On behalf of all my colleagues at RBC, I'd like to welcome everybody to our annual Financial Institutions Conference here in New York. To kick off our first fireside chat, we have U.S. Bancorp, which many of you know is the fifth-largest bank in the United States, with over $660 billion in assets. It has over 2,000 branches-
That were already on our books before August 2022, and you rep- 19.
With us, we have on my far left John Stern, who's the CFO of U.S. Bancorp. He became the CFO in June of last year. Prior to that, he's been with the company since 2000. To my immediate left is Gunjan Kedia? I always mispronounce your name.
Kaida.
Kedia, I apologize. She brings almost 30 years of financial services experience. She joined the bank in 2016, and she's Vice Chair of the Wealth, Corporate, Commercial, and Institutional Banking businesses at U.S. Bancorp. With that introduction, maybe John, we could start off with you with some questions. Can you share with us what's your current view of the macro environment, and can you update us on any trends in business and credit from your customers, and what are you hearing from them about their operating environment?
Sure, sure. Well, thank you for that, and good morning, everybody. Hope everyone is doing well as we kick off things. You know, Gerard, we think about the economy as doing quite healthy at this point. Inflation is moderating, spend levels are robust, and our base case... Well, of course, there are risks out there. Base case is that we are in for a soft landing. And so if I think about the different type of clients that we serve on the consumer side, you know, people are employed, people have wages that are growing. The payments component, their spend levels remain constructive. Balance sheets are strong.
If I look at the on the business side of things, there's a little bit more hesitancy, especially in terms of loans, a little bit more softer, and that's just a function of things like inflation, things like interest rates are causing a little bit of, just shyness around wanting to expand their expense base. And so those are the things that we're, we're seeing. On the credit side, things are normalizing, back to pre-pandemic levels, as we would've expected, and just overall, I feel that our bank is really well-positioned for this environment. You know, we just closed our Union Bank transaction. We have cost and revenue synergies associated with that.
In terms of building client and deeper relations, we've been growing client accounts, and we've been growing our capital up 150 basis points over the last year. And so we're very much focused on capital-efficient growth at this stage and making sure we retain our, and maintain our industry-leading Return on Tangible Common Equity, which you just cited.
Yep. Maybe we could follow up, John, with a question about we've got a few weeks left in the quarter. Can you give us any updates on your first quarter 2024 guidance? Obviously, you gave us that guidance in-
Yeah
... your fourth quarter earnings call. Are things playing out as expected, and any update for the full year?
Sure. So, importantly, there's no change to our guidance for first quarter or for the full year. Can give a little bit of color here. First of all, net interest income for the first quarter will be between $4.0 billion and $4.1 billion. Fee revenue continues to be... You know, we look at payments, as I mentioned. Payment levels remain constructive. We'll have a little bit of seasonality in the payment side, as we tend to do with the first quarter. But in terms of capital markets, trust and investment management fees, we've had strong markets, and we've really been building on deep relations, and Gunjan will talk, I'm sure, about that.
In terms of one thing that you should know on other revenue, we'll have a little bit less revenue in the other revenue category in 2024 versus 2023, and there's a couple reasons for that. One, tax credit syndication levels will be a bit lower, and end-of-term gains on auto will be a little bit lower as well. That's just a business we've been a little bit less in over the last year or two, and used car prices are a little bit lower. So you can think about the run rate being between $125 million and $150 million per quarter during 2024. Otherwise, full year guidance that we provided, there's no change to that either.
Net interest income at $16.6 billion to up slightly, fee revenue being up mid-single digits, and expenses being flat on a year-over-year basis.
Very good. Gunjan, maybe we could move to you as head of the... became the head of the two of U.S. Bancorp's biggest businesses. When you look at the Wealth, Corporate, Commercial, and Institutional Banking area, can you remind us the evolution of those businesses, and what do you see as the key strategic priorities as you go forward?
Wonderful, and good morning, Gerard.
Good morning.
Let me add my thanks for having us here. Looking forward to this conversation. So Gerard, I think you know our bank is about 161 years old, and many of the institutional businesses and the wealth clients do indeed sort of date back 100+ years. However, our institutional product sets outside of core banking are relatively new, and that's an important point.
Around the turn of the century, we started buying properties that were not core banking. You know, we bought Piper Jaffray. That became our investment capabilities. We did 20+ acquisition to build out our Corporate Trust business, and we built some business organically, like capital markets. So in summer last year, we were wanting to bring together these deep, deep-rooted client relationships that we have nurtured through our bank for a long time....
with these new product capabilities that are really growing into the size of the client franchise and to make the experience more seamless for the clients, and hence this wealth and institutional franchise together came together in last summer. So our priorities really are making sure that we are very disciplined about introducing our very unique and differentiated product capabilities to all our banking clients and serving them in a deeper and broader way.
Going a little deeper in that, what are the business segments and industry verticals and product offerings, and what do you see as your key competitive advantages? What differentiates you from your peers?
Yeah, thank you for asking us. So just as context to remind you, WCIB, which I know is not a name that rolls off your tongue, is about half the deposits and loans of the bank and 38% of the revenue. So it's a large, large part of the bank. We have three types of businesses, in total, nine separate businesses that we report externally as well. So the three are core banking businesses.
It's a commercial bank, a corporate bank, and a commercial real estate business. The second very new set of capabilities are transaction processing business. Very attractive fee-based businesses. It's our Treasury Management, it's our corporate trust, and it's our Global Fund Services. And, you know, there we have crossed 10 trillion in assets under administration-
Very focused on the fixed income side, but growing very nicely for us, and then also our wealth management and investment capabilities we put there. So that's sort of the franchise. Collectively, you asked. And, you know, we've been growing at about 10%, so if you go back several years, we would have been much less than 38% of the bank. And as I said, the institutional side is sort of growing into our own size of the franchise. So really, if you think of sort of what we are trying to do with all of these businesses together, a very simple way to describe it is we are truly strengthening our product capabilities.
So you'll see us introduce sort of not a brand-new business, but more capabilities within each of these sort of 9 product areas. And then we are expanding our franchise, especially to those parts of the country that have a lot of people and business growth. So think of the smile at the bottom of the country. So California has become very significant for us after Union Bank.
We went from number 10 to number 5. We have just wonderful institutional event relationships there. And now and we did Charlotte organically a few years back, so it's sort of the in-between that we are filling out. So you'll just see us in a very sort of systematic way, growing out the client franchise and deepening it through our product, new product capabilities.
You touched on one product area, corporate trust, which has been around forever. Obviously, you have a leading position in this area.
Yeah.
Can you kind of touch on some of the growth opportunities? Because we don't think of corporate trust as, you know, something that grows that much. And then who are your main competitors in corporate trust?
So, you know, corporate trust is a little bit of an esoteric product. It was actually introduced in the California Gold Rush because you require, you were required to have a trustee for the expeditions. Even today, you're required to have a corporate trustee when you issue a bond or do a securitization. So, there is very meaningful fundamental growth built in because globally, the bond markets are deepening and securitizations are becoming a strategy people use. It's a scale business, Gerard. It's kind of a complex business. We have 3,000, John ran that business-
Yeah
Until last year. We have 3,000 people. They're paralegals, they're data analysts. You need to know how to do sort of waterfall calculations. So we have to operate document walls that are temperature and moisture controlled. So, it's not easy to run those businesses at a subscale. So the last couple of decades, we found a lot of regional banks exited that business, and we consolidated much of that volume.
More recently, we have seen many banks get out of it, so we have non-bank competitors. So we have a very distinct ability to be very good on the payments and the liquidity solution side, which are very important, and we have scale on the technology and the operating side, so that's sort of very important. So it's truly sets us apart as a very differentiated business.
I'll also add two other points, that we grow the business because we have this mega scale institutional franchise out of a lending capability, and they introduce us many times because we are, you know, talking to treasurers and CFOs on both sides. So the distribution advantage is very sizable, and the balance sheet advantage and product advantage is very sizable. So we expect that we, you know, continue to, and we have number one or number two market shares in almost every segment that we play in. The long answer, but it's a complex business and a very special business for us.
And who do you run into as your competitors in that business since you have this scale?
So it's a global set of competitors. Most clients sort of think of their securitizations sort of in a global, global way. So here we run into sort of one or two big banks. The trust banks, yeah, are in it. Some non-banks who bought some of the bank franchises. But I would say it's a pretty tight market for large players and then a long tail of smaller, more specialized players.
Got it.
Yeah.
Sticking with the fee revenues, one of the differentiating factors for you as U.S. Bancorp is your fee businesses, particularly payments. And John, maybe we could talk a little bit how, an update on the payments business, and also how business, banking, and payments, and that whole ecosystem, how they are integrated, and what you guys are doing to grow that business.
Sure. Well, thank you. I, you know, we're very blessed to have a, a bank that has fee revenue and spread revenue, nice mix of that. On the fee side of things, we have the traditional fees, like mortgage banking, for example, would be one. Gunjan laid out a number of different fee categories within her WMIS business line. And on the payment side, we have three unique business lines.
We have the credit and debit card component, which really has three sleeves to it. It's really the cards that we issue for, on behalf of our customer. We have the Elan brand, which really provides white label for financial institutions, typically smaller banks or credit unions, and then co-branded partnerships that we have with them, with many different clients.
Then you have our Corporate Payment Systems unit, and they serve many corporations and government, a lot of Gunjan's clients. We provide T&E cards and all sorts of other payment capabilities for them. In addition to that, we have fleet and freight, so those are other very big sets of business for us there. And then we have the merchant acquiring business, which is unique to us, but it provides secure payment services for our clients across a whole host of different payment streams and capabilities that we have.
And so you put that all together, along with all the banking products that Gunjan has under her, as well as our business banking, and that's the payment ecosystem, Gerard, that we talk so much about, is how do we get banking clients that we have introduced to our payment capabilities or payment client or vice versa, right? And so these are the, we've been making a number of investments over and making sure we have integrated software and things of that variety. We use tech-led initiatives to try to integrate with different providers to really grow and enhance the relationship.
Not unlike corporate trust or other investment services, where we've made investments and mergers and things like that, we've done things like Talech and Bento and other properties like this that we've integrated with our offerings. And that is really the power of providing all that integrated software to help businesses run themselves better. And so, from a growth standpoint, we do continue to expect mid-single digits from our card business line and high single digits from a merchant and our Corporate Payment Systems side.
Yeah. Gunjan, coming back to you about the businesses that you manage, how much of the business is coming outside of your physical footprint in terms of, both, you know, on the wealth side, the commercial institutional banking side?
Thank you for asking. You know, if you look at the nine-ish businesses we have, about seven of them are kind of effortlessly national and even international in some ways because there isn't sort of a geography lens to things like fund services.
The two businesses that have deep gravity in the areas that we have traditional branch networks are commercial banking and our wealth business, and our expansion plans are very focused on those two businesses, so just to put that. You know, today, what we find is that there's a lot of growth, and in some cases, like two or three times our traditional markets coming from these, you know, Sun Belt and low-tax sort of markets, and there's six states we have identified, and that's where our expansion focus is.
Now, we, through our digital program, you know, we've been very, very, disciplined about building out our digital capabilities. The product set is very deliverable in a national way. The issue really is our brand presence and our brand sort of awareness in these areas. So we have three or four businesses.
It's the mortgage business, it's the commercial business, it's small business, and the wealth businesses that are going to market in a capital-light way, and by that I mean we're not building out dozens and dozens of branches necessarily. We often have branch licenses, which you can have, but in a capital-light way, multi-product client centers into these. So that's sort of our expansion, and it's a meaningfully higher growth rate outside of the core footprint.
Got it. And speaking of expansion, obviously, private credit's been growing very rapidly in the United States as a competitor to the banking industry. You recently announced launching a new division to provide financial services to the private capital firms, global asset managers. How do you manage between servicing those private capital companies, but at the same time competing against them on the corporate loan side?
This topic has been sort of in people's interest levels quite a lot, and one of our motivations for creating a unique division was just the dynamics. It's a strategically important and complex business. So Gerard, I would say we are not strangers to competing and collaborating within banking. I mean, that you see very much here.
What we were finding within our unique product mix is we compete less and collaborate more. So one is our credit box is not that overlapping with the private credit market, and we don't have an investment bank either a middle market, and we generally tend to not sort of like the leveraged finance area on our own balance sheet. However, we have these big processing capabilities. Like, many of these private capital shops are clients of ours in our fund services business.
We administer their funds. They're clients of ours on the corporate trust side, and it was really them telling us that we needed to bring all of this together into a more coherent. They love the fact that we are sort of on the lower edge of the competitive dynamics with them, but we have this mega-size balance sheet because they are--they have big aspirations.
These are becoming very sizable entities at this point, and hence the partnership. So we expect that on the margin, there will be deals that we'd rather do on a balance sheet, and they did it, and there's some dynamics in the commercial market. But it's more of a real growth collaboration play. That sector has shown sustainable multi-decade growth, so our focus was that this is a phenomenon that is real. It's not sort of...
It's multi-pronged, and we are very, very uniquely suited with our differentiated product mix to be a very relevant partner for them. That's our, that's our aspiration there.
Very good. And moving from strategy to more everyday questions here, John. Can you guys share with us how you're positioned today, the balance sheet, on the possibility of rate cuts, you know, later this year? It seems like we might actually be in a higher-for-longer environment than what the forward curve was saying as recently as two and a half months ago. How are you guys positioned, and what's your view on rate cuts?
Sure. Maybe to answer your last question first, our in-house forecast right now is for 4 interest rate cuts throughout the year, all pretty much in the back half of the year. You know, Gerard, we try to work really hard to be as neutral as possible, especially in this environment. You know, going into the year, we really didn't know, will there be rate cuts? Will there be 6 or 7 rate cuts? So we want to make sure we were positioned, and fortunately, our balance sheet is very much naturally positioned to be fairly neutral. So if I think about loans, the loan mix, we are roughly 50/50 in terms of floating rate versus fixed rate.
On the deposit side, we have about 50/50 in terms of consumer deposits, and then 50% institutional, wholesale, and all that sort of thing, which is very well diversified across a number of different streams represented by many of Gunjan's businesses that she's talking about today. So that helps us, and then we'll utilize hedges, and that can go against our corporate loans, or it can go against our investment portfolio to kind of round out the edges, so to speak. But, you know, we try to maintain neutrality as much as possible, so that depending on how many rate cuts or, if any, we maintain kind of in that same range that we've been talking about.
Yeah. And another very topical point is credit quality, particularly in commercial real estate. USB has always separated itself from many of its peers due to the strength of your underwriting and credit quality. Can you share with us some of the trends you're seeing in different segments of commercial real estate in particular, whether it's office or-
Sure
... retail, et cetera, and also on the consumer side, where you've got a nice credit card portfolio, what you're seeing there as well?
Yeah, so I think importantly, it's important to note that we haven't really changed... We haven't changed our forecast or our view on credit, since we last talked about it during our earnings call. We still expect mid-50s basis point charge-off for the year. You know, maybe just taking a couple of those categories, you know, on credit card, I think it's important to note we have a prime, super prime book, so, you know, we aren't seeing, you know, stress levels in some of that lower-level tier that I think some others are seeing. But, you know, in terms of charge-off levels, you know, we're below pre-pandemic levels at this point in time, and as expected, we'll march toward that, normalize back to that pre-pandemic level.
Office you mentioned as well. I believe you mentioned, you know, office is a small part of our book. We only have 2% of our loans in CRE office, and related to that, we have a 10% coverage on that in terms of, ACL and all that sort of thing. So we have a good, appropriately reserved in that area. You know, and this is a spot where, you know, we've had losses in the past quarters.
There probably will be others. We're just working with clients on a case-by-case, client-by-client basis. It's gonna be that kind of cycle that will just take a lot of time to move through. And then multifamily, I think you also mentioned. Multifamily, about 5% or so of our loan book.
For us, this is not a loss content story. We feel good about the underlying properties. We're appropriately reserved, and there will be stress on certain clients. That is to be expected, and so you may see downgrades and things of the like. But in terms of actual losses, as we work with clients, the underlying properties are in good shape and good valuations, and so we feel good there. So those are kind of the highlights.
Yeah
... on the credit side.
Very good. You talked in your opening question, answer to my question about flattish expenses. Maybe for both of you, but more from a strategy and then on the expense side, with the Union Bank acquisition, I think at the time of the announcement, you were looking for $900 million in cost-saving synergies. You know, how do we, as outsiders, measure whether you achieved... I know you've said you achieved it-
Yeah
... but is there anything that we can look at to, you know, see those numbers? And Gunjan, and what are you seeing in terms of growth opportunities with that, bolting on that franchise?
... Yeah, I can start just on the $900 million is the number that we've talked about, and we have realized that. Now, it's kind of hard to see because it just kind of gets sprinkled throughout the year, but at the end of the year, we have that full $900 million in our base case. And so that's allowing us to do a couple things. One, it helps keep our expenses flat for the year, and two, it allows us to take some of that and then continue to invest in the business.
Some of the things that Gunjan mentioned in her business where we've made investments, some of the places in the payment side where we continue to make investments and the like, and even in the consumer side with the branch network and so on and so forth. So there's just a lot of areas that we can cover with savings such as that. The Union client base, I'll let Gunjan maybe expand a little bit, but incredibly loyal base. You know, from a product set standpoint, they are rapidly adapting to our digital capabilities.
In the consumer side, we are making a lot of headway in terms of penetration rates versus a legacy Union Bank client and a legacy U.S. Bank client, who was about a half a difference, and we've been making steady progress there. And so those are kind of the highlights on the consumer side, and then I'm not sure if you want to-
The cost reduction are very real, just from the platform synergy standpoint. Like, almost the entire book has been moved to the U.S. Bank core platforms on all products, so it's very real. You know, I'll add to it that the brand and the market share going from number 10 to number 5 is helping business development efforts everywhere, just because we are bigger there and more well known.
There are a couple sort of very specific nuances, the penetration rates that John talked about. You know, like we have Ascent. They have very affluent clients. That's been a very good marriage. We have a lot of the payments and transaction processing on the investment servicing side. That was not a product that they had. So these are very natural conversations to deepen relationships.
Got it. Maybe as we're winding down here, the final question is, what are the one or two things you want to leave with investors as it relates to the group you're running, Gunjan, and also U.S. Bancorp, John? Gunjan, maybe we'll start with you.
Thank you. Well, you know, one, we want to introduce our institutional franchise in its fullness by the WSIB stories, and I would say you'll see us do three very simple but powerful strategies. The first is to deepen our clients and make sure we are meeting their needs, given the product sets we have, and bringing that to life together.
The second is to keep enhancing our product capabilities. Many examples of deepening that product and expanding that set, so we continue to be very relevant for our clients. And then the third is an increasingly capital-light national footprint. So we stop feeling on this side as a regional or a super regional player, but really a near national player.
Yeah, and I would just add on top of that, you know, from a standpoint of all the things that were accomplished in 2023, that's really going to help us as we move forward into 2024. Again, we just talked about Union Bank, but that has been so helpful from a cost synergy perspective, as well as revenue synergy. Along the way, we've been growing our capital. We grew 150 basis points of capital over the last year, and we've been growing accounts and growing in deepening relations and doing it, as Gunjan mentioned, in a capital-efficient way.
That's really important for us, because in that sense, what we want to do is make sure we're growing the bank in a capital-efficient manner such that we maintain and extend out our industry-leading returns, particularly as it relates to return on tangible common equity.
Maybe, in the final minute here, Basel III Endgame obviously is coming. The capital markets players are going to see bigger impacts to their capital requirements than regional banks. What's your guys' view on where it stands now, and when do you think we'll get the final proposal? Any thought, any color there?
You know, we're hearing a lot of discussions between regulators and banks, a lot of clarification with comment letters. You saw just a tremendous amount of comment letters that were-
Mm-hmm
... provided into the agencies, and so they're listening. You can tell they're listening just by the questions that they're asking.
Mm-hmm.
We do anticipate change. It's hard to know the timing of these things. My guess is in the summer or so, we'll have some, whether it's the final rule or maybe it's components of it are final and other parts of it will need to be explored a little bit more. But the Fed has been taking more and more information in the quantitative impact studies or QISs, and so that's those are things that are really we feel are going to be impactful to talk to them about the real impact of these proposals.
Have you gotten a sense that they're more interactive in this proposal than in past proposals? Do you, do you-
Yeah, I do.
Yeah.
I do. I do think that they are, you know, and Vice Chair Barr is set the tone in that-
Yeah
... by he, you know, many times when he speaks, he's always talking about, "We want to listen, we want to listen," and all that sort of thing, and I think that's, we see that in the agencies.
Got it. Great. Well, with that, we've run out of time. I want to thank both of you for joining us this year. You did a great job. Thank you.
Great. Thank you so much. Thank you.