U.S. Bancorp Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

• George Andersen, Senior Vice President and Director of Investor Relations
• Andrew Cecere, Chairman, President and Chief Executive Officer
• John Stern, Senior Executive Vice President, Chief Financial Officer
• Terry Dolan, Vice Chair, Chief Administration Officer

Analysts

• Scott Siefers, Piper Sandler Companies
• Ebrahim Poonawala, Bank of America Co.
• John Pancari, Evercore ISI
• John McDonald, John McDonald
• Erika Najarian, UBS Group AG
• Mike Mayo, Wells Fargo & Company
• Matt O'Connor, Deutsche Bank Aktiengesellschaft
• Gerard Cassidy, RBC Capital
• Ken Usdin, Jefferies Financial Group Inc.
• Saul Martinez, HSBC Holdings plc

Presentation

[Operator]

Hello, and welcome to the U.S. Bancorp Fourth Quarter 2023 Earnings Conference Call. Following a review of the results, there will be a formal question-and-answer session. [Operator Instructions] This call will be recorded and available for replay beginning today at approximately 8 AM Central Time.

I will now turn the conference call over to George Anderson, Senior Vice President and Director of Investor Relations for U.S. Bancorp. Please go ahead.

[George Andersen, Senior Vice President and Director of Investor Relations at U.S. Bancorp]

Thank you, Sarah, and good morning, everyone. Today I'm joined by our Chairman, President, and Chief Executive Officer, Andy Cecere; our Vice Chair and Chief Administration Officer, Terry Dolan; and our Senior Executive Vice President and Chief Financial Officer, John Stern. With their prepared remarks, Andy and John will be referencing a slide presentation. A copy of the presentation, as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com.

Please note that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, our earnings release, our Form 10-K, and in subsequent reports on file with the Securities and Exchange Commission. Following our prepared remarks, Andy, Terry, and John will take any questions that you have.

I will now turn the call over to Andy.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Thanks, George. Good morning, everyone, and thanks for joining our call.

I'll begin on Slide 3. In the fourth quarter, we reported earnings per share of $0.49, which included $0.50 per share of notable items that John will discuss in more detail. Excluding these notable items, earnings per share totaled $0.99 in the fourth quarter. For the fourth quarter, on an adjusted basis, net revenue totaled $6.9 billion, and for the full year, we generated record net revenue of $28.3 billion. We demonstrated strength across our fee businesses, which helped to offset pressure on net interest income.

Turning to Slide 4. Total loans were lower on a linked quarter basis by 1.1%, reflecting slower demand, particularly in corporate lending, and continued focus on lending opportunities that meet our return hurdles. Average deposits declined compared with the third quarter, as our strong funding position allowed us to be more disciplined on deposit pricing, while maintaining our liquidity profile.

Credit quality continued to normalize towards pre-pandemic levels this quarter, and we further strengthened the balance sheet by adding $49 million to our loan loss reserve. As of December 31st, tangible book value per share increased 14.7% from a year ago, and our common equity tier 1 capital ratio ended the year at 9.9%, an increase of 20 basis points this quarter. This ratio is 150 basis points higher than when we completed the acquisition of Union Bank in the fourth quarter of 2022. Supported by our strong capital accretion this year, the Board approved an increase to our quarterly common dividend in December to $0.49 per common share.

Slide 5 provides key performance metrics. On an adjusted basis, we delivered 19.6% return on tangible common equity in the fourth quarter and 21.7% return on tangible common equity for the full year.

Let me now turn the call over to John, who will provide more details on the quarter as well as forward-looking guidance.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Thanks, Andy. Turning to Slide 6, we reported diluted earnings per share of $0.49 for the quarter, or $0.99 per share, after adjusting for notable items. Notable items totaled $1.1 billion on a pre-tax basis, or $780 million net of tax, representing a $0.50 reduction per diluted common share, including an FDIC special assessment charge of $734 million, offset by a benefit from tax settlements in the quarter.

Other notable items this quarter included merger and integration costs of $171 million, a charitable contribution to fund our community benefits plan of $110 million, and a balance sheet optimization charge of $118 million. This quarter, we opportunistically restructured a portion of our investment securities portfolio, which we expect will enhance our net interest income trajectory, while also strengthening our capital and liquidity positioning. Slide 7 provides a more detailed earnings summary for the quarter.

Turning to Slide 8, we continued to manage the balance sheet prudently as we saw reduced loan demand this quarter, and the competition for deposits remained heightened as system-wide liquidity declined. Total assets ended the year at $663 billion. Average loans declined 1.1% on a linked quarter basis, as growth in credit card loans, supported by consumer spending and low payment rates, was more than offset by weaker commercial loan demand.

Average deposits declined 1.9% linked quarter. Given our strong deposit balances in the third quarter, we moderated our deposit pricing somewhat in the fourth quarter, even as we grouped consumer deposits by 1%. During the quarter, we rebalanced a portion of our securities portfolio, which provided risk-weighted asset relief and improved our overall earnings trajectory. The average yield on total investment securities portfolio increased 2.97% for the fourth quarter, a 55 basis point increase compared to a year earlier.

As of December 31st, the ending balance on the total investment securities portfolio was $161 billion. During the quarter, effective duration on the available-for-sale portfolio declined to less than three years as unrealized losses, net of tax, improved by approximately $2 billion, given the movement in rates and repositioning.

Turning to Slide 9. Net interest income on a fully taxable equivalent basis declined 3.0% linked quarter, driven by a modest decline in the net interest margin of 2.78%. The 3 basis point decline in the net interest margin reflected market dynamics, including deposit pricing pressure and unfavorable shifts in the deposit mix, partially offset by better earning asset spreads and improved total funding mix. In the first quarter of 2024, we expect net interest income on a fully taxable equivalent basis to be in the range of $4.0 billion to $4.1 billion. For the full year 2024, we expect net interest income on a fully taxable equivalent basis to be consistent with our annualized fourth quarter 2023 net interest income level of approximately $4.14 billion to up slightly.

Slide 10 highlights trends in non-interest income. Non-interest income, as adjusted, increased 12.1% on a year-over-year basis, driven by new account growth and deepening relationships across the business. Year-over-year payment service revenue benefited by continued strength in consumer and business spending activities, while increases in trust and investment management fees and commercial product revenue were driven by underlying market activity, a full fourth quarter with Union Bank, and core growth.

Turning to Slide 11, non-interest expense, as adjusted, decreased by 1.0% on a linked quarter basis, driven by lower compensation-related expense that was partially offset by strategic investments in marketing and business development.

Slide 12 highlights our credit quality performance. Asset quality metrics trended in line with expectations, and key metrics continued to normalize toward pre-pandemic levels. Our ratio of non-performing assets to loans and other real estate was 0.40% at December 31, compared with 0.35% at September 30, and 0.26% a year ago. The fourth quarter net charge-off ratio of 0.49% increased 5 basis points from a third quarter level of 0.44% and was higher when compared to a fourth quarter 2022 level of 0.23%, as adjusted.

Turning to Slide 13, we increased our common equity tier 1 ratio to 9.9% as of December 31. The combination of earnings accretion, net of distributions, and balance sheet optimization actions resulted in a 20 basis point increase linked quarter. Balance sheet optimization activities continued to have a low to neutral impact on earnings and provided additional risk transfer benefits.

As we move into 2024, we expect earnings to be the primary driver of capital accretion with limited reliance on balance sheet capital-related actions. As of December 31, 2023, our common equity tier 1 capital ratio remains above our regulatory capital minimum by 290 basis points.

Let me now hand it back to Andy for closing remarks.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Thanks, John. I will end my prepared comments on Slide 14. 2023 was a turbulent year for the industry. However, we achieved a great deal, including our successful conversion of Union Bank in late May and the realization of $900 million in run rate cost synergies related to Union Bank by year end as we had targeted. Additionally, we accomplished our goal of accreting the -- accelerating the accretion of CET1 capital and received full relief from Category II commitments we made in conjunction with the Union Bank transaction.

Entering 2024, we are positioned to continue to deliver industry-leading returns on tangible common equity, are appropriately reserved for macroeconomic uncertainties, and remain confident in our strategy for future growth and expansion. We are seeing positive momentum across our fee-based businesses as we deepen our most profitable client relationships and continue to target flat expense growth in 2024, even as we strategically invest in key areas and further execute on revenue growth opportunities with Union Bank.

Let me close by thanking our employees for their continued dedication to supporting the needs of our clients, communities, and shareholders in what was a meaningful year for the company.

We'll now open up the call for Q&A.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Scott Siefers with Piper Sandler. Your line is open.

[Scott Siefers, Analyst at Piper Sandler Companies]

Thanks, everybody.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Good morning.

[Scott Siefers, Analyst at Piper Sandler Companies]

Hey. John, I was hoping you could maybe throw out a little more context around the NII thoughts for the full year. It sounds like, if I did the math correctly, we're expecting somewhere between $16.5 billion and $16.6 billion for the full year. Maybe just some thoughts on how the margin and NII should project. I would presume maybe a little more downward pressure on NII given day count in the first quarter, but does it trot there and then sort of grow throughout the year, or would there be other factors that would cause NII maybe to bleed through, say, middle of the year and then start to inflect back up, or maybe just any thoughts there?

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Sure. Good morning, Scott. Thank you. Just -- maybe just to reiterate what was mentioned, in the first quarter, we'll see net interest income between $4.0 billion and $4.1 billion. As we think about the full year for 2024, it's going to be consistent with our annualized fourth quarter number -- 2023 level of $4.14 billion to up slightly.

And we're using the fourth quarter actuals, really, because we feel that's a more appropriate starting point given our balance sheet has now passed all the capital actions that took place during the 2023 calendar year. And so, some of the color around that and some of the drivers related to how we are thinking about that is, we do believe that DDA and low-cost deposit churn into higher-cost deposits are going to abate over time. By the end of this quarter, we'll be nine months past the last Fed hike, as an example. We continue to see loan spreads improve in various categories, led on the commercial side of things.

Loan and investment portfolio asset churn continues to occur. Our loan pipelines have continued to strengthen over this quarter, certainly stronger than we've seen in the past couple of quarters. And we think that loan demand should be improved just given that the Fed is likely going to be in a cutting mode over time. And the counter to that, of course, is that deposit pricing is going to be competitive, especially with QT running in some form in the background. So, while I'll say that first quarter NII projection is going to be slightly lower than the fourth quarter, these broad factors are really going to be supportive of NII growth, especially as we think about the second half of the year.

[Scott Siefers, Analyst at Piper Sandler Companies]

Okay. Perfect. Thank you. And then, maybe just a quick question on capital. Glad to hear that some of those balance sheet optimization efforts are beginning to sunset. Maybe -- one, do you have what you all estimate the fully loaded common equity tier 1 ratio to be now and maybe the balance between just building and potentially returning capital going forward?

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Yeah. So I mean, right now, as you know, we're at 9.9% on CET1. With the improvement in rates, the impact of the AOCI on the investment portfolio securities is about 2.2 percentage points. And so, you're at 7.7%, as we think about that on a fully loaded basis. So if you think about it on a go forward basis, we're going to create capital in the area of 20 basis points to 25 basis points per quarter. We will have a burn down on that securities book of about 30% or so relative to where it is by the end of '25, just to give you some context. So all that kind of adds up to building our capital to where we think it needs to be up for the appropriate time, given regulation and the timing of that.

[Scott Siefers, Analyst at Piper Sandler Companies]

Okay, perfect. All right. Thank you very much.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

You bet.

[Operator]

Your next question comes from the line of Ebrahim Poonawala of Bank of America. Your line is open.

[Ebrahim Poonawala, Analyst at Bank of America]

Good morning.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Good morning.

[Ebrahim Poonawala, Analyst at Bank of America]

Just maybe -- John, following up on the NII question. One, sorry if I missed it. What assumptions did you have in your NII outlook? And then, just talk to us about sensitivity. Are three cuts worse than six cuts? Just how we should -- given market expectations around this probably is going to change week by week. I'm just trying to test the resiliency of your NII outlook if we get more or less rate cuts.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Sure, absolutely. So, in terms of our current projections, we have four interest rate cuts by the Fed starting in the second quarter of this year. Now, whether or not that's two cuts or six cuts, it's not going to be a material driver to our outlook. We have worked hard to get our net interest income sensitivity to be more or less in a neutral position. And so, we feel like whether the cuts are how they're positioned or not going to be a material driver to the change -- of the outlook, excuse me.

[Ebrahim Poonawala, Analyst at Bank of America]

That's helpful. And I guess, just a second question. I'm not sure if you laid out any outlook for fee revenue growth for the year in terms of, if you can just talk to in terms of what you expect overall in fee revenues and particularly on payments, if you can call out expectations on what you assume for the year. Yeah, thank you.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Sure, yeah. I'll call a couple of things on payments and some of the other fee categories. So, as we think about payments, certainly in terms of merchant processing, we've put a lot of investment in there. There's a lot of technology-led advancements that we've made in terms of connections and certainly some MUB synergies. And so, we continue to expect high single-digits in terms of revenue growth there.

The same would be said for corporate payments. We think high single-digits, given the amount of T&E growth and client growth and all that sort of thing that we see. And then, on the card side of things, we've seen a very nice margin expansion. MUB certainly helps and holiday sales have been certainly helpful this past quarter, but we see that extending. And so, we think mid-single-digits from that standpoint. I would also reiterate, we've had really very nice growth in the commercial product side. We've had -- particularly in 2023, we would expect high single-digits there, given the strength we've had in foreign exchange, derivatives, the fixed income capital markets, loan syndications, all have been performing very well for us.

Our trust and investment management fee also should have experienced growth led by our institutional service businesses and corporate trust and fund services and certainly in wealth management, some of the fees associated with that. The one thing I would point out though, in terms of service charges, we've exited our ATM cash servicing business, and that was a business we decided to exit just given the high level of capital related to it in terms of intensity and investment. And so that will impact us by about $30 million to $35 million per quarter starting in the first quarter.

[Ebrahim Poonawala, Analyst at Bank of America]

Thank you so much.

[Operator]

Your next question comes from the line of John Pancari with Evercore ISI. Your line is open.

[John Pancari, Analyst at Evercore ISI]

Good morning.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Good morning.

[John Pancari, Analyst at Evercore ISI]

John, thanks for the colors so far on the guidance. I guess, similarly, can you walk through your -- within the NII expectations you provided, can you walk through your expectation for loan growth for the year and how you expect that could traject? I know your cited demand weakening, and then the same thing on the deposit front. If you can maybe give us your expectation of how you think growth can look like on an overall basis and maybe how the net interest -- I mean, the non-interest-bearing mix could traject from here? Thanks.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Sure. So, a couple of things there. So I'll start on the loan growth side. I do believe our expectation is that we will see growth on the commercial side. Of course, that was a little bit weaker this last quarter as we experienced paydowns, particularly as clients were accessing capital markets and things of that nature. But we've seen really a good pipeline build on that. We expect utilization to pick up and things of that variety. So we feel like that, along with credit cards, will be good sources of growth for us as we think about loan growth going forward.

On the deposit side, as a reminder, we'll probably be lower in the first quarter. We seasonally lose deposits just as we kind of go through the year-end process and just given the mix of our businesses, deposits end up being a little bit lower in the first quarter, but then we see more or less stabilization. But there might be some headwind there, particularly depending on QT and how the Fed draining of liquidity out of the system will impact the numbers there.

And then, going into your NIB comment, we've seen, of course, rotation out of NIB into other interest-bearing products. That continues, but starts to wane as we go throughout the year. And again, as I mentioned, we're going to be nine months by the end of this quarter, past the last Fed hike, and that gives us some signal that that will begin to abate.

[John Pancari, Analyst at Evercore ISI]

Great. Okay. Thank you for that. And then, I guess, if you could help us just think about how we should think about the magnitude of operating leverage that's reasonable as you look at next year? I know we do have some color on how you're thinking about NII and fees and then put that against your efforts to keep expenses stable. But I guess, if you could just maybe frame it, the range of operating leverage that you think is reasonable as we look at the next year?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Good morning, John, this is Andy. So, let me start with this, and John can add on. So, as I said in my prepared remarks, we're going to benefit from the cost deficiencies of the Union deal to a total of $900 million. And that is fully reflected now and in the run rate starting this quarter. So we're achieving those benefits because of the benefits of technology investments we've made, digital investments, operational investments, our risk platform. And so that is the benefit of the investments we've made. And we would expect to continue to invest in the business in those capabilities and payments and technology modernization.

So, we are also very cognizant in managing expenses very closely. We still have opportunities in terms of efficiencies in personnel, in operations and activities around technology that will allow us to more efficiently deliver the services we have. So, I would expect, as we get towards the second half of the year, that when we start to see that margin growth that John talked about as well as the fee normalization, that we would have opportunity for positive operating leverage and we're going to -- again, that is our long-term objective, as always, and we have levers to pull.

[John Pancari, Analyst at Evercore ISI]

Great. Thanks, Andy.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

You bet.

[Operator]

Your next question comes from the line of John McDonald with Autonomous Research. Your line is open.

[John McDonald, Analyst at John McDonald]

Good morning, John.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Good morning.

[John McDonald, Analyst at John McDonald]

Hi, good morning. I was wondering if you could give a little color on what you saw this quarter in credit quality on the NPA movement, particularly in commercial. And then also, John, maybe just some thoughts on the potential charge-off trajectory as you see things migrate from NPA into charge-offs this year, what we should be thinking about? Thank you.

[Terry Dolan, Vice Chair, Chief Administration Officer at U.S. Bancorp]

Yeah. Good morning, John. This is Terry Dolan. So I'm going to take this question related to credit quality. Your first one was really related to non-performing assets and some of the things we saw in the fourth quarter. If you end up going across the portfolio, generally pretty stable. We did see a couple of idiosyncratic loans that went into non-performing status. Both of those were kind of Union legacy sort of credits, so continue to kind of work through that. But I would also say that both of those are fairly well collateralized. So we don't necessarily see a lot of charge-off content related to those idiosyncratic credits.

When we look at net charge-offs and the trajectory, I would expect that -- or we would expect that it will continue to kind of normalize. Credit card is kind of getting closer to pre-pandemic levels, but that will continue to move up a little bit. Our expectation is that for full year 2024, we'll probably be in kind of in the mid-50s in terms of the net charge-off rate.

[John McDonald, Analyst at John McDonald]

Okay. Thanks, Terry. And then, John or Andy, just on the fee revenues. John ticked off on the fee revenues, a number of high single-digit kind of potential growers in '24. How do we think about kind of the ability to grow total fee revenues and what kind of base should we use for that? It looks like maybe the adjusted base for '23 was about $10.8 billion of fee revenues. Is that something you can grow off of that? Just trying to contextualize. Total revenue last year was around $28 billion. How should we think about the ability to grow revenues on fees and maybe total revenues this year?

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Yeah. So, I mean, we had -- as you mentioned some of the fee numbers there -- from a core fee perspective, we do expect to grow. I ticked off some of the areas in terms of payments, commercial products, trust and all sort of thing and some of the service charges components there. Of course, in terms of mortgage, that will be probably somewhat in the flat range. And in terms of other, we had a little bit of a high number in terms of the fourth quarter related to tax credit-related impact finance, syndication fees and things like that. So, all those things in, we expect kind of that mid-single in terms of the fee components going forward for this year.

[John McDonald, Analyst at John McDonald]

Okay. Kind of a mid-single from that $10.8 billion adjusted base? Okay, thank you.

[Operator]

Your next question comes from the line of Erika Najarian of UBS. Your line is open.

[Erika Najarian, Analyst at UBS Group]

Hi, good morning.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Good morning, Erika.

[Erika Najarian, Analyst at UBS Group]

Good morning. My first question is for you, Andy. Clearly, you went through it in terms of some capital consternation in 2023. And now, you're sitting here with 9.9% CET1. No longer have to be a category to bank early. And all the color that we're getting from Washington is that Basel III end game will be at least delayed, if not soften significantly. As you think about maybe just one more hurdle ahead over the near term in terms of the DFAST, how are you thinking about where U.S.-based proper CET1 we show is in terms of the minimum looking forward to a future where maybe capital is a little bit tighter, but you're also growing. And do you feel like you're now on offense and all the sort of the balance sheet management that was designed to optimize capital is fully behind you?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Yeah, Erika. As John mentioned, I think, our balance sheet optimization efforts are behind us. Our focus on capital accretion will be from earnings as we go into 2024 and forward. As we talked about, we are at a 9.9% CET1 ratio today. A couple of years ago, our target was between 8.5% and 9%, so we're above that target. But we're also cognizant of the rules that are coming, both from the perspective of Basel III end game, which is still uncertain, as you talked about, as well as CCAR and how that will evolve over time. So we will continue to accrete the 20% to 25%. We'll continue to burn down the AOCI. When we get clarity on the capital rules, both Basel III and CCAR, we'll then determine what the proper capital target will be. My expectation is it will be above the 9% that we were a few years ago. But we'll define that, refine that, and then we'll get into what the math is around buybacks at that time.

[Erika Najarian, Analyst at UBS Group]

Got it. And one follow-up question for you, John. Thank you for giving us some of the components of the NII. I'm just wondering, as you mentioned QT, are you generally expecting deposits to be down, total deposits to be down even if DDA mix shift abates? And also, how quickly do you think the deposit betas on the way down can react to each Fed rate cut?

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Sure. So, the first part of your question in terms of QT, we do anticipate QT to be throughout the year. And so that's going to, on whole, put pressure on deposits throughout the year in terms of balances. And so, we don't expect a lot of growth overall in deposits, but we have ways to manage through that. Of course, they're talking through various ways to change the QT, but that just remains to be seen.

In terms of deposits' performance on the way down, I anticipate commercial and wholesale type balances will go down just as fast as they would come up. On the retail side, it's going to be more of an arc. It will take some time for that to turn, but those are our expectations.

[Erika Najarian, Analyst at UBS Group]

Thank you.

[Operator]

Your next question comes from the line of Mike Mayo with Wells Fargo. Your line is open.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Hey. Good morning, Mike.

[Mike Mayo, Analyst at Wells Fargo & Company]

So it wasn't clear, are you guiding for flat, positive or negative operating leverage or none of the above for 2024? And more generally, I mean, the real question is, when do you get back to your historical efficiency ratio? I think you talked about this at a presentation. In December, I mean, 61% core efficiency in the fourth quarter isn't exactly like legacy U.S. Bancorp, and that's up 300 basis points year-over-year. And earlier last decade, you were 55%. Going back further, you were the low 50s. Is that just the aspirational target now? Or is that a real target over the next two years or so? And along those lines, I guess, you have all the savings you're going to get from Union Bank. So, where does the risk come from here?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Yeah, Mike, it's probably more likely a positive operating leverage in the second half of '24 versus the first half given some of the margin pressures that we talked about. That is still our objective. My expectation is, once we get more to our normalized revenue level that we will continue to manage expenses below revenue growth and continue to take down that efficiency ratios into the 50s. That's the way we're planning.

[Mike Mayo, Analyst at Wells Fargo & Company]

When you say into the 50s, I mean, is it something -- can you get back to 55%? Is that in your planning horizon, even going out a few more years? And it looks like the payments business is recatching its stride here. And along those lines, I didn't see the slide anymore on the payments business combined with small business banking. You're going to grow small business relationship like 15% to 20% and the revenues by 25% to 30%. I don't see any slide for that.

And I know you got -- look, you got Union Bank deal, you had the issues of last March and April, and it's okay, your capital is back, the deal is done, and now we're back to kind of U.S. Bancorp business as usual. So, I'm just trying to look for some color on that if you're going to become the square of banking, if that's still a goal and how those revenues might help you improve that efficiency?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Sure, Mike. And it is still a goal. We do think this combination of payments and business banking and providing that comprehensive product set and capabilities to help people run their business is a key strategic priority, it continues to be. And I think the B categories that John mentioned are also a key driver of revenue, including payments, commercial products, trust and investment, and those are all areas that we expect continued growth on.

The immediate pressure on net interest income is what's causing us not to get positive operating leverage in the short term. But it is something that I believe, and as John mentioned, will abate and start to grow into the second half of 2024. And so, I think, we're going to get to the positive operating leverage. We are planning on it, and we will continue to drive that efficiency ratio down certainly into the high 50s at the beginning and continue to deliver positive operating leverage to get it even lower. That's our objective.

[Mike Mayo, Analyst at Wells Fargo & Company]

All right. Thank you.

[Operator]

Your next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is open.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Good morning, Matt.

[Matt O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, good morning. Just to clarify, the flat expense guidance for '24 is also the adjusted level of '23 of 17.0?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

That's correct.

[Matt O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And I assume that includes any expense benefit from the exit of that ATM cash business that you referenced earlier?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Correct.

[Matt O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And then, just stepping back, like any other kind of small businesses or segments that you're kind of reevaluating for, not so much kind of the regulatory proposals, which we'll see how they may finalize, but just other areas that you're stepping back and whether it's in mortgage, given the smaller market there, or other parts of the business portfolio that you're looking either to exit or to potentially lean into that's a bit different than you were thinking, say, six months ago?

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Well, I can start and Andy can chime in. I think, we commented on the ATM business. I mean, you're constantly evaluating certain things, particularly in the light of regulatory change. Clearly, a lot of common letters have been submitted in terms of the Basel III end game. At the end of the day, it's not going to materially drive whether we exit businesses or enter new businesses, that sort of thing. It's just going to be a combination of a continual investment, as Andy mentioned, in terms of what we need to do toward achieving positive operating leverage and managing around regulatory actions. Those are some of the comments I'd throw out there.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

I think I agree, John. And the only thing I'd add is that the environment and the competitive dynamic is something that causes us to be more aggressive or less aggressive in certain categories. And maybe the example I'll give you is auto lending, which is -- for us is not growing right now. And that's because of the spreads and the returns are just not at our levels that we want to put on the books. So, those are areas that we're going to not get out of or close down, but just not emphasize in terms of growth at the levels of returns that we're seeing right now.

[Matt O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And then, specifically in credit card, we're obviously seeing a normalization of losses with you guys and throughout the industry and also very strong growth. So, if we adjust losses kind of on a lag basis, they are above a few years ago. At what point do you tighten up credit card and say, we slow growth at this point in the cycle or do you think there's still quite a bit of runway of, call it, good growth or healthy growth?

[Terry Dolan, Vice Chair, Chief Administration Officer at U.S. Bancorp]

Yeah. Well, I mean, it is an area, Matt, that we think that there continues to be a nice growth in that particular space. It is an area though that certainly as we have looked at the economic uncertainties and all sorts of things, the pressure on consumers, especially given the inflationary sort of pressure on the margin around the edges, we do make adjustments to underwriting and tighten that up where we need to. But when you end up kind of thinking about the overall credit performance of credit card business, we still think it's a very nice business. We focus on prime, super prime sort of customers. And even through this cycle, I think it's going to perform very well.

[Matt O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Thank you.

[Operator]

Your next question comes from the line of Gerard Cassidy with RBC Capital Markets. Your line is open.

[Gerard Cassidy, Analyst at RBC Capital]

Good morning, Andy. Good morning, John.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Good morning, Gerard.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Good morning.

[Gerard Cassidy, Analyst at RBC Capital]

John, you touched on, in answering your question, about commercial loan growth that some of your customers were accessing in capital markets and things of that nature. Can you guys share with us, we read a lot and see a lot about the private credit markets have really become quite active and aggressive in making loans to corporate and commercial customers. Are you guys seeing that competition? Number one. And also, is it any different than past years or has it intensified? And then simultaneously, are any of these private, Apollo, Blackstone, etc -- are these customers of yours? And if they are, how do you balance the competition versus handling their needs?

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Sure. This is John, Gerard. So, in terms of -- on the commercial side, when I comment that going to the capital markets, it's more or less the public market, so taking bond issuance in the public investment-grade market. We tend not to see them or compete on the private credit side of things. It's just not a structure or type of loan type in terms of our client base that we tend to run into. So, it's more or less -- I can't say it's increased or decreased versus because we just don't see those names, we compete in the commercial space with our peer banks more or less in that particular venue.

In terms of -- you mentioned in terms of client interaction, we have great relationships with a number of different names in terms of investment services, capital markets activities, other sorts of categories. So we do have some very nice relationships with those institutions.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Yeah. Our corporate trust and global fund services, Gerard, as John mentioned, businesses, they support a number of large private credit funds in the industry and where they are customers and clients of ours that we continue to serve.

[Terry Dolan, Vice Chair, Chief Administration Officer at U.S. Bancorp]

And I think the last thing I would just add is that depending upon where the capital rules end up and what sort of -- where the emphasis is or isn't, you could see more or less moving into the private capital sort of markets. They tend to have more flexibility in terms of structure, they take on more risk, all sorts of things. Again, may not be where we compete, but certainly, from an industry standpoint, private credit continues to be an area of focus.

[Gerard Cassidy, Analyst at RBC Capital]

Thank you, Terry. Just if we step back for a moment and look at beyond Basel III end game, maybe we do get the final proposal in the middle of this year or later this year. We get through the next DFAST. U.S. Bancorp has always had a hallmark of having one of the highest ROTCEs amongst the regional banks. Obviously, you're probably going to maintain that. But you also were very disciplined in giving back the excess capital every year to shareholders in buybacks and dividends generally, if I recall correctly, around 75% to 80% of total earnings in a combination of both. Andy, do you see that coming on the horizon, maybe 2025, once we get all the rules that we know where the CET1 ratio needs to be. What's your outlook there?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Yeah, Gerard, we do achieve a high return on tangible comment, I mentioned 19% to 20% fourth quarter versus full year '24. And as we think about going forward, I would expect us to continue to lead the pack in terms of that return, which is key to generating capital -- key to returning capital. And again, once we get clarity on the rules, as I mentioned earlier, in both the Basel III end game as well as the CCAR process, and determine our target capital levels, we will return the difference either through dividends or buybacks, that's been our history.

[Gerard Cassidy, Analyst at RBC Capital]

Very good. Appreciate it. Thank you.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Thank you.

[Operator]

Your next question comes from the line of Ken Usdin with Jefferies. Your line is open.

[Ken Usdin, Analyst at Jefferies Financial Group]

Hey, thanks. Good morning. A follow-up on the deposit side. You mentioned in your prepared remarks about starting to moderate pricing a little bit, and you also talked about roll-off of higher cost deposits. Just wondering if you can amplify both of those comments. So, what types of products or tweaks are you already being able to make on the deposit pricing front? And then, where did those higher cost deposits flow out of from a business perspective? Thanks.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Sure. Thanks, Ken. The comment was really around in terms of the fourth quarter in just what we saw. Maybe just stepping back a bit, in the third quarter, we grew deposits quite a bit. And part of that was we were just getting through the Union Bank acquisition. We wanted to make sure we were maintaining strong relationships with those clients and really all clients as we're going through those times.

In the fourth quarter, given where loan demand went and where we had a little bit of excess deposits, so we've made decisions really just tactically to go away from non-deposit -- non-relationship or less relationship-based and specifically on time deposits declining and things of that nature. So, I think that's just going to be the ebb and flow of things of just how we manage it going forward depending on loan growth, depending on our profile and depending on the relationship. So that's really what that comment was intended for.

[Terry Dolan, Vice Chair, Chief Administration Officer at U.S. Bancorp]

And importantly, John, on our core consumer deposits, we are continuing to see growth there, as you mentioned, as we had in the slide.

[John Stern, Senior Executive Vice President, Chief Financial Officer at U.S. Bancorp]

Yeah. We continue to expect core deposit growth in the consumer side, and that has been something we've been -- the team has been very focused on, and we feel we've had great success there.

[Ken Usdin, Analyst at Jefferies Financial Group]

Got it. And as a follow-up to the UB point, is everything from UB now fully baked, whether it's the cost actions and structure and also that's kind of making sure you're buttoned up as a starting point, have that base of loans and deposits gotten to a steady state as well?

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Yes.

[Ken Usdin, Analyst at Jefferies Financial Group]

Okay. So we just move forward with everything and listen to the guide comments that you gave earlier. Okay, got it.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Thank you. Exactly. It's all in the core now.

[Operator]

[Operator Instructions] Your next question comes from the line of Saul Martinez with HSBC. Your line is open.

[Saul Martinez, Analyst at HSBC]

Hey. Good morning, guys. Maybe on the payment side, if you just add a little bit more detail about how you're feeling about your payment strategy, how you're doing and how big the upside opportunity is there. Obviously, you're growing nicely on the issuing side, the merchant acquiring side, sort of mid-single-digit growth in revenues and volumes. I think you said high single-digit next year.

I mean, as you guys know, the banks have seeded a lot of share to software companies, integrated service providers. And just how do you feel it's going in terms of integrating your commercial banking in payments offering? And it does seem like you have a major advantage in terms of having relationships both on the retail and commercial side. And then, obviously, you kind of have that two-sided network that a lot of the fintechs want. But obviously, banks have struggled in this area. So just maybe if you could just give us sort of an overview of how you're doing and how you feel the opportunity set is evolving.

[Andrew Cecere, Chairman, President and Chief Executive Officer at U.S. Bancorp]

Yeah. So, first of all, the high single-digits on merchant processing is a function of the investments we've made and the initiatives we have underway. And I would highlight two things. Number one is our tech-led initiative, which is now up over 30% of our activities related to tech-led, so that is integrating our merchant processing capabilities into the software that people use to run their businesses.

And number two is, this whole integration of banking and payments that we talked about earlier. And the advantage I do believe that we have is that we are not just providing one single service, we're integrating banking services, deposit lending capabilities, treasury management, together with payments and money movement into one comprehensive offering that helps people again run their business, particularly small businesses, and helps them ease into the process of payment activity in a comprehensive way, together with the software they're using to run their company.

So, those are the initiatives that we have underway. And that continues to be a huge focus and one that I do think differentiates us a little bit because of the capabilities we have in payments. And that's true of merchant processing, corporate payments as well as retail issuing.

[Saul Martinez, Analyst at HSBC]

Okay. Got it. That's helpful. Maybe just a follow-up on deposits. You mentioned that the migration -- you expect the migration out of non-interest-bearing deposits to sort of run its course. Just when and where do you see that? I think, non-interest-bearing was about 17.5% of total deposits. How much more room is there? And just on deposit cost, I think the cumulative beta, if my calculation is right, is around 49%. How much more room is there for that to increase -- sort of what's embedded in your guidance for NII?

[Terry Dolan, Vice Chair, Chief Administration Officer at U.S. Bancorp]

Sure. So, in terms of the NIB, I think we've talked quite a bit about it. I would just -- I mean, we're at a certain percentage that you mentioned, and we're going to be around that area, certainly could drift a little lower. But we are at a point where, from a core standpoint, particularly on the commercial and small business side, where you're starting to get into places, where companies have to run operating accounts. And over time, you're going to have account growth and things of that variety. So, I think they'll be conducive to supporting NIB going forward. But there will be some leftover churn, as I alluded to earlier in the call.

In terms of beta, as you mentioned, 48.5 or so percent is our beta right now. I think it can creep up as we've kind of talked about, but it's going to depend on when the Fed cuts is going to be kind of that focus point in terms of how much it will go from here. And so, how -- what level is hard to predict, but there will be pressure until the Fed starts cutting.

[Saul Martinez, Analyst at HSBC]

Okay. Got it. Thanks.

[Operator]

There are no further questions at this time. Mr. Andersen, I turn the call back over to you.

[George Andersen, Senior Vice President and Director of Investor Relations at U.S. Bancorp]

Thanks, Sarah, and thank you for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.

[Operator]

[Operator Closing Remarks]