U.S. Bancorp (USB) Presents at Barclays 21st Annual Global Financial Services Conference Call Transcript

U.S. Bancorp (NYSE:USB) Barclays 21st Annual Global Financial Services Conference Call September 13, 2023 9:00 AM ET

Company Participants

Andrew Cecere - Chairman, President and Chief Executive Officer
John Stern - Senior Executive Vice President and Chief Financial Officer

Conference Call Participants

Jason Goldberg - Barclays

Jason Goldberg

Great. Showing nine o'clock. Next up, very pleased to have U.S. Bancorp with us today. From the company Andy Cecere, Chairman, President and CEO. And we also have John Stern, who became -- who been at the company for a while, but became CFO I think like two weeks ago. Yeah. So John, welcome to the new role.

John Stern

Thank you.

Question-and-Answer Session

Q - Jason Goldberg

Andy, maybe the first place to start, and I apologize, but we can just get it out of the way and then kind of maybe build off of that is, two weeks to go in the quarter, you kind of have quarterly guidance out there, third quarter full year guidance, maybe kind of start with kind of any updates to that. And things playing out as expected, better or worse and have some puts and takes.

Andrew Cecere

Good morning, Jason. It's great to be here again this year. So let me start with the macro guidance and then John will talk a little bit about our specific guidance. From a macro standpoint, I think what we're seeing is consistent with what you're hearing from other banks, which is the consumer remains strong. So from a spend level, from a deposit level, by strata, from a credit quality standpoint, all a little bit better than pre-COVID levels, but all starting to trend towards normalization. So, spend levels are starting to get towards normalization. Credit balances are all starting to normalize. So, consumer remains strong, but again, starting to migrate towards normalization.

If you think about corporate and commercial loan growth, that is a little soft, a little softer than what we experienced in the second quarter. So -- and that has been trending down a bit since last year. You remember last year it was very strong and for the industry it's coming down a bit consistent with the data.

So, if you think about, the strong consumer tending towards normalization, coupled with the nice job that the Fed has been doing with regarding inflation, what we -- our expectation is the probability of a soft landing gets higher and more probable than it has been. And second thing is that we project, like the market does, one additional rate increase here in the fourth quarter. So again, big picture, Jason, trending towards normalization, likelihood of a soft landing, more like -- more high -- higher probability, and one additional rate hike.

As relates to our specific guidance, why don't I'll ask John to give that?

John Stern

Sure. And Good morning everyone, good to be here with you all. Thanks Jason for having me. Let me start by saying as it relates to guidance that we gave during July, during our earnings call for both third quarter and full year, that our guidance has unchanged from those levels.

So, let me give you a little bit of color as it relates to that. So, if I think about total revenue for the quarter of third quarters between $6.9 billion and $7.1 billion. We would expect that expenses will be approximately $4.3 billion for the third quarter, and we would expect net interest income for the third quarter to be between $4.2 billion and $4.4 billion. What I would say about that is we would be -- we would expect to be a little below the midpoint of that range for the third quarter. And that will translate into -- and the reason for that is, we see, as Andy indicated tepid loan growth that we see as well as some deposit pricing. And that will translate into a 2.80% net interest margin is what we would approximate for the third quarter, and that will be about 10 basis points or so lower than the previous quarter.

On a full year basis, we anticipate that from a net interest income standpoint, we'll be toward the lower end of the range. On expenses, we will be in line with our expense guidance that we provided for the full year. And then, however, on the other side, what I would say is that we are anticipate better than expected fee income in such areas such as our corporate trust area, mortgage and commercial products and capital markets type businesses.

From a credit standpoint, Andy mentioned normalization and that will be the theme that you'll see from a charge-off perspective. We would continue to see charge-offs normalize. And then from a provision standpoint, if we think about our reserve build, we've been building reserves and we anticipate continuing to build reserve in the third quarter. The level of that though, we would expect to be somewhere in between the first quarter level and the second quarter level of what we build from a reserve standpoint.

Andrew Cecere

So, big picture, Jason, PPNR in line for both the third quarter and the full year. And the specifics as John indicated. You're studying…

Jason Goldberg

Data.

Andrew Cecere

Just making sure that it's kind of in line with what we have and you're good. Alright, thank you. That means a lot, Jason.

Jason Goldberg

But maybe we could just unpack some of that. You talked about NAI a little bit below the midpoint. I guess specifically -- I guess first off on loan growth, there's I guess two reasons for potentials, sluggish and long list heard from others. One is, supply driven banks pulling back on RWAs, banks being mindful of the economic environment on the flip side, is a demand. Customers are cautious. Customers are paying a lot more in interest than they did just a two years ago. Let me just kind of talk to, in terms of, kind of what you think driving the slowdown and then, just maybe kind of expectations looking out.

Andrew Cecere

Yeah. I think it's a little bit of both, John. I'll go into more detail, but I think it's both a function of -- certainly, demand is down. People are being cautious, utilization levels are about flat or down a little bit. So, the higher interest rate, the uncertainty around the economy, all those things I think feed into demand, particularly on the corporate and commercial side.

Card activity is strong and card spend continues to be good. And the revolve rate is causing a little bit of higher balances. But on the corporate/commercial, I think it's a little bit of function of that and I think we in all banks are being very mindful of returns and RWA optimization and I think that's all also a factor.

John Stern

Yeah. No, I would agree. I think, particularly on the commercial side, we're seeing inventories come down, prices come down in some of those areas, so people are starting to figure out how to manage that and that coupled with higher returns and some of the -- or higher levels of absolute levels of interest rates that we have at this point. Plus, more of a lens, as you said Andy on returns from a banking standpoint, I think is all contributing factors really.

Jason Goldberg

And then just on -- you mentioned deposits is contributing as well. Just maybe just talk to kind of expectation on the beta mix balances, kind of just more context in terms of what you're seeing there.

John Stern

Sure. Yeah. So, I mentioned net interest margin down a little bit, given some of the loan and things that we talked about. We would anticipate perhaps a little bit more of that in the fourth quarter, but not nearly as much as what we saw in the third quarter and particularly bottoming out from that standpoint. We really do see the deposit environment really normalizing or being the, the competitive nature of the deposit, environment really kind of abating from what it was in the first and second quarter. So, we definitely see and have confidence that, that bottoms out, given some of those particular things.

You mentioned deposit beta, I think is a question. I think we're still in line with our guidance. We feel like with the mid 40s is kind of where our deposit beta lands. We think that the -- from a DDA perspective, and we mentioned this on the earnings call, but it's maybe worth mentioning again, but we expect 20% plus or minus a point or two here in terms of our mix of DDA relative to full deposits.

As a reminder, we had $15 billion of deposits that were classified as non-interest bearing on the retail union bank side. That will be moving into -- that did move into interest bearing in -- which is our bank smartly product, which is a nominal impact on net interest income and net interest margin. But that $15 billion moved in mid-May. So some from an optic standpoint, there's some movement there. But overall those are -- those would be kind of the puts and takes with the margin.

Jason Goldberg

And maybe we put up the first ARS question that I forgot to put up in the beginning. I'm not going to ask you about this one, but I just want to get this outta the way. And I guess just on maybe the topic of NII and NIM, just maybe talk to -- so it sounds like 10 basis points of degradation in the third quarter, a little bit less than that or less than that in the fourth quarter. Maybe talk to just how you kind of think about NII and NIM in an environment where kind of maybe rates stay higher for longer or maybe an environment where the Fed cuts.

John Stern

Sure. Yeah. Well, as Andy mentioned, we do have one rate hike in November in our forecast. But I would also say that our asset sensitivity is relatively neutral. So whether or not that Fed hike happens or not is not going to be material to result. In terms of interest rates if they're higher or continue to pressure higher and go for longer, I would expect the beta that we talked about to potentially bleed a little bit higher. But then on the other side of that, you have the assets that are going to reprice loans that would fall off and be recouponed at higher levels. And so, we are naturally positioned for that at this particular point in time. Similarly, if rates were to fall unexpectedly, obviously that would be -- we have the ability to cut deposit rates fairly quickly.

And then on the other side though, you'd have the assets. So we're pretty balanced from an interest rate perspective. I think the important thing I always try to highlight when we talk about this sort of thing is just our diversified business mix. We have a lot of different levers that we can pull in different interest rate environments. If you think about our corporate trust business, our payments and mortgage business, if rates go lower, for example, these are the sorts of things that are really beneficial to us in different interest rate environments.

Jason Goldberg

Got it. Maybe we'll put up the next ARS question. Just given maybe kind of shift gears to capital and just maybe start off with -- capital's been a lot of focus for U.S. Bank, particularly after the UB deal. On the 2Q earnings call you're approximately getting to 8.5% to 9% CET1 with AOCI by the end of the year -- by end of next year. Just maybe talk about in terms of kind of the drivers to get there? And then just any color in terms of, will you in fact be a Category II bank the end of next year?

Andrew Cecere

Right. So Jason, as you know, we ended the second quarter at 9.1%. At that time we talked about getting to 9.5% by the end of 2023. And then we did the debt to equity conversion, they added about 20 basis points. So our expectation right now is to get to about 9.7% by the end of 2023. And then back to end of 2024 on a fully loaded [technical difficulty] basis, we still expect to be 8.5% to 9%. So that's consistent and that's a function of both the earnings accretion, which is 25 basis points a quarter. It gets to 25 once we have the full takeouts, which we continue to effect.

The second thing is the RWA optimization and the third component is just normal activity over the time. So 8.5% to 9% still is our expectation at the end of 2024, that would be the earliest that we would go to Category II. We continue to work with the regulators on our balance sheet in terms of our risk metrics and so forth. And the second thing is, the activity around the new Basel III endgame, which is changing the game a bit in terms of the transition period. So -- but that's our expectation, that's consistent.

John will talk about the impact of the Basel III endgame, but it is a high single digits for us as we think about it. And I'm looking at the chart here. So it's fairly consistent with the expectation of 5% to 10%. So high single digits is what the impact is for us.

Jason Goldberg

Got it. And then how does it -- like, is it -- you wake up January 1st, 2024 and says by end of year you'll be a Category II bank or kind of a --?

Andrew Cecere

No. We're working with our regulators on an active basis, and I would expect we'll have clear guidance on that in the next few months.

Jason Goldberg

Got it.

Andrew Cecere

I would also say, just to be clear, I think we're also being very active as are all of our peers in terms of commenting on the Basel III endgame because there are a number of factors with the proposal and it's going to go through a rulemaking process and comments and so forth. But if you think about the consequences with regard to mortgages in low and moderate income communities, credit availability relates to the credit RWA credit scores, new market tax or energy tax credits, renewable energy tax credits. And there are just a lot of consequences. We want to make sure we're commenting on that. Not just the banks, but the customers of the banks, both consumers and businesses.

Jason Goldberg

Right. And then, you mentioned AOCI burned down by the end of 2024. The rate environment's I think kind of been a bit dynamic since kind of people kind of made those comments in July. I think you guys have some hedges in place already talked to kind of the interplay there.

Andrew Cecere

Yeah.

John Stern

Yeah, sure. So we continue to put hedges on our fixed rate portion of the investment portfolio, particularly the AF or in the AFS book I should say. And that's just something we've been continuing to do. As interest rates fall, we find our spots. I would say from the -- on the fixed rate portion of the AFS book, we have about 25% to 30% of that book is hedged. And so, really that has helped us as rates have gone up here a little bit, has muted some of the impact from the AFS standpoint.

I think what's important though is we continue to ensure that or maintain that the duration of the book goes down so that by the time we get to a potential Category II, if that does happen, that -- those securities would pull closer to par and we would get some benefit out of that relative to where we are today.

Jason Goldberg

Got it. And then, RWA optimization, I think surprise to the upside this year in terms of driving CET1 higher and kind maybe getting two new numbers quicker than I think some anticipated. Maybe talk to kind of how much you've done to date, what else could be down the pike on that front? And then, there -- is there or isn't there kind of an impact to kind of earnings by doing so?

Andrew Cecere

Sure. So we -- as you know we implemented about 40 basis points of RWA optimization in quarter two. We have another 50 basis points or so that'll get us to that 8.5% to 9% that I talked about by the end of 2024, including AOCI. And those are low to moderate income in terms of impact to earnings, just like the 40 basis points was in the first case. We have more flexibility beyond that, but those are the areas we're focused on right now.

Jason Goldberg

Got it. And then, you mentioned kind of the debt to equity conversions that you did with MUFG, that added 20 bps.

Andrew Cecere

Yeah.

Jason Goldberg

Maybe just talk to -- I think some people were surprised by it how this come about and just how you think about that.

John Stern

Yeah. I can speak to that. So maybe just to back up a bit, we had -- as part of the acquisition, we picked up $6.25 billion or so of tangible book value. And then there's $3.5 billion of excess capital and that was held at the bank and that was to be repaid over some period of time of that $3 billion. And so, as MUFG and our -- and we started to talk about this, they had interest of taking a non-interest bearing because this -- capital that's held that the bank is non-interest bearing for them. They had interest in holding converting non-interest bearing into something that's of an earning asset. From our standpoint, we wanted to accelerate some of our capital actions and in the meantime we wanted it -- it was helpful for us to strengthen our partnership in various areas. So in all cases it was really a win-win and that's how we thought about that in terms of our capital actions, in terms of the partnership with MUFG and things of that variety.

The last thing I would say is that there still is two and a half or $2 billion, excuse me, or so of capital that's remaining. And that would not be paid until the end of 20 -- not expected to be paid back until the end of 2027. And that would be -- we would expect to pay that with cash.

Jason Goldberg

Got it. And then, just maybe wrap ups some of the regulatory stuff. I guess Andy kind of offered some high level thoughts on Basel III. Any other thoughts there? You talked to, right, there's LCR proposal, TLAC long-term debt proposal, just kind of thinking about that maybe helps size us some of the impacts there as well.

Andrew Cecere

Yeah. So the Basel III as I said is a high single digits impact to us as currently constructed I expect commentary and changes over that for the consequences. We talked about the long-term debt proposal, John, maybe you could…

John Stern

Yeah. We're largely compliant with the long-term debt proposal as it's constructed today. There may be a billion or two, that we have to do over a three, four-year transition period plus some nominal buffer that we'll have to determine. But we feel -- it's a non-issue. I mean, if you think about our issuance, we tend to issue $8 billion to $10 billion a year. So in terms of getting compliance with this rule, it's going to be very seamless to our balance sheet.

Jason Goldberg

And then, this Moody's downgrade comments received some attention recently. Just maybe any other thoughts in terms of does that impact anything? I know you're still relatively strong rating.

John Stern

Yeah. No, but we talked to Moody's all the time and we'll continue to have conversations with them. I mean, they're asking the same questions that you're asking here today and we'll go through that with them. And at the end of the day, it's something where we will talk about our strategies as we're doing with you, but then also talk about our diversified business model and how that lends in different rate environments, the earnings generation that we get from all those different businesses and our strong risk culture that that's real -- those are really core competencies that we have. And in light of everything that's gone on in the industry, it's one worth discussing with them and we feel good about those conversations, so.

Jason Goldberg

Got it. You'll put up the next ARS question while I'll ask you a different question though. But with all this in mind, how do we think about the dividends and just capital redeployment?

Andrew Cecere

Yeah. From a capital deployment standpoint, our prioritization hasn't changed. And basic number one is reinvestment in the business. Number two is dividend, and number three is buyback. As you know, we've halted the buyback program until we get back to the capital levels that we're achieving -- striving for. I would expect us to have a conversation with our Board around a dividend increase in the fourth quarter.

Jason Goldberg

And then, I know you're kind of in capital build mode, but kind of once you kind of get where you need to be, how do you think about share buyback?

Andrew Cecere

Well, one of the things we have to finalize is the -- our new Basel III endgame proposal and what those end targets will be. And once we have more clarity around that, we will strive for a capital ratio that's appropriate in this environment and then go back to those priorities about reinvestment in the business, dividends and buybacks in that order.

Jason Goldberg

Right. And then, maybe kind of you touched on credit quality a little bit in your beginning remarks, but maybe just kind of just delve deeper into it in terms of kind of what you're saying, particularly the C&I and CRE portfolios, you criticized assets did take up more than peers in the second quarter. Maybe just give us more color on that.

Andrew Cecere

Yeah. That criticized asset increase with us being very proactive, like has been our history in terms of CRE, particularly office. We just want to be proactive about that. We think being very diligent is important. So from a credit standpoint, as I said it's tending towards normalization. We would expect to get to that 50 basis points normalized rate sometime early in 2024. Again, there aren't really any hotspots, just normalization. The area that focus for everyone as you know is CRE particularly office. Our office portfolio is about 2% of loans. About 1% of outstandings were reserved is about 8.5% against that portfolio. And it's very idiosyncratic, you can't say it generally because there's medical and there's suburban, but we're really focused on core, central city, multi-tenant and being very proactive around that and that was part of what you saw in the second quarter.

Jason Goldberg

Got it. And then, I guess, any other areas beyond that that you're focused on, maybe that you're seeing deterioration beyond normalization?

Andrew Cecere

No. I would say it's not anything that you wouldn't expect as you start to normalize after what we've been through over the past few years from an industry standpoint. Other than that focus on CRE office.

Jason Goldberg

And then maybe on the fee income side, we could start with payments. Kind of something that differentiates U.S. Bank, which is maybe talk about some of the opportunities to grow the business kind of where you're interesting about things, what's kind of moving the needle there.

Andrew Cecere

Yeah. One of the benefits, and John mentioned it, is our diversified revenue model. We have a high percentage of our revenue coming from e-revenue, and we have a number of different products and services that we offer there. Our payment -- I'll start with payments, which is just under 30% of our total. As a reminder, that's three businesses, retail card issuing, which includes retail credit card and debit card, merchant processing of merchant acquiring, as well as corporate payment systems.

We have invested in all those businesses in a couple ways, Jason. Number one is we believe strongly in this concept of an ecosystem, bringing together banking products together with payment products in a comprehensive offering to help businesses run their business, to manage inventories, cash flows and so forth. And we've made a couple of acquisitions to really strengthen our product offering, talech and Bento to have this dashboard to help them run their business. So that payments business is really a core differentiator. As you said, we continue to expect that card issuing to be in the mid single digit growth and merchant acquiring and corporate payment system in the high single digit growth level. So, about 10% plus or minus. So that -- that's a real strength.

We have this corporate trust business, which we have a dominant market share, great business for gathering deposits as well as fees that is doing very well. We have our commercial products business, did underwriting FX offering the sort of the natural extensions of credit to our corporate and commercial customers that is doing very well. Our mortgage business, a lot of investments made there in terms of technology, taking paper out of the equation. We're very focused on retail new, and that is doing well as gain on sales starts to stabilize. So, those businesses are a focus area and as John mentioned, those businesses are showing strength in this environment.

Jason Goldberg

Capital markets is something where you kind of maybe outperform peers at least from a revenue perspective. It's something you kind of mentioned that's kind of should contain outperform in the fourth quarter. Just maybe talk to in terms of kind of what your aspirations are there and what's driving those.

Andrew Cecere

Yeah. That's been a great growth story. If you think about 10 years ago that was a less than $100 million business and overall now commercial products is over $100 billion and it's really a national extension of the corporate/commercial relationships we have offering, again, debt underwriting, FX commercial product activity, loan syndication. So that business is going very well and it's again a natural partnership when you think about the lending arrangement and filling out the relationship with those corporate and commercial customers.

John Stern

It's an area where we spent a lot of time on investments and things like that. If you think about the products and capabilities, when Andy talked about it being a hundred million dollar bank to where a million dollar revenue line to where it is today, the capabilities that we broaden our spectrum to fill the gaps that that clients ask for. And they just do a great job in maintaining those clients and growing relationships and that's a really impactful business for us.

Jason Goldberg

It's a good time to pull up and kind of ask about the opportunities on the revenue side from just a UB acquisition that converted in May.

Andrew Cecere

Yeah.

Jason Goldberg

But I suspect just given your product tech versus theirs.

Andrew Cecere

Yeah. It's a good question. And let me just talk about UB, Union Bank overall. Number one, we completed the conversion in May that was successful. We're now running as a combined institution. Number two, the cost takeout expectation, the synergies is spot on. We set -- still expect $900 million that'll be fully reflected in the run rate at the end of the fourth quarter this year into 2024, which is very beneficial in terms of managing expenses on a year-over-year basis. And number three is a revenue opportunity, which we haven't modeled or given out numbers on that, but it's…

Jason Goldberg

That's why I asked.

Andrew Cecere

I know it's substantial because Union Bank had a very loyal and longstanding customer base, but at the same time they have a more limited product set than we did limited digital capabilities versus ours. So, the ability to fill out relationships is substantial. They had a number of single service customers, their number of card customers to deposits customers is about half of what ours is at U.S. Bank. So the ability to sell more products and services to those customers is substantial given the product set that we have and the digital capabilities.

Jason Goldberg

And do you care to maybe size the opportunity or?

Andrew Cecere

We continue to have tremendous focus on this across every single business line and it will add up to a material number.

Jason Goldberg

Bigger than a breadbox [ph]?

Andrew Cecere

Bigger than the breadbox.

Jason Goldberg

You talked about kind of UB merger synergies on target. Just maybe talk to maybe the overall expense picture. Kind of what areas are you going from, where do you kind of think the efficiency should get to near term and just any color in terms of kind of become a Category II bank? How did that all?

Andrew Cecere

Yeah. So, first of all, the Category II designation wouldn't cause any substantial or material increases to expense. Let me start there. Second is a good time to have the synergies in place, $900 million of cost synergies, which is important as we get into 2024. This third thing is we've been investing a lot in technology capabilities and an operational efficiency. So I would expect if you all that up, we'll have very -- we've had positive operating leverage last year 230 basis points. We expect to continue to achieve positive operating leverage as we go into 2024. And we're imagining expenses very tightly in terms of growth and I would expect it to be flattish as we have since next year.

Jason Goldberg

So expenses flattish in 2024 and you just signed up for positive operating leverage?

Andrew Cecere

We are striving absolutely for positive operating leverage.

Jason Goldberg

Fair enough. So maybe this -- tying this together, at this Investor Day in 2019, it feels like 10 years ago. But you kind of laid out profitability expectations. I think it was [technical difficulty] ROTCE, low fifties efficiency ratio. A lot's changed since then. The capital rules of Silicon Valley, UB, et cetera. Guess any updated thoughts in terms of what this company could achieve?

Andrew Cecere

Yeah. So you're right. A lot has changed. The Basel III endgame, the capital levels, deposit pricing are all things that are different than they were when we put out those numbers. But on the flip side, we passed the peak on investments. We've made a number of digital investments that improved our efficiency and our effectiveness. And importantly, we increased our scale substantially and added a lot more core deposits with a lot of revenue opportunity in terms of the Union Bank customer base. So, given all that, we continue to expect, as I said, positive operating leverage, industry leading returns. And once we have more clarity on the Basel III endgame and exactly what those capital numbers will be, we'll update those numbers, but I would expect us to continue to be industry leading.

Jason Goldberg

Fair enough. That's maybe a good spot for me to pull up in opening to the audience for questions. I've got a good turnout. Maybe put up the next ARS question while people think of what to ask. But which would have the most impact on improving USB's valuation? We touched on these, but let's see where the audience wants us to go.

So, capital, the overriding answer, and …

Andrew Cecere

Not surprisingly, and it is, we've made great progress on it. We are very focused on it as organization and I'm confident we'll get to where we need to get.

Jason Goldberg

Question from the audience. I guess, there was an article recently just turned as a banks and kind of liquidity management and maybe the regulators not -- or want more from the banks around that in terms of it seems like reporting and levels and just how do you kind of think about that impacting results.

Andrew Cecere

Yeah, I'll start. And then John will add, since he was Treasurer for a number of years. First of all, I would say liquidity management is a strength of the U.S. Bancorp. We've articulated that we want the nexus to $300 billion of available liquidity. We were very proactive in establishing lines, and all the tools available to us for utilizing the balance sheet for liquidity. So, it has been a strength, continues to be a strength and one of the areas that we've always been focused on. Maybe John, you can.

John Stern

Yeah. As we -- as I think an important thing to remember is that as we're talking about Category III, Category II, and all those sorts of things, we actually were a part of before the tailoring occurred, we were already doing liquidity reporting. We're doing daily liquidity reporting with the Fed. We've been doing a number of different things from a technology standpoint. So all that mechanism is in place and we have all that built out. So, there's really nothing material for us to do. And in terms of the actual liquidity, as Andy mentioned, we're right there and if whatever changes occur, we anticipate there'll be some change. We don't know what that is on LCR, we'll be able to manage that just because of the strength of the balance sheet.

Jason Goldberg

And then I guess as you enter kind of the 2024 budget process you gave us, I think good clarity on the expense side of it. I think a lot of people kind of focused on how NII and NIM play out in terms just terms of managing the balance sheet. I know you kind of talked to it earlier, but I guess any updated thoughts in terms of how you -- or I guess kind of maybe when you think NIM to drop, we had some banks kind of said late this year, something said next year. Something like …

Andrew Cecere

I think John mentioned that we expect NIM to bottom in the fourth quarter of this year. I think if you just step back, Jason, the industry pressures around deposits have certainly abate it. If you just think about the last 90 days, I think overall, for all of us, there's more stability for us. We would expect to have on average a little growth in deposits. Certainly -- and you look at the state terms of the outcomes. And I think all of us are also focused on the pricing of deposits as well. So, I think that stability is certainly the case for U.S. Bank and the industry overall.

I talked a little bit about loan growth, that is on the corporate/commercial side, a little softer, that I would expect at some point will start to turn as the economy starts to have more certainty. So, we expect the bottoming on NIM in the fourth quarter and then exactly where it ends up is a little bit of function of rates and yield curve and so forth, but that's what we expect.

Jason Goldberg

Got it. Any other questions? I see a question in the back.

Unidentified Analyst

Thank you. My interpretation is Basel III endgame is putting capital on whole loan mortgages versus securities. Would you agree with that? And then what's the strategy to manage around that like securitize quicker and hold securities or reduce the business or? Thank you.

Andrew Cecere

Yeah. So it does have an impact on mortgages that are put on the balance sheet. For us, it's not hugely material because the quality of the mortgage that we put on the balance sheet are [technical difficulty]. However, I will say that the impacts on higher loan to value mortgages will have an impact on the communities, the low and moderate income communities that I think is going to be certainly part of our comment letter and many comment letters because we have a number of special programs. They're not huge, they're not material, but they're impactful to those communities and those are the areas that we're commenting on, focused on.

And the other one I mentioned is the card side. So, unutilized credit lines will now get an RWA calculation that's 10%. So the natural tendency for the industry will be to maybe lower the credit availability, which is also impactful to those individuals, as well as impactful to the credit scores. So those are some of the areas that we'll comment on our Basel response.

John Stern

Another area since we're on that topic is -- renewable energy is another area of topic that we would -- will comment on. It's going from the equity investment related to renewable energies will go from 100% to 400%, which is hugely impactful. We think counters to some of the things that administratively, the U.S. is trying to accomplish. So, all those things, the surcharge just in general relative to the credit book. And the thing is that Andy talked about in terms of credit cards, it all adds up and it does impact clients quite a bit. And those are the things that we'll be discussing.

Andrew Cecere

Yeah. I think the impact is as -- the focus of our comment letter and many banks, I'm certain will be not so much the impact to the bank, which is going to result in some increase in capital, which is manageable, but the increase and the impacts to customers and communities and small businesses, that's where we're going to focus.

Unidentified Analyst

In those targeted areas.

Andrew Cecere

Right. Yeah.

Jason Goldberg

Andy, John, I think you make really good points in terms of some of these maybe unintended consequences of the Basel proposal and appreciate your comments. I mean, is there any signs -- maybe willingness among regulators to take these into account and actually adapt with the final rule?

Andrew Cecere

Well, I think the regulators have extended the comment period and asked for comments, and I'm hopeful that they'll take into account some of the comments that we and others make.

I think by law they have to read them, they have to.

John Stern

I think by signaling that they have an extended comment period signals that they know there's a lot here to it and they want to be thoughtful about it. And I think they'll take in comments or encouraging comments and we'll provide that.

Jason Goldberg

Any other questions from the audience?

I guess, U.S. Bank over the years has done a good job in kind of acquiring smaller companies, particularly on the fee income side, payments front. Kind of given you’re in capital build mode, is that kind of something that's off the table or if something of interest came along, you could consider it?

Andrew Cecere

We would consider it, Jason. None of them are material from a capital standpoint. They've been small, but important transactions, talech and Bento, which build capabilities principally around the payment space. We've also done some in asset management, which are not usually a material of the capital as well, but build out capabilities. So PFM is a great example where we taken a core competencies, we extend it to municipalities and it's a win-win again for the customers and for U.S. Bank. So those types of deals I would expect us to continue to look at.

End of Q&A

Jason Goldberg

Great. Any final questions for Andy or John. Going once? If not, please join me in thanking them for their time today.

Andrew Cecere

Thanks Jason. Thank you.