Okay, so we will move. We're going to move on to the next presentation. We're delighted to have U.S. Bancorp with us, today. Andy, obviously, you've been a very, regular attendee of this conference. He's been at U.S. Bancorp, I believe, 38 years?
Correct.
CEO for seven now, and he's joined by John Stern, who's CFO. John and Andy, thank you so much for joining us.
Thank you.
I think they're going to give a short presentation, and then join us for a fireside chat.
Right.
Andy, over to you.
Thank you, Richard. John and I will just tag team on a short overview of the bank, and then we'll be happy to take any questions. Let me start by mentioning that we may be referring to some forward-looking statements, so I refer you to page two for some of the risks and uncertainties. Let me start with the big picture. I know a lot of you know U.S. Bank, but just from an overview standpoint, as you think about the customers we serve, we're in about just over half the United States, where we have branches and ATMs and serve core retail customers. But we're a national business in terms of mortgage, credit card, commercial banking, wealth management, institutional services, serving customers across the United States and all states.
And then we have three global businesses: merchant acquiring, Elavon merchant acquiring, Global Fund Services, and Global Corporate Trust. Importantly, on the next page, are the businesses that we serve these customers through. Like most banks, we have a traditional retail banking franchise and commercial banking clients and so forth. But importantly, we have a number of unique businesses, payments, institutional services, wealth management, corporate trust fund services, that are important for a number of reasons. First of all, they're very capital efficient. Second of all, they're very fee-oriented. About 40% of our revenue stream derives from fees, which helps in volatile times. It creates stability of earnings through different economic scenarios, which is what we're seeing right now. And finally, it's an opportunity to deepen client relationships.
So we have a number of products and services that can benefit clients in terms of helping them achieve their financial objectives through these other businesses that are sometimes unique to banking, like we have at U.S. Bank. If we think about 2023, it has been an eventful year at U.S. Bank on a couple of fronts. First of all, probably our most important accomplishment was a successful merger, integration, and conversion of Union Bank. We went through the integration Memorial Day weekend, wrapped it up in June, successfully converted over a million consumer customers, 200,000 small businesses, and did it in a very smooth fashion. We also are achieving our full cost takeout objectives.
$900 million is what we articulated, $900 million is what we're doing, and we'll have that fully in the run rate by the end of this month and reflected in 2024 full year. Third of all, this is a great customer base. It is 1 million customers, I mentioned, 200,000 small businesses that were very loyal, long-standing customers, but they were also often single-service or minimal service customers. So our opportunity to sell more, to provide more services to these customers because of our digital capabilities, our product set, those businesses that I talked about that are unique to banking, is substantial.
Accelerated capital build, that John will talk more about that, but, the one consequence of the deal is we went from 9.7 to 8.4, and we were right back at 9.7 in the third quarter with 130 basis points of accretion over 3 quarters. And then finally, you may be aware that we just recently received full regulatory release of our Category II commitments, which was a component of the deal, which puts us on a level playing field in terms of our competitors in a transition period. I talked about the Union Bank transaction, I talked about the cost savings, I talked about the objectives. But I will tell you, it is an example of the benefit of scale and investment in a platform, and technology, and risk management that I think shows through in this transaction.
Simply stated, we acquired $65 billion of core deposits in an environment that core deposits are critically important. After cost takeouts, our plan assumption was $1.5 billion of PPNR, pre-provision net revenue, and we're exceeding that on both fronts. So it's, and we're doing that at a marginal efficiency ratio of about 40%. So it's a great example of the value of scale. The importance of scale makes us a player in California, and we couldn't be more pleased with the transaction. I'm going to ask John to talk a little bit more about the capital components, and then we'll take questions.
Great. Thank you. Good morning, everyone. If I go to the next slide. Andy touched on this a bit, but I think it's worth mentioning again. Our capital had a significant appreciation this year. Again, 9.7 is where we were pre-acquisition, down to 8.4%, and then back up 130 basis points into those three quarters, back up to 9.7. So as we think about capital going forward, we will continue to accrete capital as we move forward, but it will be generating through our normal course of earnings, and powered by the Union Bank acquisition, powered by the revenue synergies that we've planned to achieve and all those sorts of things. And that will be something that we'll be focused on.
Less focused, but still looking at it, is our balance sheet optimization transactions. We will be, of course, looking at those sorts of things, but only on an opportunistic basis, and of course, doing it in the fashion of that of as low or neutral from a, from an earnings perspective, impact. Andy touched on this a bit, but just to go into a little bit more color on Category II commitment relief. As you know, a couple of months ago, the Federal Reserve provided us with commitment relief to go into Category II. That's both beneficial, both from a timing perspective as well as flexibility. We now are on the same level playing field as this, as peer banks that are our size, and we'll use this opportunity really to leverage our balance sheet. We have the ability to grow.
There's no asset cap. There is, there's the ability to utilize our balance sheet to the fullest and to make sure that we're utilizing it in a way that provides, industry-leading returns, which we always strive, to do. So the three things that we're focused on, as we head into next year, are of course, on this slide, which is, talking about, our ability to grow, our ability to, develop and maintain digital capabilities, product capabilities, and how do we leverage that into our, not only our U.S. Bank core or legacy clients, but also our Union client base, so that we gain those revenue synergies that we're looking for. The second thing is on the expense management side.
Andy talked about the full run rate of $900 million that we will achieve at the end of this year. That'll be fully into our run rate, and that is something that will give us a leg up as we manage expenses going forward. The third thing is really a focus on industry-leading returns. We're going to be focusing on capital efficiency growth, being good stewards of our balance sheet, and making sure that utilizes us in a fashion to allow us to be growing our industry-leading return profile. While I'm here, I thought I would just share a couple of notes on guidance for the fourth quarter. We provided guidance during the third quarter, of course, during our earnings call, and the punchline is there's no change to our guidance for the fourth quarter.
So what that means is we'll be, on an adjusted basis, between $6.8 billion and $6.9 billion of revenue. On the expense standpoint, we'll be approximately $4.2 billion on an adjusted basis, and that is without, of course, the FDIC assessment, which we can talk about a little later. And then on a net interest income standpoint, we will be between $4.1 billion and $4.2 billion. The one thing I would mention there is that loan growth is a little weaker as expected and is consistent with the industry than what we would have expected back when we were talking about it in October.
The last thing I would mention is that from an expense standpoint, consistent with what we've talked about, our adjusted core expenses in 2024 will be flat relative to 2023. So those are the comments, Richard, that I think-
Great.
We would want to talk about here. We're happy to take questions.
Great. Thank you. So thanks very much for that. So Andy, let's start off with, you know, a question just about the economy. It does feel as if the range of outcomes has narrowed relative to where we were 6 months ago. But, you know, how are you thinking about the path for interest rates from here? How are you thinking about inflation, and how has your thought process around recession risk evolved over the course of the last 6-12 months?
Yeah, Richard, I think you're right. I think, if I were going to use two words, it would be, strong but moderating. So, the consumer still is strong, still spending. You saw, Christmas spend thus far over the holiday weekend, for us, was about 5% on card. Stronger on e-commerce, so near 11%. They still have excess savings, but they're coming down. So all the spend activity, the savings activity, are still above pre-pandemic levels, but moderating towards pre-pandemic levels. And, I would say that was our expectation is that will continue. On the loan front, as John mentioned, I think corporations and businesses are being very prudent right now. They're cognizant of the increase in rates and the impacts on their business model.
You know, there's still some uncertainty about the economy, and I think that is creating a little bit of sort of limited loan growth for us and for the industry, and I think that's an outcome. As we think about 2024, I think it is more likely than not that it'll be a soft landing. That's our base case projection. We have 2 rate declines in the second half, late in the second half of the year of 2024, but we're expecting a soft landing and a normalization of credit, a normalization pre-pandemic levels of the spend levels and everything we talked about.
I do think the second half of 2024 will be sort of an inflection point for the economy and the banking, and I think the Fed has, you know, done a nice job in terms of lowering growth expectations, and while inflation is still high, it's moderating. So I go back to my two points, strong or high, but moderating back towards normal levels, and that's our expectation.
So you talked a little bit about spending trends. Can you just expand on those a little bit? Obviously, your payment business gives you a really good insight.
Sure. Yeah, we have good, good visibility in that. We have a big merchant acquiring business, we have a big card issuing business, and we have our corporate payments business. As I mentioned, consumer spend is strong. The holiday weekend was up about 5%. In most categories, retail was strong. The one area that I think is less strong is corporate T&E. Corporate T&E is moderating for sure. Part of that is ticket prices are coming down on planes, and I think that is causing some lower spend activity. And then the one area that I think is probably not as strong is freight. Freight was gangbusters a year ago, and that's certainly moderating and probably shrinking a little bit in terms of that spend.
And then if you dig down just a little bit deeper, are there any noticeable differences by customer segments, you know, in terms of income or profile?
Yeah, certainly there is more spend from a non-discretionary standpoint than discretionary. The large ticket items are lower. The overall spend level is the same, but people are paying more for fuel, for food, for basic services, and I think you're seeing that shift. We've seen that shift for the last 12 months, and that continues.
Okay. So let's talk about your priorities for next year. Obviously, when you were here last year, I think the Union Bank transaction literally had closed.
We just clo-
Literally just closed.
We just closed the transaction. We were planning for the conversion, which was successful.
You know, so, so obviously that was your priority.
That was.
You said that was ... It's gone very well.
Yeah
... very successfully. So now that's out of the way, perhaps you can talk a little bit about the two or three most important strategic priorities you have, you know, heading into 2024 and 2025?
Right. So, first and foremost, and John mentioned this, is this concept of capital efficient growth. We have a number of terrific business lines, a great diversity of opportunity, and our focus is on really working across the bank to leverage those business lines for capital efficient growth. So growing the customer base and growing the depth of relationship with each of our customers, and that is across every single business line. That's number one. Number two is prudent expense management. It is a time for all banks, I think, to watch closely. We are very comfortable with our flat expense base year-over-year. Certainly, we're benefited by the Union Bank transaction, but importantly, it allows us to continue to invest...
We're in this place because we've invested in technology, which allows for growth and efficiency and expense management, and we can achieve flat expenses while not cutting back significantly on the investment side, which I think is important. The third category is what John mentioned as well, is really leveraging that customer base that we acquired with Union Bank. We fully implemented the cost takeouts, and that is good. But with the opportunities really growing that customer depth of relationship because of the great sense of expanded product set that we have in the digital capabilities. You know, we had a 100% increase in digital engagement from what they had within the first couple of weeks.
Wow!
It's just an example of, you know, taking this opportunity, being a big player in California, taking 1 million customers, and leveraging the opportunity.
So, let's talk a little bit more about the Union Bank acquisition and the integration. You know, maybe you can just reflect on what stood out to you in the process of the integration. You know, what went better than you thought? Where did you see challenges that perhaps you weren't anticipating? And then, look, now you've obviously had more time with the customers of Union Bank. How should we think through some of the potential revenue synergies as you get them more integrated into your platform?
Yeah, I think that the integration and the conversion went terrifically. Again, if I look back to when we signed the deal to where we are today, it's exceeded expectations across just about every category. So it's been a terrific deal, and it's a great example of the value of scale and investment and leveraging that scale and investment. So we knew we were acquiring 1 million customers. They're more loyal than I expected. They're more long-standing than I expected. There's also greater opportunity for more card revenue, more corporate payments revenue, more treasury management revenue than I expected, so that's a great opportunity. I think the other thing that was important is it was a simple lift and shift. There wasn't decisions about this system or that system or this business model or that business model.
We knew we were going to take that entire customer base and put them on our platform, which we've invested heavily in, and I think that simplified the integration. I think from a surprise standpoint, I will tell you, you know, we've all done acquisitions and integrations. I think if I look back 60+ in my career, this was the first one that was of size during the digital age. The rapid nature of the sign-up for individuals to make sure they're on the app and have all the digital capabilities wasn't weeks or days, it was hours. You can think about that, and that sort of makes sense.
If you think about how important that is to your daily life, you understand why they were really at the front of the line on that Tuesday morning to make sure they were signed up. So the speed of the integration was probably the learning.
Okay. All right, so let's talk a little bit about trends in the payment business. Obviously, a very important differentiator for you. I know you've made a few investments over the last years, you know, TravelBank, talech, I think are two. You know, maybe you could talk a little bit about those acquisitions, how those have panned out for you, because I think Union Bank's obviously dominated the news flow. And how should we think about the opportunity set for you to do more transactions like that going forward? And what would you be looking to achieve out of acquisitions within the payment business from here?
Right. So I think we're all recognizing the nature of embedded payments in the banking relationship and the importance of linking those two things together. It used to be that payments was over here and banking was over here, but if you think about integrating them, it helps businesses run their business. It helps them manage payables and receivables and cash flow and understanding lending needs and/or depository needs or investment needs. So linking those things together is critically important. So our initiatives around payments have been on two fronts. Number one is embedding it in the software that companies use to run their business. Tech- led, as we call it, which is now 30% of our sales activity. And the second is weaving together banking and payments in a dashboard setting to help them run their businesses..
So it's a huge initiative for our business banking group between payments and retail and business banking, our corporate and commercial, all those aspects. So simply stated, linking banking to payments to help companies run their business. Part of that embedded concept and really deepens relationships and strengthens the retention.
Okay. So let's talk about some of the trends that you're both seeing, but also as we head into next year, and you talked a little bit about this, but let's start off with loan growth. Obviously, that's slowed down over the course of the year, both consumer and corporate, I guess, ex-card. You know, maybe you can unpack a little bit what you're seeing in the fourth quarter. Talk about expectations as we head into next year. Are you expecting a bifurcation between consumer loan demand and corporate loan demand? I think you did mention that corporates are being more cautious-
Yeah
... I think, was the word you used.
I'll start, and then ask John to add in.
Sure.
You know, I think simply stated, the H.8 data is relatively flat, and we're consistent with that relatively flat, maybe down a little bit. The one area of growth is card because of that spend activity that I talked about. Utilization levels in commercial are relatively flat. CRE is not growing at all, and commercial and corporate are being very careful about growth, which leads to flat utilization. John, what would you add?
Yeah, maybe just to piggyback up what you just said, Andy. I mean, when we talk to our customers... And actually, one data point is, you know, we do a survey of CFOs, and last year at this time, when they took that survey, it was all about: How do I grow revenues? How do I grow, in terms of expansion of the business? This year it flipped in terms of expense management, and so what we're seeing is more how do customers saying: How do I cut interest expense? How do I cut in some areas? And that's a reflection of the pay downs that we're seeing and things of the like on the commercial side. I think, cards is right. We're seeing good growth there, constructive spend, as which is consistent with what Andy has said.
I think autos is the other one where we are active in terms of placing rate, but it's not meeting our hurdles, and so we are, while we're out in the market, we're just not at the same level of others since it's not hitting our return hurdles, and so we're probably less active in that space as well. So those are kind of the puts and takes.
Okay, that's helpful. So let's talk about deposits. Deposit outflows... suddenly seem to have slowed. Maybe you can talk a bit, a little bit about what you've seen in terms of deposit trends this quarter. Has anything surprised you, you know, given that obviously QT has continued, but it hasn't really impacted the banking system? A lot of it does seem to have come out of the RRP. Do you think that trend is going to continue into next year? And maybe you can touch a little bit on the shift between non-interest bearing and interest bearing, and whether or not you've seen much over the course of this quarter.
Yeah. Again, I'll start and ask John to add in. I think if I were going to use a word, it's stable. The H.8 data is stable to down a little bit, consistent with QT. As the Fed balance sheet shrinks, banks' balance sheets will shrink, and that's just math. But it's moderate, and it's stable. Those flows that we saw late first quarter, early second quarter, I think for the industry and for us, certainly have stabilized. We have a great core deposit base, about 50/50 insured, uninsured, but importantly, a lot of the uninsured are operational. We have a lot of these businesses, fund services, corporate trust, treasury management, did generate a lot of deposits, and so they're relatively stable.
I think for us and for all banks, you know, we're very focused on that right balance of loans and deposits, and as loan growth starts to, you know, neutralize, you'll have deposit growth following, and that's what we're seeing as well. John, what would you add?
Yeah, I would lean on that comment in terms of diversification of our businesses. You know, we have a great business on the commercial side. We service companies in all geographies, in all parts of in all different types of industries, and so we have great visibility into what is going on. And I think the word stabilization is really something in terms of that we're seeing in terms of both, you know, the NIB mix shift as well as rate, and all that sort of thing is really starting to stabilize here as we look down the future.
I mean, just as a quick follow-up on deposits, I mean, how would you characterize the competitive environment for deposits today relative to where we were, say, six months ago? I mean, have you seen a shift?
It's less intense than it was six months ago-
Yeah
... for sure.
For sure.
And it ebbs and flows, but I think for all of us, I—you know, it's interesting, nine of me and my peer group have been up here, and we're all saying the same thing on deposits. It's stable. It's still higher cost than it was two years ago, for sure, but we're seeing relative stability, and it gets back to that core customer and embedded in your business model and a core, you know, processing around deposits. But you know, on the retail side, I think we're all being prudent around this balance between rate and volume.
Okay.
Yeah, I think everyone is trying to find their the sweet spot for each institution. You know, on the commercial side, it's very steady. You understand exactly what those clients are looking for. You know where the rate is. It's fairly transparent and things like that. On the retail side, you have different banks doing different specials and different money markets promotions and things like that. So it varies from institution to institution, but broadly speaking, compared to six months ago, it's much different and more stable.
Okay. And just in terms of deposit betas, I think you talked about a mid-forties terminal deposit beta. I think since you made that comment, rate structures have moved all over the place.
Sure. Yeah.
Is that still your expectation?
Yeah
- you know, as we, as we think about next year?
Yeah. You know, we were basically at mid-forties in the third quarter. I think what we've seen is a little bit of a creep since that, but I would, I would offer maybe two points in terms of beta and rate paid and all that sort of thing. First of all, I'd say yes, rates have gone up and down and all that sort of thing on the long end. On the short end, though, the Fed has effectively stopped, I mean, or that's what the market is saying anyway. And so July being the last rate hike that the Fed had, our models and our experience would tell us kind of that five to six months after is kind of when things just kind of level off, and that's exactly what we're seeing.
And so that gives us comfort on that. The second thing I would say is that I know there's a lot of focus on betas, and is it going to be 46 or 47 or, you know, whatever. You know, sometimes what we do is we look at it holistically from an interest-bearing liability standpoint. And so we had a lot of growth of deposits in the third quarter. Part of that reason was because we saw an opportunity to even though the rate might have been a little bit higher and accelerate our beta a little bit quicker than what we would have otherwise anticipated, what we were doing is also bringing had the ability to bring down short-term deposit borrowings, which had a much higher rate.
So it allowed us to really manage the interest-bearing liability component, which is kind of the other piece that we look at.
So it optimizes overall rate paid.
Yeah. That's right.
Yeah.
Just a quick follow-up. I mean, look, again, the uncertainty around rates makes it very difficult to forecast, but does your thought process around terminal deposit betas change if we don't get rate cuts next year? And maybe you can just talk a little bit about how you would expect deposit betas to really behave if we do get into, I guess, a more rapid Fed rate reduction environment.
Sure. So if we're higher for longer, let's say we just stay at a higher rate, it's possible that betas would—could creep up, but there's a lot of puts and takes now. We're at a part of the cycle where, you know, like, let's take the retail example. You have people that were early adopters on CD rates and really going into that. Sometimes those folks renew or they put it back in the money market, which is a lower rate, so that actually helps. There might be other people that are going the other way, and so you get that, you're at that point of rotation that is kind of neutralized, if you will. Same thing on the corporate side, and actually that happens a lot faster.
So I think, you know, there might be a, a wiggle up, a wiggle down, you know, in terms of rate if you're higher for longer. But then let's take on the other side. I think if rates -- if there are cuts, then of course, then many of our deposits are what we would call managed rate or the ability to change those rates as needed. And I think that gives us a lot of flexibility, particularly as you think about the other side of our balance sheet, the asset side, which is about 50/50 in terms of mix of floating versus fixed rate.
Okay. So look, we've talked about a lot of the different moving pieces around NII, so maybe we can just talk about NII and expectations fading into next year. Obviously, you know, a number of your peers have talked about NII troughing at some point in the middle of next year and starting to grow, largely driven by the asset side of the balance sheet. You know, I appreciate you're probably going to give, you know, more guidance in January, but just broadly, how are you thinking about the trajectory of NII from here?
Yeah. Maybe I'll take it in two pieces, I think, NII, NIM. Maybe NIM, just to start. I think we have great confidence that net interest margin will, will trough or bottom out in the fourth quarter, given all the trends that we were just talking about and things of that variety. I think that's very supportive for net interest income to, to trough as well in the fourth quarter. The one wild card is just what the industry is experiencing, and what we've talked about is just on the loan demand side of things.
Okay. The other piece I just want to talk about, which does feed through into NII, is just your ALM strategy.
Mm-hmm.
You know, and I think more and more investors, I think, are asking this question around, like, what is your ALM strategy? What's your ALM philosophy, and how has that evolved, just given how rapidly rates have gone up, as well as some of the potential regulatory changes around AOCI, maybe interest rate risk, risk testing, maybe around how HTM securities get treated from an LCR perspective? So maybe you could talk a little bit about that and talk about how you're thinking about protecting against rising or falling interest rates as we head into next year.
Yeah. Well, maybe I'll first start by saying, you know, as, as we sit here today, where rates go is anyone's guess. I, you know, we were just talking to some of my team and, and, you know, the, the chances of a 100 base point move in three months is, like, 3%. Well, we basically had an up and down in three months over that period of time, and that's a really rare feat. So in terms of, you know, that's the backdrop, making sure we are as neutral as possible from an interest rate risk sensitivity and, and NII sensitivity is really important for us. And so, how we manage that, of course, is through the investment portfolio. It's also through the loan book and, and, and all those sorts of things.
Maybe just to give you some color, you know, obviously, on the investment portfolio side, we are wanting to protect against higher rates because that will ultimately impact capital levels at some point. We've taken some opportunity here with rates a little bit lower, is to add additional hedges onto that. That would add some more asset sensitivity to us. On the other side, to keep us neutral, we'll do some receive-fixed swaps at various points, and that will help us on... That hedges our commercial loans. In the instance of a rapid decline in rates, then you have that protection on the loan side of things.
Holistically, we, we look at all that when we are looking at hedges, when we're looking at the mix of, of loans that are occurring, and how our deposit profile is, is shifting. Our goal right now is, given the nature of the volatility that we are seeing in that space, we want to be as neutral as possible.
Okay. That's really, really helpful. So let's talk about operating leverage. I think you did mention that the industry is more focused on expenses now, and obviously, you've come out and talked about flat core expenses year-over-year. Maybe you can unpack a little bit what is happening below the surface in terms of continued investment spend versus efficiency saves. Maybe talk a little bit about how some of the inflationary pressures have changed over the course of the year. A number of your peers have talked about much lower levels of staff turnover and therefore the need for higher severance, so maybe you could comment on that as well.
Sure. So we, we have articulated an expectation and we will achieve flat expense on a year-over-year basis. Part of that is the benefit of the Union Bank transaction, but we also have operational efficiencies across a number of units, a number of initiatives across the company. We've centralized operations, and we're trying to leverage technology and centralization to take more expense out of the operations functions across the bank, sort of holistically. We're also trying to optimize our space, and the office space, and we'll have opportunities there. So there are a number of initiatives that we have that will continue to whittle down what I would say, core operating expense, while at the same time, continuing the investment. Now, importantly, we're not spending more on investment.
We're at the part of the curve that we're sort of flat, so, the same levels. And importantly, we migrated a number of years ago to spending more on offense than defense, on revenue-generating activities, which have served us well. So we're going to manage to that flat expense. We're going to optimize operations and real estate and office space. We're going to continue the investment, and that all adds up to about a flat expense base on a year-over-year basis. We always strive for positive operating leverage. I think as we look at 2024, certainly the first half of 2024 is going to be more challenging because of the comps on a year-over-year in net interest income, which what's happened with deposit costs versus a year ago.
However, I think as we get into the second half of 2024, and we talk about the inflection point for us and for the industry in terms of rates and this moderation, I think that that will be something we're focused on.
Just longer term, you know, as you've had time to digest the benefits of the Union Bank acquisition, as well as obviously some of the events of earlier this year, you know, how are you thinking about the longer term efficiency ratio and the trajectory of that as that-
So our objective is, again, to, to have, over time, positive operating leverage and drive our efficiency ratio down into the fifties and low fifties. That continues to be the objective. And when we did a deal like Union Bank, which is at the margin of the 40% efficiency ratio, that helps us achieve that goal. It's an interesting dynamic right now. Inflation's high, expenses are high, investment requirements are high. Revenues, in some cases, are challenged because of the reasons we talked about. So having the scale in this environment is really important. Another benefit of a deal like Union Bank, you put on, you know, $3 billion of revenue at a much lower cost. It helps build that platform in terms of ongoing leverage.
So let's talk about capital. This has obviously been a real focus for you.
Yes.
First, well done on the capital generation this year. 130 basis points in a relatively short period of time is really quite impressive, and as you said, you're back to where you were prior to the deal. So maybe you can just update us on any thoughts around capital targets from here, obviously in the light of new rules? Which are coming, as well as obviously the relief that you talked about from Category II. You know, and just any thoughts, just broadly around capital returns, buybacks, attractiveness of dividends, versus perhaps, you know, using some of the capital to maybe buy pools of assets, you know, given that obviously some smaller banks are undergoing both capital and funding strain, and there are others that are up for sale?
Yeah, I'll start and then John will add in. So first of all, it was a team effort across the bank, a treasury group working together with the business line leaders, and they did a great job. It was a focus of ours, and when we focus on something, we get it done, and we got it done, so we're back at 9.7. We accrete capital from earnings 20-25 basis points a quarter. That'll be the principal area of focus as we continue to think about additional capital levels. There are new rules. There's new Basel III Endgame, which is yet to be finalized and defined. There's new potential CCAR stress testing rules, and until we get that final rule set, we won't set a capital target. Once we do, we will, but we'll continue to accrete.
Dividends continue to be important, and that is an area of focus, but I don't think we'll be in the buyback game until we get clarity of the rules.
I think you nailed it.
Anything in terms of asset acquisition opportunities, is that something that you think the pace or pipeline of which could change as we look into 2025?
You know, I think our opportunity is to, again, focus on serving our clients and extending and expanding relationships with the clients that we have and gaining new clients, so that would be the area of focus for us.
Okay. So let's talk about credit. I know you are a very consistent underwriter over the cycle, but are there any lending categories that you're either particularly focused on? Are you tightening, underwriting standards in any key areas? And are there areas that you think the market's just mispricing risk from your perspective?
You know, I think, to your point, we're consistent underwriters through the cycle and all those sorts of things. I think, but we have... You know, there is risk out there, and so we have turned dials up to the extent that you can in certain areas, but it's nominal. It's areas that you would expect and those are the sorts of things that we're looking to do. In terms of the latter question that you had, you know, autos is, again, I talked about it already, but, you know, in terms of profile, that's just something that we're, you know, it's just not a place where the returns are meeting where we would like to be.
So, I'd add, I agree with John's perspective, and I'd add two points. Two areas of focus for us, I think, for the industry. So number one is card. We have a prime and super prime card book. I think there's levels of weakness at the lower ends of the strata-
Mm-hmm.
which we don't play a lot in, but as we see some of the stress out there, I think that's an area to pay attention to. And the second is commercial real estate, particularly office. That represents about 1% of our commitments, 2% of outstandings. We're reserved at 10%. It'll be lumpy, but it's manageable, certainly for us. But those are two areas of focus.
Just on commercial real estate, obviously, the focus has been office. I think you're at a-
Yeah
10% reserve now?
10%, yeah.
Maybe you can just update us on anything you've seen in terms of office delinquencies?
You know,
But also, key question: Are you seeing anything outside of office and commercial real estate?
So let me start with the commercial real estate office. The simple answer, it's very idiosyncratic. You know, you can have three office buildings, an A in a suburb, medical tenant doing great. You can have a B or C in a downtown business district. Those are not doing as well. So you really have to peel the onion and manage it group by group, segment by segment, and property by property, which is exactly what we're doing. And it's gonna be lumpy, particularly for B and C in central business district multi-tenants, and that's the area of focus. That's a small component of ours, but that's the area I think will have the most stress. The other area that I think a lot of us are talking about, or you're getting questions on, is multifamily.
I would say multifamily will have some stress, but not nearly the level of stress as office, for a number of reasons. Remember, a lot of these multifamily structures were started a couple of years ago when rents were here. Rents have gone up a fair bit since then, and even if they don't go up more or come down a little bit, they're still gonna be above the underwriting that occurred there. So expenses are higher, but the rents are still strong. So multifamily is an area that we're looking at, but it's not the same intensity as CRE office.
Okay, so we're almost out of time.
Yeah.
Let me ask you one last question-
Sure.
Which is, you know, when you spend time with investors, what do you think is the most misunderstood component of the USB story from an equity investment standpoint? What, what, what do you think is the biggest disconnect?
You know, I think there was a tremendous focus on capital, and if I look back six months or a year, that was an area of focus for investors overall. I think we've crossed that line. We've gone over that hurdle. We've done exactly what we said we were gonna do, and we're now on a level playing field in the Cat II, so that's important as well. I think our great opportunity is leveraging those unique business lines that we have for capital-efficient growth. We are different than a lot of our peers in what businesses we have to offer to the clients we serve, and our ability to do that in a capital-efficient, high-return, high-margin business is tremendous, and I think that's the story that we want to make sure we continue to tell.
Okay, great. Well, guys, thank you so much for coming on-
Thank you
... and see you again, hopefully next year.
All right. See you.