Moving right along. I'm very pleased to have U.S. Bancorp with us from the company, Gunjan Kedia, CEO. Became CEO in April of this year, so not that long ago. John Stern, Chief Financial Officer, thank you for being with us. We'll put up the first ARS question that we've been asking all the companies. Gunjan, maybe start with you. You know, five months on the job, certainly as CEO. Maybe just start off by catching us up on what you've been up to since mid-April. Key lessons learned so far in your new role?
It's been a privilege to step into the role of the CEO of a wonderful company, and thank you for having us. I think we have passed over the fire alarm, a good sign. Jason, as I stepped into my role five months back now, we had come off of two years of quite intense focus, first on the Union Bank integration and then on building the capital back up again. This time last year, we had built on that and articulated financial targets for the medium term. That was the context in which I had stepped into my role, and I articulated three key priorities to achieve our medium-term financial targets, and that was expense stabilization, organic growth, and payments transformation.
Your question on what I've been up to for the last five months has really been putting in place a very talented leadership team, not just at my level but a level below, and rewiring the organization for more urgent execution. That's sort of been my focus for five months. I'll tell you, as I have spent an enormous amount of time listening to all our stakeholders, I am very encouraged by how well our brand and our culture resonates with our clients. Our thesis that we have enormous opportunities to deepen these client relationships by interconnecting our products is very strong and real. I've also spent a lot of time with our investors, and there we have some work to do to just consistently deliver.
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I think we're safe because if the hotel was burning, we'd be being rushed out.
Good. I guess as a follow-up to that, you talked about these three strategic priorities for the near term. Maybe you can just update us on those and the kind of the progress you've made.
Yeah. The first one is expenses, and we are really in very strong shape there. We've now reported seven straight quarters of stable expenses, and that has allowed us, Jason, to both deliver our positive operating leverage targets and invest into organic growth. We have runway with expenses. That program is executing very well, so we're in very, very strong shape there. The second priority was organic growth. Our fee growth trends are strengthening quarter by quarter, so we are very pleased there. What's very important to us is how the mix has evolved over time. We are really a fee-heavy franchise.
We were at about 42% last quarter, and it's very balanced across these three pillars: payments, which has been a historical overweight on fees, our trust in investments and capital market-related fees, which we are really doubling down on growing, and then consumer fees, which remain strong, but we don't have as much dependence on them because they're more volatile and have some regulatory pressures. The fee growth story is coming along very, very nicely. Last quarter, we took some substantial actions to reposition our balance sheet, so that has set us up for much better NII growth. Organic growth feels well underway as well. The third priority is payments transformation. We're very differentiated. Our payments franchise is quite unique and quite difficult to replicate either through acquisition or organic growth elsewhere. We are focused on transformative strategies there.
We have two leaders for two parts of the business, and they are executing to that agenda. We feel very good. We measure our success on those three priorities by our medium-term targets, and quarter after quarter, the progress we are making. As you saw last quarter, we're just really, really delivering strong progress there.
Got it. Maybe put up the next ARS question. I guess as a follow-up to what you just said, you mentioned organic growth and expense management, both strategic priorities. You mentioned seven straight quarters of stable expenses, which I guess on one hand is good. On the other hand, I don't know, any kind of impact on revenue growth from kind of focusing sort of expenses? Just how do you balance the two?
Yeah. We're not at a point when we need to balance the two because the expense stabilization is not a matter of trade-offs right now for us. It's very much real productivity. Jason, you've been following us for a long time. You know we have spent an extraordinary amount of investment dollars for the last five or six years in building out a wide array of digital capabilities. That gives you a lot of opportunities to drive real productivity. Most of these capabilities are being adopted. The operating processes around them are being designed to drive productivity. You add to it some of the new tools available, like AI, like transformative. I thought he was going to come on.
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If any of you have a card in the garage and you need to run right out, we will fully understand and not take it personally. The expense question, let me keep plowing on here. It is very real, and I don't think you need to worry at all about the trade-offs. In fact, we are generating enough expense savings that not only are we delivering sort of a stable trajectory, we are investing a fair amount, and you'll see that show up in various business lines as well.
I guess one of the things that we learned in Ambassador Day was spending about $2.5 billion a year on investments. Have we kind of reached a tipping point there? Where is most of these investments going? Is it more offensive to drive growth, more defensive? How should we think about that?
Yeah. Just to piggyback off of what Gunjan just said, the tech investments are a very important story for us in terms of our spend levels. That level you cited, $2.5 billion, is our annual run rate that we spend. The sweet spot for us in a couple of different paths, Jason, because on one hand, it's two-thirds offense, one-third defense, to use the words you used, offensively to create products, enhancements, and things of that variety, defensively to have system maintenance and the like. The other part of it is that cost is embedded in our run rate. Part of the reason that we have had this seven quarters of flattish expense and working on an eighth is that we have these opportunities to invest in the business and get that productivity that Gunjan mentioned. We're really focused on a number of different areas. We're focused on simple architecture.
How do we utilize the cloud to help our mainframe and hollowing out the core and all those sorts of things? The second thing is about product development and making sure we have all the right digital apps and capabilities available to us. The third that is really a differentiator for us is the reusability. We think the reusability of technology is a very important concept. We use it a lot in our businesses, such as Elan, such as our co-brand, our partnerships with State Farm, with Ed Jones, those sorts of things. A long way of saying this is the long-term investments we're making in technology is helping that productivity, and it's a meaningful player in how we're gaining positive operating leverage going forward.
Can I add one other point, Jason, to it? There was a time five or six years back when we really needed to focus on the digital capabilities and that $2.5 billion of capital expense was very important. I also want to point out we invest a lot of operating expense into growing our franchise. Just to build off of what has already been built, you will see us investing more in sales, marketing, building brand, building distribution presence, being more front-footed with partnerships. There are lots and lots of ways of investing in growth on top of the $2.5 billion, which was very specifically focused on an agenda of catching up and surpassing really the quality of the digital products and capabilities we had.
I guess maybe just talk to payments. It's like a quarter of the revenue, so clearly a differentiator versus other regional banks. We haven't seen consistent year-over-year growth that we'd expect from some of those businesses. Maybe just update us in terms of your payments transformation progress and what we'd expect to see there.
I'll start. Let me start with our sort of strategic commitment to the payments, which is very strong. We think of it in two ways. One, it's a standalone, very attractive product set in a growth business for us, very high returns, fee-oriented. It's also the first set of products that today's young customer uses to interact with the financial services system. If you think about how our kids, they don't start with a checking account necessarily. Years before that, they've started using some kind of a payments mechanism, a P2P vehicle, or a credit card. We have this view that in the fullness of time, as you're trying to evolve your client franchise to a Gen Z or a different type of audience, the payments products will become the more real anchor point of loyalty, longevity, more frequent connection with the bank.
Our philosophy is payments need to both be embedded in every other product set we have as a way of interacting day-to-day with our clients and be a business unit that delivers very good financial returns. Deep commitment to the franchise. It is two very separate things. I'll start with merchant because I have discovered that most people think of merchant when they're thinking of payments. That's about 6% to 7% of our revenue base, strategically very important to a small business franchise. The heart of the American economy is the small business, a very important segment for us. There, the transformative strategies are about narrowing our focus from what used to be a broad-based global acquiring-only horizontal business to a more software-led business that creates a lot more value, so less commodity. We're focused on five verticals.
The reason for the focus is that these software capabilities are very unique to the needs of the end customer. You have to really think about their operating models and embed your payments products into their front office. You don't want to be dilutive. These are five very large sectors of the economy. That focus is creating some very meaningful reacceleration of the business. More than a third of that business now is the software-led, and the growth rates there tend to be 5 to 10 times the rest of the acquiring-only business. The margins, the pricing holds up. The last thing I'll say about merchant is I have heard from the investors some amount of misconceptions about the business. It is not an unprofitable business. It's not a loss leader. We actually run it for a very high margin and very attractive set of margins.
Perhaps that is the trade-off with the volume growth that most people think about. The second thing is that business is one of the core beneficiaries of the build-out of the digital capabilities. We intend to continue investing in the business, but it's in the run rate now. It's neither a disproportionate user of profit margin or investment. Very sustainable franchise. It really anchors many, many parts of our banking franchise, and we're deeply committed to that business. That's sort of merchant. On the other side, we have the larger of the two businesses, which is a card issuing business. This is credit cards for small businesses, U.S. Bank, and Elan, which is our white-label platform for 1,200 small banks. Let me just start with Elan. Elan's digital technology and product was materially upgraded and rolled out December of last year.
The user experience has skyrocketed from some very modest numbers to a very world-class experience. We have new leadership in place. We have built out that team. We expect that to really start to perform at much, much higher rates than the past. That's one strategy. The bigger strategy is just the U.S. Bank branded cards. Historically, our product set was designed to drive loan growth because it was a balance sheet play. It's a very attractive set of products for revolvers. Our loan growth there has been very attractive, at par or better than the industry. What we are doing now with this transformation is augmenting that with a new set of products that is equally attractive to transactors. Now we are competing not at the highest level of affluence and wealth, but really at the young affluent and connecting our banking products with our credit card products.
This is a suite of products called Smartly. As that rolls out, and these pipelines, we are seeing the increase in active accounts and the revenue follows, you know, four or five quarters after that. That build-up, and that's the transformation to go from a revolver-heavy mindset to a revolver and transactor-heavy. Very good progress there, very differentiating franchise. You'll see some real acceleration of that business over time.
I guess maybe as an adjunct to that, stablecoin has been coming up throughout the conference. Do you think this could be a disruptor to the overall payment ecosystem? Just how you think about using them? I'd just love to get your perspective, given your kind of role in the payment space.
I always start by asking where the client need is because it's a very fundamental way to think of prioritizing investments and focus. I will tell you, Jason, I'm hard-pressed to find one single client who's saying, "I just really need stablecoin from a bank right now." The demand is not present and real with consumers. Where there's interesting conversations is global corporates with cross-border payments. Most of the use cases are anchored around that. Most very large companies actually have very efficient cross-border payment systems because they are not feeling the big cost of cross-border payments. It really has become, in our minds, a new payment rail, one that we expect to participate in. We are expecting to pilot some limited edition stablecoin transactions yet this year. We are doing both a pilot U.S. Bancorp stablecoin and also a sort of a partner-led.
There's quite a lot of capability available in the market to be able to do that quickly so that we are ready as and when the market develops. The underlying protocols of what the payment rail is going to look like is a collaborative effort in banking along with our industry partners. In many ways, it could be a more efficient disruptor of the institutional cross-border payments type of business, which is a very small footprint for us today, perhaps an opportunity for us going forward. What we really don't see yet is a path either from a market structure or adoption with everyday retail payments, especially in the U.S., which is sort of our bread and butter. All I can say is it's quite interesting. It's a lot of conversation around it.
We are very front-footed in learning, in experimenting, and putting pilots out, but yet not seeing fully the economic models and how they might evolve.
Got it. We're at the halfway point, so I'm obligated to ask. Two weeks left to go in the quarter. John, I guess this is you.
Yeah.
You may provide us an update on kind of business loan growth trends. You know, what are you hearing from customers regarding the operating environment?
Sure. When we look across the board, there's just been a lot of activity, renewed activity, and it is very helpful from a loan growth perspective. We've seen, in particular, on the C&I front, M&A is picking up. Pipelines are strong. Small business loans are growing. Utilization rate is hanging in there. All the things are pointing to strength in the C&I categories. I would also say that payment trends continue to be strong. There's a lot of payment activity, both on the consumer as well as on the business side of the equation. What I would say there is that the payment trends, particularly in the consumer, are helping loan growth there as well. Those are the positives. There are some components such as commercial real estate and auto loans that continue to drift a little lower.
All in, our loan growth should be in that industry HA data range. We are seeing that growth, which is positive. The other thing I would say is we are watching the employment situation. We're watching the labor markets. We do acknowledge a softness, but importantly, the unemployment rate itself is favorable. There's no concern from a credit standpoint as a result of it. The economy is resilient. Our clients are resilient, and we're excited to see them pull through here as we look through the third quarter.
Compared to April, you know, right after the tariff discussion started, the mood has shifted, Jason, to sort of a sense that our clients can get their arms around what is happening. Some of the extreme caution that we saw in the April-May timeframe has given way to sort of more front-footedness with clients, so optimism there.
I guess maybe before we delve further into the drivers, you guys give that earnings guidance slide in your deck. It's kind of a bunch of 2025 and 325 topics. Does it all remain intact? You talked about revenue growth for the year growing at the lower end of up 3% to 5%. Is that still the right way to think about it? Any updates you want to provide?
Sure. There's no change to our guidance for the third quarter or for the full year, but maybe just to give some color to the third quarter, we gave a range of net interest income of $4.1 billion to $4.2 billion. We expect to be at the high end of that range given a number of different variables I can get into. The fees as well as expenses are coming in favorable as well and as expected for us. That all leads to very meaningful positive operating leverage for us in the third quarter. On the full year, as you mentioned, no change to that on the revenue guide, the 3% to 5% still intact and on the lower end, as you mentioned.
Got it. All right, because if I guess if 3Q and AI fees and expenses are all doing a little bit better than expected, any Trump administration can really come up with a solid plan for USMCA moving forward because I think it's far and on probably one of the best trade arrangements globally. You know, again, I'm really encouraged by the meetings that we've had with the McCarthy government or recently with the Scheinbaum government administration. I think there's a willingness to work bilaterally and trilaterally. I think as someone who's had the opportunity to work in each one of these markets, I think it's a huge opportunity for us to be a powerhouse as a trading block. Scotiabank's so uniquely positioned because we're the only bank that operates Mexico, the U.S., and Canada.
To be able to, it's a great opportunity for us to be able to leverage that platform, especially for our corporate and commercial clients that want to have that multilateral trade arrangements across geographies.
You know, speaking of Scotiabank's North American corridor strategy, it's been about a year since the investment in KeyCorp. One of the things we talked a lot about is partnerships with KeyCorp. Can we talk about how, from your perspective as Chief Risk Officer, aligning kind of risk visions, culture, and strategies of that partnership?
I think Key is a great bank. I was involved in the due diligence when we were looking at partnering with KeyCorp, and I was very impressed with how they think about risk. In fact, the Chief Risk Officer was up visiting us in Toronto a few weeks ago. He and I had a wonderful discussion. We had a bit of a roundtable with his direct reports and my direct reports, just talking about the economic outlook and the regulatory outlook. There is a lot of great thinking. One of the things I loved about Key when we were first talking with them is just the cultural fit between us and KeyCorp. Certainly from a risk perspective, there is very similar thinking about how to take risk and where we want to take risk.
I think Key is a tremendous business, and I think we're really lucky to have that partnership with them.
Great. Before we open up to the audience, are there any other areas that you'd like to mention or talk about?
Again, I think I go back to some of my earlier comments about the Canadian bank. I really think that the retail business there, there's a couple of tremendous assets that we have to be able to exploit. I mentioned Scene+ and certainly from a risk perspective, we're very much getting geared up to support credit card growth, small business, and mid-market commercial. We think that getting the basics right is important. That business really focuses on the proper credit landscape, the proper credit lens, really working with the bankers to be able to grow that in a really profitable and healthy way. That's going to be a large part of my and my team's focus as we look forward into 2026.
Great. Let's open up. Any questions in the audience? Very quiet.