anderson: Thank you Audra and good morning, everyone today, I'm joined by our Chairman and CEO, Andy Cecere, President and Jim <unk>, Vice Chair and C. E O Terry Dolan, and senior Executive Vice President and CFO Jon Stern.
Georgia Anderson: A moment, Andy and John will be referencing a slide presentation together with their prepared remarks, a copy of the presentation. Our press release and all supplemental consolidated schedules can be found on our website at IR that U S Bank Dot com.
Georgia Anderson: 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 earnings release press presentation, Our press release and in our reports on file with the SEC.
Following our prepared remarks. This morning, we will be happy to take any questions that you have I will now turn the call over to Andy. Thanks, George Good morning, everyone and thank you for joining our call I'll begin on slide three in the fourth quarter. We reported a dollar one per diluted share were $1 seven after adjusting for notable items John will discuss these one time charges in his prepared remarks.
Georgia Anderson: <unk> net revenue totaled $7 billion for the quarter and $27 $5 billion for the year as we saw both sequential and year over year quarterly growth in net interest income and noninterest income driven by effective balance sheet management, earning asset repricing and mix and our highly diversified fee business offerings.
Georgia Anderson: Overall, the quarter was highlighted by top line revenue growth and continued expense discipline, which resulted in a 190 basis points of positive operating leverage on an adjusted basis year over year.
Georgia Anderson: Turning to slide four we had slight balance sheet growth this quarter with average, earning assets, increasing one 2% driven by higher on balance sheet liquidity.
Georgia Anderson: This quarter, we had modest loan loss reserve release, largely reflective of improved credit quality and a more favorable portfolio mix.
Georgia Anderson: On the bottom right of the slide you can see that our CET one capital ratio increased 10 basis points from the prior quarter to 10, 6% our tangible book value per share totaled $24 63 at December 31, an increase of 10, 4% compared to the end of last year.
Georgia Anderson: During the quarter, we effectively balance continued capital accretion with an initial $100 million of share repurchases.
Georgia Anderson: Slide five provides key performance metrics on an adjusted basis, we delivered an 18.3% return on tangible common equity and an improved efficiency ratio of 59, 9% in the fourth quarter.
Georgia Anderson: Turning to slide slid six fee income represented over 40% of total net revenue in the fourth quarter.
Georgia Anderson: Our results this quarter were driven by double digit year over year fee growth in commercial products Trust and investment management and investment product revenues.
Georgia Anderson: Slide seven highlights a few of our key selected initiatives on interconnectedness across the franchise.
Georgia Anderson: I'll now turn it over to call to John who will provide more detail on the quarter as well as forward looking guidance.
Thanks, Andy if you turn to slide eight I'll start with a more detailed earnings summary, followed by a discussion of fourth quarter earnings trends and.
John: In the fourth quarter, we reported earnings per diluted common share of a dollar one which included $109 million of notable expense items were $82 million net of tax.
Notable items for the quarter included $60 million related to operational efficiency initiatives and $49 million from lease impairments associated with strategic real estate restructuring actions.
After adjusting for these notable items, we delivered diluted earnings per common share of $8 seven this quarter.
John: Slide nine provides a balance sheet summary.
John: Total average deposits increased <unk>, 7% on a linked quarter basis to $512 billion as we continued to prioritize relationship based deposits and maintained our pricing discipline.
John: While total noninterest bearing deposits increased slightly this quarter. This was largely driven by institutional deposit seasonality at the end of the quarter importantly, after accounting for this seasonality our percentage of noninterest bearing deposits to total deposits now looks to have stabilized in line with our earlier expectations.
Average loans totaled $376 billion, a modest increase of 0.4% on a linked quarter basis, driven by commercial lending initiatives slower paydowns and new originations in our residential mortgages as well as higher seasonal credit card spend.
John: At December 31, the ending balance on our investment portfolio increased slightly to $171 billion from opportunistic repurchases of securities.
John: This quarter, we saw a slight decline in the average yield across both our investment portfolio and loan book as the impact of variable rates more than offset the benefits of fixed asset repricing.
John: Turning to slide 10, net interest income on a fully taxable equivalent basis totaled 4.18 billion, which was stable to the third quarter for.
John: For the year total net interest income on a fully taxable equivalent basis was slightly better than our earlier guidance of $16 $4 billion.
John: Slide 11 highlights trends in noninterest income.
John: Linked quarter, we saw noninterest income growth in the trust and investment management and other revenue that was partially offset by lower mortgage banking and seasonally lower payments revenue.
John: Importantly, excluding security losses full year noninterest income increased three 9% compared to 2023 consistent with our 2024 guidance as we benefited from continued growth across our diversified and differentiated business mix.
John: Turning to slide 12, noninterest expense for the quarter totaled $4 $2 billion as adjusted for the year total noninterest expense was $16 79 billion as adjusted which was just below or better than our full year guidance of $16 8 billion.
John: We remain focused on prudent expense management and continued to benefit from operational efficiencies across the company.
John: Slide 13 highlights our credit quality performance.
John: Asset quality metrics this quarter were in line with expectations and reflected ongoing macroeconomic stability our ratio of nonperforming assets to loans and other real estate was 0.48% at December 31, compared with 0.49% at September 30th and 0.40% a year ago.
John: In the fourth quarter net charge off ratio of 0.60% was flat to the third quarter as expected and our allowance for credit losses totaled $7 $9 billion or 2.09% of period end loans at December 31.
John: Turning to slide 14.
John: CET one capital ratio of 10, 6% as of December 31 increased 10 basis points net of distributions, which included an initial $100 million of share buybacks this quarter.
John: Moving forward, we expect the level and pace of buybacks to remain modest in the near term as we balance continued capital accretion with distributions.
John: I will now provide first quarter and full year 2025 forward looking guidance on slide 15.
John: <unk> with the first quarter 2025 guidance net interest income is expected to be relatively stable to the fourth quarter of 2024, excluding the impact of fewer days as a reminder, the first quarter has two fewer days than the fourth quarter.
John: Total noninterest expense is expected to be relatively stable to the fourth quarter level of approximately $4 $2 billion is adjusted.
John: We expect to deliver positive operating leverage in the first quarter of 200 basis points or more on a year over year basis.
John: I'll now provide full year 2025 guidance.
John: Total revenue growth on an adjusted basis is estimated to be in the range of 3% to 5% compared to the full year 2024.
John: We expect to achieve positive operating leverage excluding the impact of security gains or losses of greater than 200 basis points for the full year.
John: I'll now hand, it back over to Andy for closing remarks. Thanks, John 2024 was a pivotal year for the company in many ways and in market very important inflection point in our story.
John: Going into the year, there is much uncertainty with respect to the broader macroeconomic environment persistent inflation significant rate volatility political and regulatory headwinds to name a few.
John: But we effectively managed through the changes and most importantly executed on our strategic objectives.
John: Fourth quarter results showcase our commitment to execution with strong as highlighted by our delivery of 190 basis points of positive operating leverage as.
John: As credit quality continue to stabilize and we prudently manage our capital position. It was effective balance sheet management, our financial discipline and expanding interconnectedness across the franchise that enable us to fully deliver the strong results. We did this quarter and fully expect that momentum to continue into 2025.
John: Finally, I'd like to extend our thoughts to those impacted by the devastating and ongoing wildfires in Los Angeles, we are closely monitoring the situation and have teams across the bank involved in our collective response efforts to help best support our employees customers and their communities.
John: Let me close by thanking our employees for their continued dedication to our clients communities and shareholders and was a meaningful year for the company. We will now open up the call for Q&A.
John: Sure.
John: Thank you at this time I would like to remind you. If you would like to ask a question Press Star then the number one on your telephone keypad.
John: Just a moment to compile the Q&A roster.
John: Okay.
John: Yes.
Speaker Change: And we'll go first to Scott staffers at Piper Sandler.
Speaker Change: Good morning, guys. Thank you for attending.
Speaker Change: Okay got.
Speaker Change: John I was hoping maybe you could delve in a little more can you discuss the drivers of the 3% to 5% expected full year 'twenty five revenue growth in other words, how much comes from NII, how much ends up coming from from fees.
Speaker Change: Maybe and then I guess, a little clarification. When you are talking about the one Q NII guide I think youre, saying flat excluding the day count difference. So I just wanted to be certain we're thinking it would be down on a reported basis marginally just didn't hear it.
Speaker Change: Right. Thanks, Scott and good morning, So maybe let me take your last question first yes.
Speaker Change: Yes, excluding days about $40 million.
Speaker Change: It would be lower on a reported basis, so stable excluding those those two days of that $40 million.
Speaker Change: That's how we're representing that.
Speaker Change: On your <unk>.
Speaker Change: Sure on the drivers on the 3% to 5% revenue growth.
Speaker Change: Let me, let me start with our fees and then I'll go over to into net interest income, we had really solid and healthy growth on the fee side of things.
Speaker Change: And we have a lot of momentum building and that's despite some headwinds that we saw particularly on our prepaid.
Speaker Change: On the card side of things as well as freight and so some areas in the payment space that saw some headwinds. We also saw headwinds with the ATM exit of our cash servicing business. So those things will abate or have abated here in 2024, and so we see obviously momentum in the core.
Speaker Change: At Investor Day, we talked about.
Speaker Change: Our our expectation for the medium term for rate expectations for 2026, and 2027 to be at mid single digits for fee growth.
Speaker Change: That's a reasonable range for us to really think about as we think about 2025 and it really comes down to core areas of growth within our trust area. We're seeing strong market share fund formation. The macro is really strong there payments we have good momentum in a number of areas strategic initiatives that are underway Treasury management.
Speaker Change: And capital markets have continued to have strong growth in certain areas. A couple of areas that we're watching is mortgage mortgages with these higher rates, it's hard to see volumes really.
Speaker Change: Persist or be lot stronger than it was in the prior year and gain on sale is pretty pretty stable as well and then our other revenue will continue to be in that $125 million to $150 million range.
Speaker Change: On an average basis per quarter. So put another way, we expect fees to grow we have strong momentum and we think that is that mid single digit is a reasonable place for us to begin.
As we think about net interest income again, well positioned the balance sheets in a great spot we saw inflection in our in our 2000 throughout 2024, and we really think about three key drivers for net interest income.
Speaker Change: To come from better asset mix, which we've seen.
Speaker Change: Or a shift into higher returning assets.
Speaker Change: That shift will continue we've seen deposit normalization.
That's the noninterest bearing rotation is starting to slow down and really stabilize at this level and then importantly fixed asset repricing on our back book is going to be a meaningful driver. This year is particularly with the curve.
Speaker Change: Steepening.
Speaker Change: <unk> seen since we were last on this call the curve.
Speaker Change: I always look at sulfur versus a five year treasury that was meaningfully inverted back in September and now were positive actually and so we think the back book is going to give us some nice trajectory just as an example, we have about $3 billion of an investment portfolio that re prices on a per quarter three.
Speaker Change: $1 billion that runs off that can get replaced at 150 to 200 basis points.
Speaker Change: Of of.
Speaker Change: Spread and then on the other fixed rate assets that we have which includes residential mortgage commercial loans and auto loans and things like that we have $5 billion to $7 billion.
Speaker Change: On average that reprice again at that 150 to 200 basis points.
Speaker Change: Mark and that's that's assuming kind of today's rates so either way, we're very confident in our growth both on fees and our net interest income and you put it all together and that's really where we where we come up with our 3% to 5% total revenue growth.
Speaker Change: Perfect Alright, good I appreciate all the details thank you.
Speaker Change: You bet.
John Mcdonald: Well move next to John Mcdonald that tourists securities.
Speaker Change: Hi, good morning.
Speaker Change: Hey, guys wanted to ask two.
Speaker Change: Two strategic questions, maybe the first one is for guns.
Just on payments you reorganize the business yesterday or this week, you announced the new head to the consumer side, maybe just kind of give us the.
Speaker Change: The plan for payments and what you hope the new organization and setup will do for the growth and opportunities there.
Speaker Change: Good morning, John let.
Speaker Change: Let me just remind you of some of the facts that we shared last time.
Speaker Change: <unk> franchise is the very strategic asset for us and our sense is that we can do more to interconnect that product set with <unk> <unk>.
Speaker Change: <unk> franchise in our institutional franchise.
Speaker Change: So the old structure and splitting it into the two pieces that are more aligned with the two parts of the franchise is an expectation too.
Speaker Change: Accelerate execution. So it's not really a strategic focus we are very pleased to welcome two very high quality leaders, Mark Runkel, we announced linear.
Speaker Change: Early in the year he stepped into his at all on the institutional side and could Miquel. So joins us from Amex.
Speaker Change: Next month.
Speaker Change: So that was sort of the intention then.
Speaker Change: The goal is to.
Speaker Change: Truly accelerate that execution on time.
Speaker Change: <unk> claimed to connectedness.
Speaker Change: Okay. Thanks.
Thanks, Tien tsin, and Andy maybe a broader just kind of where wherever you planted seeds for offense across the company I think in the retail bank.
Speaker Change: We're looking in the Union franchise, and maybe through your partners Edward Jones and state farm, but maybe just across the footprint, where you're excited about where U S. Bank is kind of invested for growth and you might be moving to the front foot.
Speaker Change: Thanks, John and good morning, I think it's across all of our business lines and it's that concept that we talked about in Investor day, which is about interconnectedness, but if you think about the momentum that John articulated and <unk> talked about.
Speaker Change: Our payments business, our trust and investment management business, our commercial products business, our retail business the growth in deposit activity, our commercial business with the growth in targeted loan activity profitable loans. So we really have a lot of momentum going in that John coupled that with sort of the headwind that was the yield curve that.
Speaker Change: John talked about I think drives to positive momentum on net interest income the fee categories, we've talked about which I think have positive momentum in all of that is coupled with a relatively flat expense for the laptop highest quarters, which drives to this positive operating leverage that we talked about so across all of their care categories of revenue it's part.
Speaker Change: Positive expenses, well managed and that's going to deliver the positive operating leverage.
Speaker Change: Okay. Thank you.
Betsy: We will go next to Betsy <unk> at Morgan Stanley.
Speaker Change: Hi, Good morning, Brian Bethany Betsy.
Speaker Change: I noticed that mine sounds very taking tacky, but I just want to make sure I understand what forward curve. Your NII guidance based on I think you mentioned.
Speaker Change: But.
Speaker Change: And the reason I ask is as we all know that foreign currency changed a lot between.
Speaker Change: Beginning of December and today so.
Speaker Change: So that's the first question.
Speaker Change: Sure so.
Speaker Change: In terms of our our curve, we do have two rate cut assumptions.
Speaker Change: Embedded I think ones in May and one in September.
Speaker Change: So that's kind of how we think about the short end of the curve and the long end of the curve is.
Speaker Change: At this level so right now the 10 year treasuries at 465, that's probably a good.
Speaker Change: Place, that's kind of where we're at kind of throughout the year of course, we know that it's volatile it's been volatile and and Thats why I say the curve does matter when we kind of look at these these sorts of things, but those are our projections.
Okay, Great and can you help us understand.
Speaker Change: Now your projections would move in the event that you got fewer rate cards.
Speaker Change: Sure.
The long end went up more.
Speaker Change: Yes, exactly so.
Speaker Change: And we can have continued to be neutral from an interest rate risk standpoint, so as I mentioned, we expect two cuts, but if those cuts don't manifest or the fed even hikes or theres more cuts, which we know the cycles right things will will shift we want to be as neutral as possible to those particular <unk>.
Speaker Change: Movements from the fed on the short end of the curve.
Speaker Change: There were there is can be some changes really on the shape of the curve. So steeper curve the better off we are if it's more inverted then that would put a little bit more pressure on the noninterest income so at a high level. Those are kind of the puts and takes and as we roll through the year can you just give us a sense as to that fixed asset repricing.
Speaker Change: Is it coming through kind of.
Speaker Change: Quarterly cadence the same or is there any acceleration or deceleration during the year that we should be thinking about.
Speaker Change: It's pretty consistent so I mentioned, the $5 to $7 billion per quarter, I mean, it's going to range in that.
Speaker Change: That corridor.
Speaker Change: Each quarter, but it doesn't accelerate it doesn't tail off it's pretty consistent throughout the throughout the course of the year same on the investment portfolio pretty pretty consistent.
Speaker Change: Okay. Thank you so much.
Speaker Change: You bet.
Speaker Change: We will move to our next question from Ebrahim <unk> with Bank of America.
Ebrahim: Good morning.
Speaker Change: Morning.
Speaker Change: Sorry, if I missed this in your prepared remarks, when we think about the <unk>.
Speaker Change: Guidance for the.
Speaker Change: Our revenue outlook.
Speaker Change: Yeah.
What's underpinning that from a loan growth perspective late one so yes, what's the assumption of a loan and deposit growth and are we seeing any green shoots of a pickup in lending demand.
Speaker Change: Sure. Thanks Ebrahim so.
Speaker Change: We did not comment yet on loans, but I would just say in terms for purposes of our forecast and how we're thinking about 25, we are pretty modest loan and deposit growth for the for the full year now.
Speaker Change: In terms of sentiment and things of that variety of clearly there's a lot of positivity our client bases.
Speaker Change: Excited I think theres, a theres a lot of momentum clearly in our pipelines that we can see has not yet translated into into elevated loan growth at this point, but perhaps that changes were thinking hopefully it's in the back half of the year, we see that pick up in loan growth, but in terms of our forecast in our projections, we anticipate modest for the.
Speaker Change: For the for the year.
Speaker Change: Got it and I guess, maybe just.
Speaker Change: Talk about anything you addressed a little bit around the payments business as we think about the fee revenue sort of category across payments.
Speaker Change: If you can sort of drill into.
Speaker Change: Expectations around that year over year in context of your overall revenue guide and obviously you brought in a new head of payments yesterday.
Speaker Change: Remind us of the market positioning or winning share losing market share and what the ambition is there going forward. Thank you.
Speaker Change: Sure so as.
Speaker Change: As I mentioned in payments earlier.
We have momentum on the core side, we had had some some headwinds there so if I just kind of.
Speaker Change: Go through the different categories.
Speaker Change: On the on the card side of things, we had strong sales in the credit card side.
Speaker Change: Five just over nearly 6% really in total revenue was hurt in prepaid this quarter by about four percentage points of given the the.
Speaker Change: Exiting some of our prepaid revenue that's going to impact us again in the first quarter, but then we will fully lap that in the second second quarter.
Speaker Change: Continuing in the card side, we anticipate growth there and we have a lot of momentum in different products. We have are are smartly.
Card.
Speaker Change: That is coming online we have a lot of excitement around that our union.
Speaker Change: Acquisition inquiries seen that penetration. So we continue to expect that that mid single digit.
Speaker Change: Growth in terms of on a retail card side of things.
Speaker Change: On the merchant side of things. We've had again strong sales are tech led formation and growth. There has been really strong we've been making investments we expect travel to improve same store sales to improve clearly our growth rate in 'twenty four was below our expectations.
Speaker Change: And as we see a lot more.
Mark Runkel: Hi, Mark Hi.
Mark Runkel: Volume lower margin type clients continuing their pace.
Mark Runkel: We are we're looking at the growth rate is better then of course 2024, but it may not be at our at our aspiration of high single digits for 2025, and then on the Cps side of things.
Mark Runkel: Strong quarter, we growth that we had had the had their best year, we've been making a lot of investments there. The pipelines are strong freight we have lapped so a lot of positive things there and again in the union penetration is going to be really paying off for us as well and so we see high single digits, there as well.
Mark Runkel: Alright, thank you.
Speaker Change: We'll go next to Erika Najarian at UBS.
Erika Najarian: Yes, good morning.
Speaker Change: You did.
Speaker Change: Announced that $5 billion share repurchase authorization during Investor day, and I think the market got quite excited about that.
Speaker Change: In terms of the pacing of the buybacks you did $100 million this quarter.
Yes.
Speaker Change: Yes.
Speaker Change: I heard you guys loud and clear during the prepared remarks, but you know what.
Speaker Change: What are the puts and takes that you are considering in terms of thinking about that pacing I know that youre looking for for modest.
Speaker Change: A modest pace it.
Speaker Change: To begin with but if loan growth is a little soft and it seems like you have conservative guidance.
Speaker Change: Bedded in your revenue guide for for balance sheet growth.
Speaker Change: What are the puts and takes in terms of the more modest start to buybacks.
Speaker Change: Sure at a high level Erica.
Speaker Change: It's really the balance between growing our capital to get to where we would need to be from a category two perspective, we talked about 10.
Speaker Change: 10% being our approximate level of where we want to be on a on a on a caf two basis.
Speaker Change: And obviously, we don't expect to be a caf II bank until 2027 or thereabouts. So that's that's really the one side of it. The other side is as you said loan growth. If it's if it's weaker than there is an opportunity for deployment, but we're going to be we're going to.
Speaker Change: Just started we're stepping into this and.
Speaker Change: And we talked about the next quarter and the pace thereafter is just going to be dictated on those on those factors that I just mentioned.
Speaker Change: Yeah.
And just as a follow up here and maybe this is for Andy.
Speaker Change: The way you.
Speaker Change: Laid out your projection on slide 15 in terms of the revenue guide and then positive operating leverage.
Speaker Change: If net interest income or our payment swing, one way or the other either to the better or maybe softer is the message here that you are now to a point, where there is enough flex where regardless of the revenue environment at 200, plus basis point is going to be sort of the baseline for what.
Speaker Change: You can deliver in 2025.
Speaker Change: Eric.
Short answer here, because yes, it's 200 basis points plus on positive operating leverage we do have flex on expense I'm going to ask John to highlight some of the areas.
Speaker Change: We've been managing to a flat expense base for a number of quarters. This is our fifth quarter of that flat expenses.
John Mcdonald: We're still investing in the company, where we're managing across many different areas and we're very confident in that positive operating leverage regardless of what the revenue environment is and John why don't you talk about some of the lenders, yes, clearly we've done a lot of work on the expense were very.
John Mcdonald: Proud of the efforts that the teams have made thus far but we have continued to see different levers that we're looking at and we'll kind of throughout the year kind of talk more about but obviously, we had a notable item on the real estate side of things.
John Mcdonald: There is continued to be optimization their procurement and third party spend actions, we see opportunity as well as organizational simplicity.
John Mcdonald: And bringing fragmented groups together and centralizing certain aspects and then just automation of processes. We have a lot of the investments that we've been talking about over in an investor day help us manage that expense by automating certain processes and then.
John Mcdonald: That inflection point that we've talked about in terms of investment in our digital capabilities. So the stabilization of that digital investment.
John Mcdonald: Increased that amount all along the curve that J curve, if you will and now we're at a flat place and we're bending that cost curve on the digital side, which we're really excited about so those are kind of the main main pieces. There's others. We have a lot of different initiatives, but those are the different levers that we look at.
Speaker Change: Great. Thank you.
Erica: Thanks Erica.
We will take our next question from John <unk> at Evercore ISI.
John: Good morning.
Jonathan just.
Speaker Change: I appreciate the color the breakout of the revenue growth outlook by fees and then your commentary around net interest income just behind that net interest income commentary.
Speaker Change: And some of the drivers you mentioned around fixed asset repricing your deposit normalization could you give us maybe your thoughts around the.
Speaker Change: Net interest margin trajectory as we look through the year and perhaps maybe even help us with how the where the margin could end up.
Speaker Change: As an exit rate coming out of 2025, just to help give us a better.
Speaker Change: Color around the.
John: What it means for the medium term trends thanks sure. Thanks John.
John: We anticipate given the drivers we do anticipate net interest margin to follow net interest income and increase we certainly.
John: From a management standpoint, we don't manage the net interest margin as an example, this quarter.
John: It fell three basis points entirely due to liquidity right. So I mean, there's always going to be transitional puts and takes to it but directionally. It should follow we talked about at Investor day about how.
John: If there is anything magical about 3%, but I mean theres certainly.
John: A lot of momentum in all of those categories and drivers that I. Just mentioned is really to kind of get us into that level over time.
John: Think the the big things that can move it or really the loan growth as that goes up and down deposit management and then the shape of the curve, which impacts our fixed asset are our back book repricing. So those are going to be the components, but certainly expect directionally. The net interest margin to improve as we as we March through time.
Okay.
John: Got it alright, John Thank you for that and then some.
Speaker Change: Currently back to.
Capital, Let me on the M&A front I know post the Investor day, <unk> been clear that.
Speaker Change: Larger whole bank M&A would be more of a consideration longer term as you look at your <unk>.
Speaker Change: Your franchise versus the near term.
Speaker Change: Opportunity I guess, Andy has done well.
Speaker Change: Has that changed at all or just given the election results and how comprehensively.
Speaker Change: We expect our regulatory supervisory role change across the different regulators and then.
Speaker Change: It does it does it I guess another question would be what would change your view in terms of possibly putting M&A options.
Speaker Change: More in the near term view.
Speaker Change: So John our perspective is the same which is it's just not a priority for US right now the combination of the purchase accounting marks the regulatory approval process, which may improve but isn't clear yet and the current bank valuations all factor into this so.
Speaker Change: While it May return large bank M&A return over the longer term.
Speaker Change: Very focused on our organic growth opportunities because we have a lot of them and that's where we're putting our efforts and priorities right now and going through maybe you can highlight a couple of them because I think that emphasis is because of the opportunities that we have in front of us.
Speaker Change: Very good morning, John.
Speaker Change: I'll add that while the regulatory environment is very attractive for our organic growth opportunities to we saw very significant acceleration of our trust and investment fees and our capital markets fees investor confidence and consumer confidence is very high so the ability.
Speaker Change: To drive.
Speaker Change: Inflection inorganic growth that positive operating leverage is very much a focus and it's across many many parts of our business.
Speaker Change: On the product side.
Speaker Change: Have.
Speaker Change: Our balance sheet that would support a much bigger capital markets business. So we are very focused on that we are introducing new capabilities. There's at quite quite a good good pace and the interconnectivity across our product sets is really deepening the franchise as well. So it's a very good it's a very good.
Speaker Change: <unk> to drive drove positive operating leverage and that is that is our focus right now.
Speaker Change: Okay, great. Thank you mentioned.
Speaker Change: Thanks, John.
Speaker Change: We'll go next to Mike Mayo at Wells Fargo Securities.
Speaker Change: Good morning, Mike.
Speaker Change: <unk>.
Speaker Change: Finally, turning the corner on pilot rock deleverage you said at least 200 basis points I think.
Speaker Change: After.
Speaker Change: So long now having positive operating leverage I think.
People are wondering.
Speaker Change: Yes, it's kind of a show me story I think you might understand that.
Speaker Change: What under what scenario do you think you could have more than the 200 basis points guide. Some other banks are actually guiding higher today and.
Speaker Change: And you're asking a lot of tailwind to the industry. So.
Speaker Change: How high could that go because the stock's down pay for question. This.
Speaker Change: What would be your reaction.
Speaker Change: Mike what we wanted to do is to provide a guy that we have confidence in that we're conservatively given your numbers I'm very confident in our ability to manage expense in this environment and I am very confident in the inflection point on the revenue components. So and that's why we put a 200 basis point plus on that guide. So we'll hit 200 at least.
Speaker Change: But at the extent that the market helps us on the revenue side with the yield curve and the things that John talked about I would expect it to be above that but we wanted to give you a guide and an expectation that we're very comfortable with and that we take into account the different puts and takes that are a little bit out of our control like yield curve.
Speaker Change: And then.
Speaker Change: And more specific question the merchant acquiring yield looked like it contracted 70 basis points year over year in the fourth quarter and the revenues didn't accelerate with the volumes with that.
Speaker Change: <unk> had a surprised is there competitive pressure, what's causing that Kevin.
Speaker Change: 70 basis points contraction in the merchant acquire yield thanks.
Speaker Change: Sure so.
Mike: Mike I think.
Mike: I mentioned, although it was pretty quick when I mentioned that our client base.
While we had strong growth in terms of same store sales and tech led initiatives, which are.
Mike: <unk> has strong margins and it continues to be about a third and it has been growing a third of our total business on the merchant side the growth on the other side of the of our client base has been in higher vol.
Mike: Volume lower margin and that has persisted.
Mike: Throughout the year and that's kind of creating that disconnect that you did that you just mentioned.
Mike: Talked about the expectations that we have here in 2025 is kind of followed because of that.
Mike: I can add some color here, John if I may vivo disappointed in the merchant results for this quarter as well, but the business is really showing two very different characteristics does the part that we are very proud of which is the tech led at about a third of the business now the value proposition to the customer and the client across our franchises.
Mike: Very strong there and we see very nice growth rates there talent can slow cooler two acquisitions, we did.
Mike: Around the retail space in the healthcare space, So that part you see.
Mike:
Mike: Our revenue and.
And sales volumes should show good patents on the other side, we have a very vast group of partners and we just saw growth in a few very large volume low margin businesses and some of that might persist on that side of the business, but that was the.
Mike: That was the quarter here.
Mike: Alright, thank you.
Mike: Thanks, Mike.
Mike: We will take our next question from Matt O'connor and Deutsche Bank.
Matt O'connor: Good morning, I was wondering if you could talk about the trends in commercial products revenue.
Nicely year over year, what was a little bit lower versus kind of the run rate you've seen.
Matt O'connor: The other quarters. This year, just remind us I think there's a decent contributor of capital markets and that and remind us like what the drivers of the underlying businesses are.
Matt O'connor: Sure. So this is a commercial products, Matt is what I heard you say so yes, we had strong growth in commercial products has been a good story for US we've highlighted it and of course at various investor conferences.
Matt O'connor: Obviously at Investor Day, and then in our fourth quarter conference as well, so we've talked quite a bit about it but the growth really came in a lot of different areas. Here. This quarter. It was in client related derivative activity, which are either interest rate swaps or foreign exchange loan syndication was up as well bond underwriting.
Matt O'connor: And we're seeing.
Matt O'connor: New products also kick in so we've talked about some of our other.
S desk syndication desks in commodities and things like that and so that's that's about 20% of our growth. This year was really on the new product side and the verticals interconnectedness, we have with the private credit side of things really help us focusing on that growth and we expect and we've talked about our expectations with that nothing.
Matt O'connor: What really changed we have high expectations for this business.
Matt O'connor: Okay, and then separately on the deposits. The average deposits grew and I know, there's I know, there's some seasonality on the period end.
Matt O'connor: But they were down a little bit this quarter for the third quarter in a row.
Matt O'connor: Maybe I just answered the question that.
Matt O'connor: Too much seasonality to really focus on paradigm, but maybe just address that and I think you did say you expect modest deposit growth though.
Matt O'connor: Anything to add to the narrative.
Speaker Change: Paradigm with lower.
Matt O'connor: Sure Yeah. So.
For us as we've talked about the average balances is a better indicator than ending the ending can really fluctuate we do get.
Matt O'connor: We can get some some pretty meaningful movements at the end of quarters, particularly in the third quarter was very strong from a deposit growth standpoint, so even though we had a pretty big surge of deposits at the end of the fourth quarter.
Matt O'connor: It was compared to <unk>.
Matt O'connor: Really high third quarter. So that's just kind of one example.
In the first quarter part of the reason, we talk about a stable.
Matt O'connor: Net interest income for the first quarter as in the first quarter deposits seasonally decline, particularly in our institutional and wholesale side of things in DDA. As an example, just because if you think about X.
Matt O'connor: <unk>.
Matt O'connor: Our operational accounts that we have there there is a lot of either deployment of investments from our institutional clients or just overall investment from our corporate related clients and so that's kind of a driver of Q1 from a deposit standpoint, but overall you should think about deposits being a modest growth consistent with the industry. Those sorts of things is kind of.
Matt O'connor: How I'd characterize it.
Speaker Change: Okay. Thank you.
Matt O'connor: Okay.
Matt O'connor: And as a reminder, if you would like to ask a question. Please press star one.
Speaker Change: We will go next to David long at Raymond James.
Matt O'connor: Yes.
David Long: Good morning, everyone.
Matt O'connor: Morning.
Speaker Change: Just wanted to stick with the deposit theme here and when I look at your average cost deposit costs for the quarter came down in line with what Im seeing with some of your peers. Just curious what you see in the competition for deposits and pricing and how do you think that plays out throughout 2025.
Speaker Change: Sure. Thanks, David So from a deposit standpoint, and this is again embedded in our in our growth.
No.
Speaker Change: The projections and things like that a modest growth in deposits I do expect it to be kind of equal in terms of either whether it's on the consumer side or on the institutional side.
Speaker Change: If I kind of break those two pieces apart on the consumer side.
Speaker Change: Like things have been.
Speaker Change: It is kind of either.
Speaker Change: It comes and goes in terms of competitive nature, I would say more lately with the rate cuts that have occurred that's loosen things up and so we're seeing a little bit better in terms of pricing.
Speaker Change: Competitively it may not show up immediately this quarter, but over time, we would expect.
Speaker Change: The retail competitiveness to moderate.
Speaker Change: Institutional side that also kind of comes and goes but I would call. It pretty standard at this point I think the one negative or a headwind right now is Q T. That's been.
Speaker Change: No drying up liquidity in that that can create some competitive natures on the institutional side, but all in all.
Speaker Change: We expect to be obviously very competitive out there we have a lot of new great products that are helping us grow grow deposits and we feel very strongly about that and those are kind of the main puts and takes.
Speaker Change: Excellent Thanks, John I appreciate it.
Speaker Change: Yes.
Speaker Change: We will go next to Vivek Jain enter at J P. Morgan.
Speaker Change: Hi.
Speaker Change: Hi, Thanks for taking my question Randy.
Speaker Change: So.
Speaker Change: A strategic question in our payments there has been.
Speaker Change: Discussion about that already.
Speaker Change: And a quick question.
Speaker Change: On previous calls here.
Speaker Change: I heard <unk>, our sponsor <unk> is doing well, but the rest of that new store drag and that probably company is into next year.
Even the business given the pricing pressures.
Speaker Change: Have you considered about whether you should get rid of this business and deploy the capital to other areas, where you are doing a much.
Speaker Change: And a much stronger position getting better returns.
Speaker Change: Why wouldn't you think of that.
Speaker Change: I'll start with that can ask Jean to add on but.
I think in this environment.
Speaker Change: Interconnectedness of banking and payments is as important as ever been and the concept of moving money together with storing money in lending money is all intertwined and to the extent we can offer these things together.
Speaker Change: Terrific technology platform that we have and also have the ability to grow that in a very capital efficient fee forecast way is why we wanted to retain the business and at the interconnectedness of that is.
Speaker Change: As critical as it has been in the last 20 years. So we're very.
Speaker Change: Focused on this business because of that opportunity and <unk> add on.
Speaker Change: Good morning.
Speaker Change: It's a thoughtful question and I'll add to what Andy is saying here first just.
Speaker Change: We are talking about deltas to expectations, but the business has very high returns, it's a very attractive business.
Speaker Change: It is an area where a lot of.
Speaker Change: The competitive set.
Speaker Change: <unk> has been building market share and we are seeing more discipline come into this.
Speaker Change: Industry just.
Speaker Change: Just focus on profitability focus on return on investments rather than just market share gains and if you look long term. It is the one product where we have frequent deep embedded interactions with our clients and it incus decline value proposition and the client retention.
Speaker Change: <unk>.
Speaker Change: In a way that is very hard to do from.
Speaker Change: Some of the banking.
Speaker Change: Some of the more sort of routine routine products that we have deep conviction that money movement needs to be on the center.
Speaker Change: So financial.
Speaker Change: Financial relationship with the clients surrounded by banking capabilities.
Speaker Change: I also just.
Speaker Change: Remind you of the size of just.
Speaker Change: The various parts of our payments business, it's a 25% of our total revenue two thirds of that is our core credit card card issuing business many healthy dirty.
Speaker Change: Steady market shares there are corporate payments and card issuing business is also looking at very healthy pipelines.
Speaker Change: All of this gives us great capacity to stay the delavan business and build it out both for the small business and for the corporate areas. So to answer your question. It's a good question and strategically you want this capability.
Speaker Change: And in the mix the deal clients.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks Vivek.
Speaker Change: Well move next to Bill Kirk Kashi at Wolfe Research.
Good morning Bill.
Speaker Change: Good morning, Thanks for taking my question. Your Tech led merchant processing services service revenue growth seems solid at a time there is still a perception that you are at a disadvantage to some of your Fintech competitors can you take us inside of that 9% growth and discuss the breakdown between new new cars, new additions and versus <unk>.
Customer attrition.
Ben: Good morning, Ben Let me just start here.
So.
Ben: Did the competition on the Tech led comes in two ways. One is the user experience on the front end.
Ben: What we do with our partners here in the Tech led space is provide the reliability the operations, it's not easy to be the backend partner of.
Ben: The unique value proposition in the front. So it's fraud monitoring its transaction one thing it's the reliability of systems. It's all of the networks that go into it. This is a very good partnership as much as it this competition to the other areas. It's a magical there may you obtain goal.
Ben: We do expect that to be.
Ben: Really strong.
Ben: Really strong contributed to the growth rate of this business and as time goes by to take over more and more of the total franchise.
Ben: Your question around sort of the new business versus not so very dynamic space. I mean, we have a vast number of partnerships and their success in the front end can shift that mix a little bit so.
Ben: So it's really the portfolio that we manage to.
Speaker Change: Got it separately following up on your NIM commentary I may have missed this but where did deposit funding costs in the quarter and where would you expect the average cost to grow from here given your rate expectations.
Ben: Sure so from a deposit cost standpoint.
Ben: Maybe I'll speak to it in beta terms, because I think it's just easier to utilize that because.
Ben: Obviously, youre going to see a little bit of impact next quarter, but the fed moves that we saw in the fourth quarter will impact the first quarter.
Ben: So our cumulative beta for the throughout the through the fourth quarter was 38%, we anticipate our beta to be at kind of the mid to high <unk> as we look at our first quarter results and so youll see that decline on the deposit rate.
Ben: As we move forward.
Ben: Got it if I could squeeze in one last one can you discuss how much cash flow and fair value hedge notional is active.
Ben: I guess, how that exposure changes as we progress through the year and any color.
Ben: Versus receive rates for for both.
Ben: Sure. So you know.
Ben: This quarter is actually a really good example of our hedging program at work and why it's working as intended.
Ben: We have pay fixed swaps and we have received fixed swaps the pay fixed swaps are intended to help protect capital.
Ben: When interest rates rise. They did rise we saw 80 basis point upward movement or ACO OCI number did increase but not nearly the magnitude that perhaps others and things of that variety and that helps us manage to that Caf II.
Ben: Capital level that I spoke to obviously with pay fix swaps, that's going to create a little bit of a drag on NII. However, offsetting that was our receive fixed swaps.
Ben: We're attached to either commercial loans or debt and those receive fixed swaps increased our rate relative to where they would've been otherwise and so you can think of those as largely offsetting so from an income standpoint, the hedges are relatively neutral.
Speaker Change: Thank you for taking my questions.
Ben: You bet.
Ben: We will take our final question from Saul Martinez of HSBC.
Saul Martinez: Hey, Hey, good morning, guys.
Speaker Change: I think Vivek asked my question, but.
Speaker Change: Ill, maybe ask it another way I guess I'm struggling to see how you differentiate yourself in the merchant acquiring businesses.
Speaker Change: Yes.
Speaker Change: With the exception of maybe chase.
Speaker Change: Most banks have lost share over the years.
Speaker Change: There is enormous amount of innovation in that space a lot of capital in that space you see.
Speaker Change: A shift in power and software providers and magazine merchant acquirers have lost share over the years.
Speaker Change: I guess.
Speaker Change: Was going to ask you is whether you can make an argument that it's worth more to somebody else than to you and I guess the answer to that question from your answer to the next question is that it does provide value to the entire franchise to the entire business that.
Speaker Change: The answer and I guess, the the adjunct to that question is how do you measure success in Macquarie.
Speaker Change: Are you looking at just volume growth revenue growth or are there other measures.
Speaker Change: How do you measure whether you're whether those businesses.
Speaker Change: <unk> new strategy here.
Speaker Change: This business is all about taking the entire.
Speaker Change: Tighter Frac sands.
Andy: So I'm going to start and then I'll ask <unk> to add on this is Andy.
Speaker Change: Im going to start by reiterating what I said before which is this interconnectedness banker.
Speaker Change: Banking and money movement and payments and we've made investments in categories and verticals that are very focused on.
Speaker Change: Capabilities to provide information and help those businesses run their platform and their business like health care and some of the other areas that we're focused on so whats happened in payments and money movement has become more embedded in the banking component and I think thats, our advantage versus as pure play merchant provider is interlocking those components.
Speaker Change: To help them run their business and we've focused.
Speaker Change: Certain verticals that are I think very important in terms of our overall growth opportunities and in terms of what we're looking for it's all of those things just top line revenue growth, but importantly bottom line profitable revenue growth and the progress we've made in the tech and Tech led.
Speaker Change: The interconnected components that we've talked about in terms of those verticals. We're focused on are all indications that we're headed in the right directions, we're not where we want to be yet, but we're heading the right way what would you add.
Speaker Change: At the power of the distribution franchise, we have 15 million clients and if you look at Standalone players the drink.
Speaker Change: A very high level of innovation as you called it to the to the table.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: The gap is the client franchise and that spurred the partnerships come with some of the.
Speaker Change: Innovation in the industry.
Speaker Change: Sure.
Speaker Change: It's a lot of infrastructure and investment to connect the transaction.
Speaker Change: And the provision of the services.
Beyond the user experience and the innovation in the front and so we see very significant demand for our partnership with us, but the model has to transform in the direction that we are going there we need to be able to provide.
Speaker Change: And connect and have a very easy on boarding experience very easy quick ability to bring merchants on and off and that's all of the investments that we have.
Speaker Change: We have been making so it's the distribution side and it's all of the backend product capabilities that make give us the competitive edge here.
Speaker Change: Okay. That's helpful.
Speaker Change: Yes, just a quick follow up on <unk>.
Speaker Change: Hey, John.
Speaker Change: <unk>.
Speaker Change: I guess, we're closer to the end of the rate cutting cycle ago.
Seemingly every day there is shifting with the forward curve is it.
Speaker Change: But remind us what the through the cycle.
Speaker Change: The data you're expecting I mean.
Speaker Change: Accordingly in Q1.
Speaker Change: I think like.
Speaker Change: Hi, 40, low <unk> is what you get.
Speaker Change: We've got the right.
Speaker Change: Through the cycle beta.
Speaker Change: So also we think about.
Speaker Change: 38 as spot through the cycle as of this quarter, we expect mid to high 40 percents in the first quarter and assuming.
Speaker Change: Others of additional cuts we would we would migrate kind of in a through the cycle to that 50% north of that level is kind of where our expectations are thank you got it okay. Thank you.
Speaker Change: And there are no further questions at this time, Mr. Anderson I will turn the conference back over to you.
Speaker Change: Thanks, Andre Thank you to everyone, who joined our call. This morning. Please contact the Investor Relations Department. If you have any follow up questions. You may now disconnect the call.
Speaker Change: And this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Speaker Change: [music].