Great. Showing 9:00. Next up, very pleased to have U.S. Bancorp with us today. From the company, Andy Cecere, Chairman, President, and CEO. And we also have John Stern, who's been at the company for a while, but became CFO, I think, like, two weeks ago.
Yeah.
John, welcome to the new role.
Thank you.
Andy, maybe the first place to start, and I apologize, but we can just get it out of the way and then kind of maybe build off of that, is, you know, two weeks to go in the quarter, you kind of have quarterly guidance out there, third quarter, full year guidance. You know, maybe kind of start with kind of any updates to that, and, you know, things playing out as expected, better or worse, and-
Sure.
Some puts and takes.
Good morning, Jason. It's great to be here again this year. So let me start with the macro guidance, and then John will talk a little bit about our specific guidance. From a macro standpoint, I think what we're seeing is consistent with what you're hearing from other banks, which is the consumer remains strong. So from a spend level, from a deposit level by strata, from a credit quality standpoint, all a little bit better than pre-COVID levels, but all starting to trend towards normalization. So spend levels are starting to get towards normalization, credit balances are all starting to normalize. So consumer remains strong, but again, starting to migrate towards normalization. If you think about corporate and commercial loan growth, that is a little soft, a little softer than what we experienced in the second quarter.
So, and that has been trending down a bit since last year. If you remember, last year it was very strong, and for the industry, it's coming down a bit, consistent with the economic data. So, if you think about the strong consumer tending towards normalization, coupled with the nice job that the Fed has been doing with regarding inflation, you know, our expectation is the probability of a soft landing gets higher and more probable than it has been. And, second thing is that we project, like the market does, one additional rate increase here in the fourth quarter. So again, big picture, Jason, trending towards normalization, the likelihood of a soft landing, more like, more higher probability, and one additional rate hike.
As it relates to our specific guidance, why don't I ask John to give that?
Sure, good morning, everyone. Good to be here with you all. Thanks, Jason, for having me. You know, let me start by saying, as it relates to guidance that we gave during July during our earnings call for both third quarter and a full year, that our guidance is unchanged from those levels. So let me give you a little bit of color as it relates to that. So, if I think about total revenue for the quarter of third quarter is between $6.9 billion and $7.1 billion. We would expect that expenses will be approximately $4.3 billion for the third quarter, and we would expect net interest income for the third quarter to be between $4.2 billion and $4.4 billion.
What I would say about that is we would expect to be a little below the midpoint of that range for the third quarter. And that will translate into, and the reason for that is we see, as Andy indicated, tepid loan growth that we see as well as some deposit pricing, and that will translate into a 2.80% net interest margin is what we would approximate for the third quarter. And that will be about 10 basis points or so lower than the previous quarter. On a full year basis, we anticipate that, you know, from a net interest income standpoint, we'll be toward the lower end of the range.
On expenses, we will be in line with our expense guidance that we provided for the full year. And then, however, on the other side, what I would say is that we anticipate a better than expected fee income in such areas such as our corporate trust area, mortgage and commercial products and, you know, capital markets type businesses. From a credit standpoint, Andy mentioned normalization, and that, that will be the theme that you'll see from a charge-off perspective. We would continue to see charge-offs normalize. And then from a provision standpoint, you know, if we think about our reserve build, we've been building reserves, and we anticipate continuing to build reserve in the third quarter.
The level of that, though, we would expect to be somewhere in between the first quarter level and the second quarter level of what we built from a reserve standpoint.
So big picture, Jason, PPNR in line for both the third quarter and the full year, and then the specifics, as John indicated. You're studying your data.
Just making sure that it's, it's kind of in line with what we have.
Yeah.
You're good.
All right. Thank you.
Um-
That means a lot, Jason.
But maybe we could just unpack some of that. You know, you talked about NII, you know, a little bit below the midpoint. I guess specifically, I guess first off, on loan growth, you know, there's, I guess, two reasons for potential sluggish in loan growth we heard from others. You know, one is, you know, supply driven, you know, banks pulling back on RWAs, banks, you know, being mindful of the economic environment. The flip side, you know, is the demand. Customers are cautious. Customers are paying a lot more in interest than they did just two years ago. Let me just kind of talk to you in terms of, you know, kind of what you're seeing driving the slowdown and then just maybe kind of expectations looking out.
Yeah, I think it's a little bit of both. John will go into more detail, but I think it's both a function of, certainly, demand is down. People are being cautious. Utilization levels are about flat or down a little bit. So, you know, the higher interest rate, the uncertainty around the economy, all those things, I think, feed into demand, particularly on the corporate and commercial side. Card activity is strong, and card spend continues to be good, and the revolve rate is causing a little bit of higher balances. But on the corporate commercial, I think it's a little bit of function of that. And I think we and all banks are being very mindful of returns... and our RWA optimization, and I think that's also a factor.
Yeah. No, I would agree. I think, particularly on the commercial side, we're seeing, you know, inventories come down, prices come down in some of those areas. So people are starting to figure out how to, how to manage that. And that coupled with higher returns and some of the absolute levels of interest rates that we have at this point, plus more of a lens, as you said, Andy, on returns from a banking standpoint, I think is all contributing factors, really.
And then just on, you know, you mentioned deposits is contributing, as well. So maybe just talk to kind of expectation on the beta mix balances, kind of just more context in terms of what you're seeing there.
Sure. Yeah. So, you know, I mentioned net interest margin down a little bit, given some of the loan and deposit things that we talked about. We would anticipate perhaps a little bit more of that in the fourth quarter, but not nearly as much as what we saw in the third quarter, and particularly bottoming out from that standpoint. We really do see the deposit environment really normalizing or being the competitive nature of the deposit environment really kind of abating from what it was in the first and second quarter. So we definitely see and have confidence that that bottoms out, given some of those particular things. You mentioned deposit beta. I think there was a question.
I think we're still in line with our guidance. We feel like the mid-forties is kind of where our deposit beta lands. You know, we think that the... You know, from a DDA perspective, and we mentioned this on the earnings call, but it's maybe worth mentioning again, but we expect 20% ± a point or two here, in terms of our mix of DDA relative to full deposits. You know, as a reminder, we had $15 billion of deposits that were classified as non-interest-bearing on the retail Union Bank side. That will be moving into that did move into interest-bearing, which is our Bank Smartly product, which is a nominal impact on net interest income and net interest margin.
But that $15 billion moved in May, so some from an optics standpoint, there's some movement there. You know, but you know, overall, those would be kind of the puts and takes with the margin.
Maybe put up the first earnings question that I forgot to put up in the beginning. I'm not going to ask you about this one, but I just want to get this out of the way. I guess just on, maybe the topic of, you know, NII and NIM, just maybe talk to. So it sounds like, you know, 10 basis points of degradation in the third quarter, a little bit less than that, or less than that in, you know, the fourth quarter. Maybe talk to just how you kind of think about, you know, NII and the NIM in an environment where kind of maybe rates stay higher for longer, or maybe an environment where the Fed cuts.
Sure. Yeah. You know, well, as Andy mentioned, we do have one rate hike in November in our forecast. But I would also say that our asset sensitivity is relatively neutral. So whether or not that Fed hike happens or not is not going to be material to result. You know, in terms of, you know, interest rates, if they're higher or continue to pressure higher and go for longer, I would expect, you know, the beta that we talked about to potentially bleed a little bit higher. But then on the other side of that, you have the assets that are going to reprice, loans that would fall off and be recouponed at higher levels. And so, we are naturally positioned for that at this particular point in time.
Similarly, if rates were to fall unexpectedly, obviously, that would be we have the ability to cut deposit rates fairly quickly. And then on the other side, though, you'd have the assets. So we're pretty, we're pretty balanced from an interest rate perspective. I think the important thing I always try to highlight, when we talk about this sort of thing, is just our diversified business mix. We have a lot of different levers that we can pull in different interest rate environments. If you think about our, our corporate trust business, our payments and mortgage business, if rates go lower, for example, you know, these are the sorts of things that are really beneficial to us in different interest rate environments.
Got it. Maybe we'll put up the next ARS question. Just given maybe kind of shift gear to capital, and just maybe start off with, capital's been a lot of-
Yes
... focus for, for U.S. Bank, particularly after the MU deal. You know, on, on the Q2 earnings call, you're talking getting to 8.5%-9% CET1, you know, with AOCI by the end of the year, by end of next year. Just maybe talk about in terms of kind of the drivers to get there, and then just any color in terms of, you know, will you in fact be a Category II bank by the end of next year?
Right. So, Jason, as you, as you know, we ended the second quarter at 9.1%. At that time, we talked about getting to 9.5% by the end of 2023. And then we did the debt-to-equity conversion. They added about 20 basis points. So our expectation right now is to get to about 9.7% by the end of 2023. And then back to end of 2024 on a fully loaded AOCI basis, we still expect to be 8.5%-9%, so that's consistent. And that's a function of both the earnings accretion, which is 25 basis points a quarter. It gets to 25 basis points once we have the full takeouts, which we continue to expect. The second thing is the RWA optimization, and the third component is just normal activity over the time.
So 8.5% - 9% still is our expectation at the end of 2024. That would be the earliest that we would go to Category II. We continue to work with the regulators on our balance sheet in terms of our risk metrics and so forth. And the second thing is the activity around the new Basel III Endgame, which is changing the game a bit in terms of the transition period. So but that's our expectation, that's consistent. John will talk about the impact of the Basel III Endgame, but it is a high single digits for us as we think about it. And I, I'm looking at the chart here, so it's fairly consistent with the expectation of-
There you go.
... 5%-10%. So high single digits is what the impact is for us.
Got it. And then how does it—like, is it, you know, you wake up January 1st of 2024 and says, "By the end of the year, be a Category II Bank?" Or kind of the-
No, we're working with our regulators on an active basis, and I would expect we'll have clearer guidance on that in the next few months.
... Got it.
I would also say, just to be clear, you know, I think we're also being very active, as are all of our peers, in terms of commenting on the Basel III Endgame. 'Cause there are a number of factors with the proposal, and it's going to go through a rulemaking process and comments and so forth. But if you think about the consequences with regard to mortgages in low- and moderate-income communities, credit availability relates to the credit RWA, credit scores, new market tax or energy tax credits, renewable energy tax credits. And there are just a lot of consequences we want to make sure we're commenting on that impact not just the banks, but the customers of the banks, both consumers and businesses.
Right. And then, you know, you mentioned, you know, AOCI burn down by the end of 2024. You know, the rate environment's, I think, kind of been a bit dynamic since kind of people kind of made those comments in July. I think you guys have some hedges in place. Maybe talk to kind of the interplay there.
Yeah. Yeah, sure. So, you know, we continue to put hedges on our fixed-rate portion of the investment portfolio, particularly the AFS book, I should say. And that's just something we've been continuing to do as interest rates fall, we find our spots. I would say on the fixed-rate portion of the AFS book, we have about 25%-30% of that book hedged. And so, really, that has helped us as rates have gone up here a little bit, has muted some of the impact from the AFS standpoint.
You know, I think what's important, though, is we continue to ensure that or maintain that the duration of the book goes down so that by the time we get to a potential Category II, if that does happen, that those securities would pull closer to par, and we would get some benefit out of that relative to where we are today.
Got it. And then, you know, RWA optimization, I think, surprised to the upside, you know, this year in terms of, you know, driving CET1 higher and kind of maybe getting to your numbers quicker than I think some anticipated. Maybe talk to, you know, kind of how much you've done to date, you know, what else could be down the pike on that front? And then, you know, is there or isn't there kind of an impact to kind of earnings by doing so?
Sure. So we, as you know, we implemented about 40 basis points of our RWA optimization in quarter two. We have another 50 basis points or so that'll get us to that 8.5-9 that I talked about by the end of 2024, including AOCI. And those are low to moderate income in terms of impact to earnings, just like the 40 basis points was in the first case. We have more flexibility beyond that, but those are the areas we're focused on right now.
Got it. And then, you know, you mentioned kind of the debt to equity conversions that you did with MUFG, that added 20 basis points.
Yep.
Let me just talk to... I think some people are surprised by it. You know, how did this come about, and just how you, how you think about that?
Yeah, I can speak to that. So maybe just to back up a bit, we had as part of the acquisition, we picked up $6.25 billion or so of tangible book value, and then there's $3.5 billion of excess capital, and that was held at the bank. And that was to be repaid over some period of time of that $3 billion. And so, as MUFG and our and we started to talk about this, you know, they had interest of taking a non-interest-bearing, 'cause of this capital that's held at the bank is non-interest-bearing for them. They had interest in holding non-converting non-interest-bearing into something that's of an earning asset.
From our standpoint, we wanted to accelerate some of our capital actions, and in the meantime, we wanted—it was helpful for us to strengthen our partnership in various areas. So in all cases, it was really a win-win, and that's how we thought about that, in terms of our capital actions, in terms of the partnership with MUFG and things of that variety. The last thing I would say is that there still is $2.5 billion or $2 billion, excuse me, or so of excess capital that's remaining, and that would not be paid until the end of—it's not expected to be paid back until the end of 2027, and that would be—we would expect to pay that with cash.
Got it. And then, you know, just maybe wrap up some of the regulatory stuff. You know, I guess Andy kind of offered some high-level thoughts on Basel III. You know, any other thoughts there? You know, there's LCR proposal, TLAC, long-term debt proposal. You know, just kind of thinking about that, maybe help size us some of the impacts there as well.
Yeah. So the Basel III, as I said, is a high single digits impact to us. As currently constructed, I expect commentary and changes over that for the consequences we talked about. The long-term debt proposal, John, maybe you could-
Yeah. You know, we're largely compliant with the long-term debt proposal as it's constructed today. There may be a billion or two that we have to do over, you know, a three-four-year transition period, plus some nominal buffer that we'll have to determine. But we feel, you know, it's a non-issue. I mean, if you think about our issuance, we tend to issue $8 billion-$10 billion a year. So in terms of, you know, getting in compliance with this rule, it's going to be very seamless to our balance sheet.
And then, you know, this Moody's downgrade kind of received some attention recently. Just maybe any other thoughts in terms of does that impact anything? I know you-
Yeah.
You're still relatively strong rating.
Yeah.
Um-
No, but we, you know, we talk to Moody's all the time, and we'll continue to have conversations with them. I mean, they're asking the same questions that you're asking here today, and we'll go through that with them. And, you know, at the end of the day, you know, it's something where we will talk about our strategies as we're doing with you, but then also, you know, talk about our diversified business model and how that lends in different rate environments, the earnings generation that we get from all those different businesses and our strong risk culture.
Those are really core competencies that we have, and in light of everything that's gone on in the industry, it's one worth discussing with them, and we feel good about those conversations, so.
... Got it. We'll put up the next ARS question while I'll ask you a different question, though. But, you know, with all this in mind, you know, how do we think about the dividends and just capital deployment?
Yeah. From a capital deployment standpoint, our prioritization hasn't changed. Number one is reinvestment in the business, number two is dividend, and number three is buyback. As you know, we halted the buyback program until we get back to the capital levels that we're striving for. I would expect us to have a conversation with our board around a dividend increase in the fourth quarter.
And then, I know you're kind of in capital build mode, but kind of once you kind of get where you need to be, you know, how do you think about share buybacks?
Well, one of the things we have to finalize is our new Basel III Endgame proposal and what those end targets will be. And once we have more clarity around that, we will strive for a capital ratio that's appropriate in this environment. And then, you know, go back to those priorities about reinvestment in the business, dividends, and buybacks in that order.
Right. And then, maybe kind of you touched on credit quality a little bit in your beginning remarks, but maybe just kind of delve deeper into it in terms of what you're seeing, particularly in the C&I and CRE portfolios. Your criticized assets did tick up-
Yeah
more than peers in the second quarter. Maybe just give us more color on that.
Yeah, that criticized asset increase was us being very proactive, like has been our history in terms of CRE, particularly office. We just want to be proactive about that. We think being very diligent is important. So from a credit standpoint, as I said, it's tending towards normalization. We would expect to get to that 50 basis points normalized rate sometime early in 2024. Again, there aren't really any hotspots, just normalization. The area of focus for everyone, as you know, is CRE, particularly office. Our office portfolio is about 2% of loans, about 1% of outstandings. We're reserved is about 8.5% against that portfolio, and it's very idiosyncratic. You know, you can't say it generally because there's medical and there's suburban, but we're really focused on core central city multi-tenant and being very proactive around that.
That was part of what you saw in the second quarter.
Got it. And then I guess any other areas beyond that, that you're, you know, focused on, you know, maybe that you're seeing deterioration beyond normalization?
No, I would say it's not anything that you wouldn't expect as you start to normalize after what we've been through over the past few years from an interest rate standpoint, other than that focus on CRE office.
And then maybe on the fee income side, we could start with payments, kind of something that differentiates U.S. Bank. But just maybe talk about some of the opportunities to grow the business, kind of where you're interesting about things, you know-
Right
What's kind of moving the needle there.
Yeah, one of the benefits, and John mentioned it, is our diversified revenue model. We have a high percentage of our revenue coming from e-revenue. We have a number of different products and services that we offer there. I'll start with payments, which is just under 30% of our total. As a reminder, that's three businesses: retail card issuing, which includes retail credit card and debit card, merchant processing and merchant acquiring, as well as corporate payment systems. We have invested in all those businesses in a couple of ways. Number one is we believe strongly in this concept of an ecosystem, bringing together banking products together with payment products in a comprehensive offering to help businesses run their business, to manage inventories, cash flows, and so forth.
We've made a couple of acquisitions to really strengthen our product offering, talech and Bento, to have this dashboard to help them run their business. So that payments business is really a core differentiator, as you said. We continue to expect that card issuing to be in the mid-single-digit growth, and merchant acquiring a corporate payment system in the high single-digit growth level. So, about 10% plus or minus. So that's a real strength. We have this corporate trust business, which we have a dominant market share. Great business for gathering deposits as well as fees. That is doing very well. We have our commercial products business, debt underwriting, FX, offering the sort of the natural extensions of credit to our corporate and commercial customers. That is doing very well.
Our mortgage business, a lot of investments made there in terms of technology, taking paper out of the equation. We're very focused on retail new, and that is doing well as the gain on sales starts to stabilize. So those businesses are a focus area, and as John mentioned, those businesses are showing strength in this environment.
You know, capital markets is something where you kind of maybe outperform peers, at least from a revenue perspective. It's something you've kind of mentioned that kind of should continue to outperform in the fourth quarter. Just maybe talk to in terms of kind of what your aspirations are there and what's-
Yeah, that's been a great growth story. You know, if you think about, 10 years ago, that was less than $100 million business. And overall, now commercial products is over $1 billion, and it's really a natural extension of the corporate commercial relationships we have, offering, again, debt underwriting, FX, commercial product activity, loan syndication. So that business is going very well, and it's, again, a natural partnership when you think about the lending arrangement and building out the relationship with those corporate and commercial customers.
You know, it's an area where we spent a lot of time on investment and things like that. If you think about the products and capabilities from when Andy talked about it being a $100 million bank to where a $1 million revenue line to where it is today. The capabilities that we broaden our spectrum to the gaps that clients ask for. And they just do a great job in maintaining those clients and growing relationships, and that's a really impactful business for us.
Maybe it's a good time to follow up and kind of ask about the opportunities on the revenue side from just a UB acquisition that converted in May.
Yeah.
But I suspect, you know, just given your product set versus theirs-
... Yeah, it's a good question. And let me just talk about UB, Union Bank, overall. Number one, we completed the conversion in May. That was successful. We're now running this combined institution. Number two, the cost takeout expectation, the synergies is spot on. We still expect $900 million. That'll be fully reflected in the run rate at the end of the fourth quarter this year into 2024, which is very beneficial in terms of managing expenses on a year-over-year basis. And number three is a revenue opportunity, which we haven't modeled or given out numbers on that, but it's-
That's why I asked.
I know it's substantial because, Union Bank had a very loyal and long-standing customer base, but at the same time, they have a more limited product set than we did, limited digital capabilities versus ours. So the ability to fill out relationships is substantial. They had a number of single-service customers. Their number of card customers to deposits customers is about half of what ours is at U.S. Bank. So the ability to sell more, products and services to those customers is substantial, given the product set that we have and the digital capabilities.
Do you care to maybe size the opportunity or?
You know, we continue to have tremendous focus on this across every single business line, and it will add up to a material number.
Bigger than a bread box?
Bigger than a bread box.
You know, you talked about kind of UB merger synergies on, you know, on target.
Yeah.
Just maybe talk to maybe the overall expense picture, kind of what areas are you going from? You know, where do you kind of think the efficiency ratio to get to near term and, you know, just any color in terms of kind of become a Category II Bank, how did that all-
Yeah. So first of all, the Category II designation wouldn't cause any substantial or material increases to expense. Let me start there. Second, it is a good time to have the synergies in place. $900 million of cost synergies, which is important as we get into 2024. The third thing is we've been investing a lot in technology capabilities and in operational efficiency. So I would expect if you add all that up, we'll have very-- we've had positive operating leverage last year, 230 basis points. We expect to continue to see positive operating leverage as we go into 2024, and we're managing expenses very tightly in terms of growth, and I would expect it to be flattish as we head into next year.
Expense is flattish in 2024, and you just signed up for positive operating leverage?
We are striving absolutely for positive operating leverage.
Fair enough. So maybe this time is together, you know, at this Investor Day in 2019, it feels like 10 years ago.
Yeah.
But you, you kind of laid out profitability expectations. I think it was 7.5%-20% ROTCE, low 50s efficiency ratio. A lot has changed since then, with capital rules of Silicon Valley, UB, et cetera. I guess, any kind of, any updated thoughts in terms of what this company could achieve?
Yeah. So you're right, a lot has changed. The Basel III Endgame, the capital levels, deposit pricing are all things that are different than they were when we put out those numbers. But on the flip side, we passed the peak on investments. We've made a number of digital investments that improved our efficiency and our effectiveness, and importantly, we increased our scale substantially and added a lot more core deposits with a lot of revenue opportunity in terms of the Union Bank customer base. So, given all that, we continue to expect, as I said, positive operating leverage, industry-leading returns, and, you know, once we have more clarity on the Basel III Endgame and exactly what those capital numbers will be, we'll, we'll update those numbers. But I would expect us to continue to be industry-leading.
Fair enough. It's a good—maybe a good spot for me to pull up and open it to the audience for questions. We've got a good turnout. Let me put up the next ARS question while people think of what to ask. But, you know, which would have the most impact on improving USB's valuation? We touched on these, but let's see where the audience wants us to go. So well, capital, the overriding answer, and I-
Not surprisingly, and it is, we've made great progress on it. We are, very focused on it as an organization, and I'm confident we'll get to where we need to get.
Question from the audience. I guess, you know, there was an article recently just in terms of banks and kind of liquidity management, and maybe the regulators not, or want more from the banks around that in terms of, it seems like, reporting and levels and just... You know, how do you kind of think about that impacting results and-
Yeah, I'll start, and then John will add, since he was treasurer for a number of years. First of all, I would say liquidity management is a strength of U.S. Bancorp. We've articulated that we want in excess of $300 billion of available liquidity. We were very proactive in establishing lines on all the tools available to us for utilizing the balance sheet for liquidity. So it has been a strength, continues to be a strength, and one of the areas that we've always been focused on. Maybe, John, you can talk.
Yeah, you know, as I think an important thing to remember is that, as we're talking about Category III, Category II, and all those sorts of things, we actually were a part of. Before the tailoring occurred, we were already doing liquidity reporting. We were doing daily liquidity reporting with the Fed. We've been doing a number of different things from a technology standpoint. So all that mechanism is in place, and we have all that built out. So it, there's really nothing material for us to do. And in terms of the actual liquidity, as Andy mentioned, we're right there. And if whatever changes occur, we anticipate there'll be some change. We don't know what that is on LCR.
We'll be able to manage that just because of the, the strength of the balance sheet.
And then I guess, you know, as you enter kind of the 2024 budget process, you gave us, I think, good clarity on the expense side of it. You know, I think a lot of people kind of focused on how NII and NIM, you know, play, play out, you know, in terms, just terms of managing the balance sheet. I know you kind of talked to it earlier, but, you know, I guess any updated thoughts in terms of how you, you know, or I guess kind of maybe when you think NIM could drop, you know, some banks kind of saying late this year, some banks early next year, some banks late next year?
Well, I think, I think John mentioned that we expect NIM to bottom in the fourth quarter of this year. You know, I think if you just step back, Jason, the industry pressures around deposits have certainly abated. If you just think about the last 90 days, I think overall, for all of us, there's more stability. For us, we would say expect to have, on average, a little growth in deposits. Certainly, and when you look at the AT, more stable in terms of the outcomes. And I think all of us are also focused on the pricing of deposits as well. So I think that stability is certainly the case for U.S. Bank and the industry overall. I talked a little bit about loan growth, that is on the corporate commercial side, a little softer.
That I would expect at some point will start to turn as the economy starts to have more certainty. So, we expect the bottoming on NIM in the fourth quarter, and then exactly where it ends up is a little bit of function of rates and yield curve and so forth, but that's what we expect.
Any other questions? I see a question in the back. I think.
Thank you. My interpretation is Basel III Endgame is putting more capital on whole loan mortgages versus securities. Would you agree with that? And then what's the strategy to manage around that? Like, securitize quicker and hold securities or reduce the business or... Thank you.
Yeah. So it does have an impact on mortgages that are put on the balance sheet. For us, it's not hugely material, because the quality of the mortgages that we put on the balance sheet are of such that it's basically neutral from an RWA standpoint. However, I will say that the impacts on higher loan-to-value mortgages will have an impact on the communities, the low and moderate-income communities, that I think is going to be certainly part of our comment letter and many comment letters, because we have a number of special programs. They're not huge, they're not material, but they're impactful to those communities, and those are the areas that we're commenting on and focused on. And the other one I mentioned is the card side. So, unutilized credit lines will now get an RWA calculation of 10%.
So the natural tendency for the industry will be to maybe lower the credit availability, which is also impactful to those individuals, as well as impactful to the credit score. So those are some of the areas that we'll comment on in our Basel response.
You know, another, another area, since we're, we're on that topic, is renewable energy, is another area of topic, that we'll comment on. It's going from the equity investment related to renewable energies, from 100% to 400%, which is hugely impactful, we think counters to some of the things that, administratively, the U.S. is trying to accomplish. So, you know, all those things, the surcharge, just in general, relative to the credit book and the thing is that Andy talked about in terms of credit cards, it all adds up, and it does impact clients, quite a bit, and those are the things that we'll be discussing.
Yeah, I think the impact is as... The focus of our comment letter, and many banks, I'm certain, will be not so much the impact to the bank, which is going to result in some increase in capital, which is manageable, but the increase and the impacts to customers and communities and small businesses, that's where we're going to focus.
In those targeted areas.
Right.
Yeah.
Andy, John, I think you make really good points in terms of some of these maybe unintended consequences of the Basel proposal, and appreciate your comments. I mean, is there any signs of, maybe willingness among regulators to take these into account and actually adapt with the final rule?
Well, I think the regulators have extended the comment period and asked for comments, and I'm hopeful that they'll take into account some of the comments that we and others make.
I think by law, they have to read them. They have to read them. I think by signaling that they have an extended comment period, signals that they know there's a, there's a lot here to it, and they want to be thoughtful about it, and I think they'll, they'll take in comments or encouraging comments, and we'll provide that.
Hope so. Any other questions from the audience? I guess you know, U.S. Bank over the years has done a good job in kind of acquiring smaller companies, particularly on the fee income side, payments front. You know, kind of given you're in capital build mode, is that kind of something that's off the table, or if something of interest came along, you could consider it?
We would consider it, Jason. None of them are material from a capital standpoint. They've been small but important transactions, talech, Bento, which build capabilities principally around the payment space. We've also done some in asset management, which are not hugely material to capital as well, but build out capabilities. So PFM is a great example, where we've taken a core competencies. We extend it to municipalities, and it's a win-win again for the customers and for U.S. Bank. So those types of deals I would expect us to continue to look at.
Great. Any final questions for Andy or John? Going once. If not, please join me in thanking them for their time today.
Thanks, Jason.
Great. Thank you.