U.S. Bancorp (USB) Earnings Call Transcript & Summary

Great. It's showing 9:00. 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've been at the company for a while but became CFO, I think, like 2 weeks ago.

Yes.

So John, welcome to the new role.

Thank you.

Andy, well, maybe to -- first place to start, and I apologize, so we can just get that out of the way and then kind of maybe build off of that is 2 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 share some puts and takes.

Sure. 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 or so. And that has been trending down a bit since last year. If you remember, last year, it was very strong. And for the industry, it's coming down a bit, consistent with the [ H1 ] dip. So if you think about this broad 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 -- higher probability and one additional rate hike. As it relates to our specific guidance, why don't we ask John to give that.

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 hasn't changed 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 quarter, it's 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. Our expenses 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 anticipate a 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 built from a reserve standpoint.

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

Just making sure that it's kind of in line with what we have. And you're good.

All right. Thank you. That means a lot, Jason.

But maybe we could just unpack some of that. You talked about NII a little bit below the midpoint. I guess, specifically -- I guess, first off, on loan growth. There's, I guess, 2 reasons for potential sluggish [ and longer as we heard ] from others. One is supply-driven banks pulling back on RWAs, banks being mindful of the economic environment. On the flip side is the demand, customers are cautious. Customers are paying a lot more in interest than they did just 2 years ago. Maybe just kind of talk to in terms of kind of what you're seeing driving the slowdown and then just maybe kind of expectations looking out.

Yes, I think it's a little bit of both. John will 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 and Commercial, I think it's a little bit a function of that. And I think we and all banks are being very mindful of returns and RWA optimization, and I think that's also a factor.

Yes. No, I would agree. I think particularly in 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.

And then just on you mentioned deposits is contributing as well. So 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.

Sure. Yes. So I mentioned net interest margin down a little bit given some of the loan and deposit 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 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, was the question. I think we're still in line with our guidance. We feel like 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 1 point or 2 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 noninterest-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 has a nominal impact on net interest income and net interest margin. But that $15 billion moved in mid-May. So 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.

And maybe 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 out of 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 the NIM in an environment where kind of maybe rates stay higher for longer or maybe an environment where the Fed cuts?

Sure. Yes. 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 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. So 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.

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 has been a lot of focus for U.S. Bank, particularly after the UB deal. On the 2Q earnings call, you talked about 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 by end of next year?

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 and [indiscernible] AOCI 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 takeout, which we continue to predict. The second thing is the RWA optimization, and the third component is just normal activity over [indiscernible] time. So 8.5% to 9% still is our expectation [ for the cycle ] 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 and 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 and that's consistent. John will talk about the impact of the Basel III endgame, but it is 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.

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

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

Got it.

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 rule-making 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 as it 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.

Right. And then you mentioned AOCI burn-down by the end of '24. The rate environment is, I think, kind of been a bit dynamic since kind of people made those comments in July. I think you guys have some hedges in place. So maybe talk to kind of the interplay there.

Yes. Yes, sure. So we continue to put hedges on our fixed rate portion of the investment portfolio, particularly the -- 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.

Got it. And then RWA optimization, I think, surprised to the upside this year in terms of driving CET1 higher and kind of maybe getting to your 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 is there or isn't there kind of an impact to kind of earnings by doing so?

Sure. So we -- as you know, we implemented about 40 basis points of RWA optimization in quarter 2. We have another 50 basis points or so that will 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.

Got it. And then you mentioned kind of the debt-to-equity conversions that you did with MUFG that added 20 bps. Maybe just talk to, I think some people were surprised by it, how this come about and just how you think about that?

Yes. 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 we started to talk about this, they had interest of taking a noninterest-bearing -- because the capital that's held at the bank is noninterest-bearing for them, they had interest in holding -- converting noninterest-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 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 2.5 -- or $2 billion, excuse me, or so of excess capital that's remaining. And that would not be paid until the end of -- it's not expected to be paid back until the end of 2027, and that would be -- we would expect to pay that with cash.

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

Yes. So the Basel III, as I said, is 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...

Yes. We're largely compliant with the long-term debt proposal as it's constructed today. There are maybe $1 billion or $2 billion that we have to do over a 3-, 4-year transition period, plus some nominal buffer that we'll have to determine. But we feel it's a nonissue. I mean if you think about our issuance, we tend to issue $8 billion to $10 billion a year. So in terms of getting in compliance with this rule, it's going to be very seamless to our balance sheet.

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.

Yes. No. But we talk 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. Those are really core competencies that we have. And in light of everything that's going on in the industry, it's one worth discussing with them and we feel good about those conversations. So...

Got it. Maybe we'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 deployment?

Yes. So from a capital deployment standpoint, our prioritization hasn't changed. Basically, 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 striving for. I would expect us to have a conversation with our Board around a dividend increase in the fourth quarter.

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 buybacks?

Well, one of the things we have to finalize is our new Basel III endgame proposal and what those end targets would 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.

Right. And then maybe kind of you touched on credit quality a little bit in your beginning remarks. So maybe just kind of just delve deeper into it in terms of kind of what you're seeing, particularly in the C&I and CRE portfolios. Your criticized assets did tick up [ what it appears ] in the second quarter. Maybe just give us some more color on that.

Yes. That criticized asset increase was 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 is focus for everyone, as you know, is CRE, predictably office. Our office portfolio is about 2% of loans. About 1% of outstandings were reserved at 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. That was part of what you saw in the second quarter.

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

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 interest standpoint other than that focus on CRE office.

And then maybe on the fee income side, we could start with payments, kind of something that differentiates U.S. Bank. But maybe talk about some of the opportunities to grow the business, kind of where you're [ interested investing ]. What's moving the needle there?

Right Yes. 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. We have a number of different products and services that we offer there are payment. I'll start with payments, which is just under [ 2% ] of our total. As a reminder, that's 3 businesses: retail card issuing, which includes retail -- credit card and debit card; merchant processing and merchant acquiring; as well as corporate payment systems. We have invested in all those businesses in a couple of ways. So 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'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. debt underwriting FX, offering 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 start to stabilize. So those businesses are a focus area. And as John mentioned, those businesses are showing strength in this environment.

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

Yes. That's been a great growth story. If you think about 10 years ago, that was less than $100 million business. And overall, our commercial products is over $1 billion. And it's really a natural extension of the corporate and commercial relationships we have, offering, again, debt underwriting, FX, commercial product activity, loan syndications. So that business is going very well. And it's again a natural partnership when you think about the lending arrangement and filling down the relationship with those corporate and commercial customers.

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 from when Andy talked about it, $100 million bank, to where -- [ $1 million ] revenue line. So that's where it is today. The capabilities that we broaden our spectrum [ to fill ] the gaps that the clients ask for. And they just do a great job in maintaining those clients and growing relationships. So that's been really an impactful business for us.

Maybe it's a good time to follow up and kind of ask about the opportunities on the revenue side from just the UB acquisition converted in May. But I suspect just given your product set versus theirs...

Yes. It's a good question. And let me just talk about UB, Union Bank, overall. So 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 still expect $900 million that will be fully reflected in the run rate at the end of the fourth quarter of this year into 2024, which is very beneficial in terms of managing expenses on a year-over-year basis. And number three is the revenue opportunity, which we haven't modeled or given out numbers on that, but if...

That's why I asked.

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 and limited digital capabilities versus ours. So the ability to fill out relationships is substantial. They had a number of single-service customers. There are a 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.

And you care to maybe size the opportunity or...

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

Bigger than the breadbox?

Bigger than the breadbox.

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 ratio would get to near term? And just any color in terms of kind of to become a Category II bank, how does that all...

Yes. So first of all, the Category II designation wouldn't cause any substantial or material increases to expense. Let me start there. Second is it's a good time to have the synergies in place, $900 million of cost synergies, which is important as we get into '24. The third thing is we've been investing a lot in technology capabilities and in operational efficiency. So I would expect, if you add 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 '24. And we're managing expenses very tightly in terms of growth, and I would expect it to be flattish as we head into next year.

So expense is flattish from '24? And you just signed up for positive operating leverage?

We are striving absolutely for positive leverage.

Fair enough. So maybe just tying this together, we had this Investor Day in 2019, it feels like 10 years ago. But you kind of laid out profitability expectations. I think it was [ 17.5% ] to 20% ROTCE, low 50s efficiency ratio. A lot has changed since then, new capital rules, [ fall ] of Silicon Valley -- VB, et cetera. I guess, kind of any updated thoughts in terms of what this company could achieve?

Yes. 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 improve 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.

Fair enough. It's maybe a good spot for me to pull up and open it to the audience for questions. We'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. [Voting]

So wow, capital, the overriding answer.

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

Question from the audience? I guess there was an article recently [ just tailoring of ] 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 and...

Yes, 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 U.S. Bancorp. We've articulated that we have in excess of $300 billion of available liquidity. We were very proactive in establishing lines on 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...

Yes. As we -- 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 were 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.

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 just in 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 could drop, you had some things kind of [ stay ] late this year, some things [ really ] next year, some things like...

Oh, 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 abated. If you just think about the last 90 days, I think overall, for all of us, there's more stability. For us, we would certainly expect to have on average a little growth in deposits. Certainly, when you look at the [indiscernible] were stable in 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 and 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 a function of rates and yield curve and so forth, but that's what we expect.

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

My interpretation is Basel III endgame is putting more 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...

Yes. So it does have an impact on mortgages that are on the balance sheet. For us, it's not hugely material because the quality of the mortgages that we put on the balance sheet are such that they should be neutral from RWA standpoint. 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 -- 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 and focused on. And the other one I mentioned is the card side. So unutilized credit lines will now get an RWA calculation at 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 score. So those are some of the areas that we'll comment on in our Basel response.

Another area since we're on that topic is -- renewable energy is another area of topic that we will comment on. It's going from the equity investment related to renewable energies 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 surcharges in general relative to the credit book and the things 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.

Yes. And 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 what we're going to focus.

In those targeted areas.

Right.

Yes.

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

I think the regulators have extended the comment period and asked for comments. 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 read them.

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. And I think they're making comments -- they're encouraging comments, and we'll provide that. Hope so.

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?

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

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

Thanks, Jason.

Thank you.