Q4 2023 US Bancorp Earnings Call

Participants

Andrew J. Cecere; Chairman, President & CEO; U.S. Bancorp

George Andersen; Senior VP & Director of IR; U.S. Bancorp

John C. Stern; Senior Executive VP & CFO; U.S. Bancorp

Terrance Robert Dolan; Chief Administration Officer & Vice Chair; U.S. Bancorp

Ebrahim Huseini Poonawala; MD of United States Equity Research & Head of North American Banks Research; BofA Securities, Research Division

Erika Najarian; Analyst; UBS Investment Bank, Research Division

Gerard Sean Cassidy; MD, Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst; RBC Capital Markets, Research Division

John Eamon McDonald; Senior Analyst of US Large-Cap Banks; Autonomous Research US LP

John G. Pancari; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division

Kenneth Michael Usdin; MD and Senior Equity Research Analyst; Jefferies LLC, Research Division

Matthew Derek O'Connor; Research Analyst; Deutsche Bank AG, Research Division

Michael Lawrence Mayo; MD, Head of U.S. Large-Cap Bank Research & Senior bank Analyst; Wells Fargo Securities, LLC, Research Division

Robert Scott Siefers; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Saul Martinez; Senior US Financials Analyst; HSBC, Research Division

Presentation

Operator

Hello, and welcome to the U.S. Bancorp Fourth Quarter 2023 Earnings Conference Call. (Operator Instructions) This call will be recorded and available replay beginning today at approximately 8:00 a.m. Central Time.
I will now turn the conference call over to George Andersen, Senior Vice President and Director of Investor Relations for U.S. Bancorp. Please go ahead.

George Andersen

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 its 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 J. Cecere

Thanks, George. Good morning, everyone, and thanks for joining our call. I'll begin on Slide 3. In our 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 31, 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 C. Stern

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 pretax 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 continue to manage the balance sheet prudently as we saw reduced loan demand this quarter and the competition for deposits remain 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 grew 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 to 2.97% for the fourth quarter, a 55 basis point increase compared to a year earlier.
As of December 31, 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 3 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 noninterest income. Noninterest 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. Noninterest 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 nonperforming 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 continue 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 J. Cecere

Thanks, John. I'll 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 2 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.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Scott Siefers with Piper Sandler.

Robert Scott Siefers

I was hoping you could maybe provide 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 traject. I would presume maybe a little more downward pressure on NII given day count in the first quarter, but does it trough 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 C. Stern

Sure. Just -- maybe to just 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 and -- to up slightly. And we're using the fourth quarter actuals really because that -- we feel that that's a more appropriate starting point given our balance sheet is now past 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 9 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 as we -- especially as we think about the second half of the year.

Robert Scott Siefers

Okay. Perfect. 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 sort of fully loaded common equity Tier 1 ratio to be now? And maybe the balance between just building and potentially returning capital going forward.

John C. Stern

Scott. 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 it 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 to 25 basis points per quarter. We will have a burn-down on the 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 for the appropriate time, given regulation and the timing of that.

Operator

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

Ebrahim Huseini Poonawala

Just maybe, John, following up on the NII question. One, sorry if I missed it, what rate cut did -- assumptions did you have in your NII outlook? And then just talk to us about sensitivity. Are 3 cuts worse than 6 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 they get more or less rate cuts.

John C. Stern

Sure. Absolutely. So in terms of our current projections, we have 4 interest rate cuts by the Fed starting in the second quarter of this year. Now whether or not that's 2 cuts or 6 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 are positioned are not going to be a material driver to the change -- of the outlook, excuse me.

Ebrahim Huseini Poonawala

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 there.

John C. Stern

Sure. Yes, I'll call out 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 -- were 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 strength we've had in foreign exchange, derivatives, the fixed income, capital markets, loan syndication has all been performing very well for us. Our trust and investment management fee also should experience 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.

Operator

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

John G. Pancari

Thanks for the color 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 you 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 noninterest-bearing mix could traject from here.

John C. Stern

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 in 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 9 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 G. Pancari

Okay. 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, could you just maybe frame it, a range of operating leverage that you think is reasonable as we look at next year?

Andrew J. Cecere

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 efficiencies of the Union deal to a total of $900 million, and that is fully reflected now and into 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 in 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.

Operator

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

John Eamon McDonald

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?

Terrance Robert Dolan

John, this is Terry Dolan. So I'm going to take this question related to credit quality. Your first one was really related to nonperforming 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 nonperforming 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 Eamon McDonald

Okay. 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 C. Stern

Yes. 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 that sort of thing. Other -- and some of the service charges components there. Of course, in terms of mortgage, that will be probably somewhat on 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 Eamon McDonald

Okay. Kind of a mid-single from that $10.8 billion adjusted base.

Operator

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

Erika Najarian

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 2 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 USB's proper CET1 ratio 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 J. Cecere

Yes, 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 we'll 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

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 C. Stern

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'll -- 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 would 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'll take some time for that to turn. But those are our expectations.

Operator

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

Michael Lawrence Mayo

So I 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 in the low 50s. Is that just a aspirational target now? Or is that a real target over the next 2 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 J. Cecere

Yes, 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.

Michael Lawrence Mayo

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 or if that's still a goal, and how those revenues might help you improve that efficiency.

Andrew J. Cecere

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 fee 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 50 -- high 50s at the beginning and continue to deliver positive operating leverage to get it even lower. That's our objective.

Operator

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

Matthew Derek O'Connor

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

Andrew J. Cecere

That's correct.

Matthew Derek O'Connor

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

Andrew J. Cecere

Correct.

Matthew Derek O'Connor

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, 6 months ago.

John C. Stern

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 comment 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 J. Cecere

Yes. 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.

Matthew Derek O'Connor

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 should 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 and healthy growth?

Terrance Robert Dolan

Yes. 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 those all sorts of things, the pressure on consumers, especially given the inflationary sort of pressure, we -- 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.

Operator

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

Gerard Sean Cassidy

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, et cetera, are these customers of yours? And if they are, how do you balance the competition versus handling their needs?

John C. Stern

Sure. This is John, Gerard. In terms of on the commercial side, when I commented 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 J. Cecere

Yes. 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.

Terrance Robert Dolan

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 those 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 Sean Cassidy

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 your CET1 ratio needs to be, what's your outlook there?

Andrew J. Cecere

Yes, Gerard, we do achieve a high return on tangible common. I mentioned 19% to 20% fourth quarter, first -- 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, as been our history.

Operator

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

Kenneth Michael Usdin

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?

John C. Stern

Sure. Thanks, Ken. Mike, 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.

Andrew J. Cecere

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 C. Stern

Yes. 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.

Kenneth Michael Usdin

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?

John C. Stern

Yes.

Kenneth Michael Usdin

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

John C. Stern

Exactly. It's all in the core now, yes.

Operator

(Operator Instructions) Your next question comes from the line of Saul Martinez with HSBC.

Saul Martinez

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 much -- 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 ceded a lot of share to software companies, to integrated service providers. And just how do you feel it's going in terms of integrating your commercial banking and 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 2-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 J. Cecere

Yes, Saul. 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 2 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

Okay. Got it. No, that's helpful. Maybe just a follow-up on deposits. You mentioned the migration, you expect the migration out of noninterest-bearing deposits to sort of run its course. Just when and where do you see that? I think noninterest-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's right, is around 49%. How much more room is there for that to increase? Sort of what's embedded in your guidance for NII?

John C. Stern

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 that will 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 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 we -- there will be pressure until the Fed starts cutting.

Operator

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

George Andersen

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

This concludes today's conference call. We thank you for joining. You may now disconnect.