2023-12-06 14:53:07 ET
U.S. Bancorp (USB)
Goldman Sachs 2023 US Financial Services Conference
December 06, 2023 10:40 AM ET
Company Participants
Andrew Cecere - Chairman, President & CEO
John Stern - CFO
Conference Call Participants
Richard Ramsden - Goldman Sachs
Presentation
Richard Ramsden
We're going to get started in one minute. Okay. So we will -- we're going to move on to the next presentation. We're delighted to have U.S. Bancorp with us today. Andy, obviously, has been a very regular attendee at this conference. He has been at U.S. Bancorp, I believe, 38 years?
Andrew Cecere
Correct.
Richard Ramsden
And CEO for 7. And he's joined by John Stern, who's CFO. John and Andy, thank you so much for joining us. I think they're going to give a short presentation and then join us for a fireside chat. So Andy, over to you.
Andrew Cecere
Thank you, Richard. And John and I will just tag team on a short overview of the bank, and then we'll be happy to take any questions.
Let me start by mentioning, we may be referring to some forward-looking statements, so I refer you to Page 2 for some of the risks and uncertainties.
So let me start with the big picture. So I know a lot of you know U.S. Bank, but just from an overview standpoint. As you think about the customers we serve, we're in about just over half the United States where we have branches and ATMs and serve core retail customers. But we're a national business in terms of mortgage, credit card, commercial banking, wealth management, institutional services serving customers across the United States in all states.
And then we have 3 global businesses: merchant acquiring, all about merchant acquiring, global fund services and global corporate trust. Importantly, on the next page is -- are the businesses that we serve these customers through. Like most banks, we have a traditional retail banking franchise and commercial banking clients and so forth. But importantly, we have a number of unique businesses, payments, institutional services, wealth management, corporate trust, fund services that are important for a number of reasons.
First of all, they're very capital-efficient. Second of all, they're very fee-oriented. About 40% of our revenue stream derives from fees, which helps in volatile times. It creates stability of earnings through different economic scenarios, which is what we're seeing right now. And finally, it's an opportunity to deepen client relationships. So we have a number of products and services that can benefit clients in terms of helping them achieve their financial objectives through these other businesses that are sometimes unique to banking like we have at U.S. Bank.
If we think about 2023, it has been an eventful year at U.S. Bank on a couple of fronts. First of all, probably our most important accomplishment was a successful merger, integration and conversion of Union Bank. We went through the integration on Memorial Day weekend, wrapped it up in June, successfully converted over 1 million consumer customers, 200,000 small businesses and did it in a very smooth fashion.
We also are achieving our full cost takeout objectives, $900 million is what we articulated, $900 million is what we're doing. And we'll have that fully in the run rate by the end of this month and reflected in 2024 full year.
Third of all is that this is a great customer base. It is 1 million customers, I mentioned, a couple of 100,000 small businesses that were very loyal, long-standing customers, but they were also often single service or minimal service customers. So our opportunity to sell more, to provide more services to these customers because of our digital capabilities, our product set, those businesses that I talked about that are unique to banking is substantial.
Accelerated capital build, John will talk more about that. But the one consequence of the deal is we went from 9.7% to 8.4%, and we were right back at 9.7% in the third quarter with 130 basis points of accretion over 3 quarters.
And then finally, you might be aware that we just recently received full regulatory release of our Category II commitments, which was a component of the deal, which puts us on a level playing field in terms of our competitors in a transition period.
I talked about the Union Bank transaction. I talked about the cost savings. I talked about the objectives. But I will tell you, it is an example of the benefit of scale and investment in a platform and technology and risk management that I think shows through in this transaction. Simply stated, we acquired $65 billion of core deposits in an environment that core deposits are critically important.
We acquired -- after cost takeouts, our plan assumption was $1.5 billion of PPNR, pre-provision net revenue, and we're exceeding that on both fronts. So it's -- and we're doing that at a marginal efficiency ratio of about 40%. So it's a great example of the value of scale, the importance of scale. Makes us a player in California. We couldn't be more pleased with the transaction.
I'm going to ask John to talk a little bit more about the capital components, and then we'll take questions.
John Stern
Great. Thank you. Excuse me. Good morning, everyone. If I go to the next slide, Andy touched on this a bit, but I think it's worth mentioning again. Our capital had a significant appreciation this year. Again, 9.7% is where we were pre-acquisition, down to 8.4% and then back up 130 basis points in those 3 quarters, back up to 9.7%.
So as we think about capital going forward, we will continue to accrete capital as we move forward. But it will be generating through our normal course of earnings powered by the Union Bank acquisition, powered by the revenue synergies that we plan to achieve and all those sorts of things. And that will be something that we'll be focused on.
Less focused but still looking at it is our balance sheet optimization transactions. We will be, of course, looking at those sorts of things but only on an opportunistic basis and of course, doing it in a fashion of that if it's low or neutral from an earnings perspective impact.
Andy touched on this a bit, but just to go into a little bit more color on Category II commitment relief. As you know, a couple of months ago, the Federal Reserve provided us with Commitment relief to go into Category II. That's both beneficial both from a timing perspective as well as flexibility. We now are on the same level playing field as peer banks that are our size, and we'll use this opportunity really to leverage our balance sheet. We have the ability to grow. There's no asset cap. There's the ability to utilize our balance sheet to the fullest and to make sure that we're utilizing it in a way that provides industry-leading returns, which we always strive to do.
So the 3 things that we're really focused on as we head into next year are, of course, on this slide, which is talking about our ability to grow, our ability to develop and maintain digital capabilities, product capabilities and how do we leverage that into our -- not only our U.S. Bancorp or legacy clients, but also our Union client base so that we gain those revenue synergies that we're looking for.
The second thing is on the expense management side. Andy talked about the full run rate of $900 million that we will achieve at the end of this year. That will be fully into our run rate, and that is something that will give us a leg up as we manage expenses going forward.
And the third thing is really a focus on industry-leading returns. We're going to be focusing on capital efficiency growth, being good stewards of our balance sheet and making sure that, that utilizes us in a fashion to allow us to be growing our industry-leading return profile.
So while I'm here, I thought I would just share a couple of notes on guidance for the fourth quarter. We provided guidance during the third quarter, of course, during our earnings call. And the punchline is there's no change to our guidance for the fourth quarter. So what that means is we'll be, on an adjusted basis, between $6.8 billion and $6.9 billion of revenue. On an expense standpoint, we'll be approximately $4.2 billion on an adjusted basis, and that is without, of course, the FDIC assessment, which we can talk about a little later. And then on a net interest income standpoint, we will be between $4.1 billion and $4.2 billion.
The one thing I would mention there is that loan growth is a little weaker as expected and is consistent with the industry than what we would have expected back when we were talking about it in October. The last thing I would mention is that from an expense standpoint, consistent with what we have talked about, our adjusted core expenses in 2024 will be flat relative to 2023.
So those are the comments, Richard, that I think we would want to talk about here. We're happy to take questions.
Question-and-Answer Session
Q - Richard Ramsden
Great. So Andy, let's start off with a question just about the economy. It does feel as if the range of outcomes has narrowed relative to where we were 6 months ago, but how are you thinking about the path for interest rates from here? How are you thinking about inflation? And how has your thought process around recession risk evolved over the course of the last 6 to 12 months?
Andrew Cecere
Yes, Richard, I think you're right. I think if I were going to use 2 words, it would be strong but moderating. So the consumer still is strong, still spending. You saw Christmas spend thus far over the holiday weekend for us was about 5% on card, stronger on e-commerce, so near 11%. They still have excess savings, but they're coming down. So all the spend activity, the savings activity are still above pre-pandemic levels but moderating towards pre-pandemic levels. And I would say that was -- our expectation is that will continue.
On the loan front, as John mentioned, I think corporations and businesses are being very prudent right now. They're cognizant of the increase in rates and the impacts on their business model. They have -- there's still some uncertainty about the economy. And I think that is creating a little bit of sort of limited loan growth for us and for the industry, and I think that's an outcome.
As we think about 2024, I think it is more likely than not that it will be a soft landing. That's our base case projection. We have 2 rate declines in the second half, late in the second half of the year of 2024, but we are expecting a soft landing and a normalization of credit and normalization pre-pandemic levels of the spend levels and everything we talked about.
I do think the second half of '24 will be sort of an inflection point for the economy and the banking. And I think the Fed has done a nice job in terms of lowering growth expectations. And while inflation is still high, it's moderating. So I go back to my 2 points, strong or high but moderating back towards normal levels, and that's our expectation.
Richard Ramsden
So you talked a little bit about spending trends. Can you just expand on those a little bit? Obviously, your payment business --
Andrew Cecere
Sure. Yes, we have good visibility in that. We have a big merchant acquiring business, we have a big card issuing business, and we have our corporate payments business. As I mentioned, consumer spend is strong. The holiday weekend was up about 5%. In most categories, retail is strong.
The one area that I think is less strong is corporate T&E. Corporate T&E is moderating for sure. Part of that is ticket prices are coming down on planes, and I think that is causing some lower spend activity. And then the one area that I think is probably not as strong is freight. Freight was gangbusters a year ago, and that's certainly moderating and probably shrinking a little bit in terms of that spend.
Richard Ramsden
And then if you dig down just a little bit deeper, are there any noticeable differences by customer segments in terms of income or --
Andrew Cecere
Yes. Certainly, there is more spend from a nondiscretionary standpoint than discretionary. The large ticket items are lower. The overall spend level is the same, but people are paying more for fuel, for food, for basic services, and I think you're seeing that shift. We've seen that shift for the last 12 months, and that continues.
Richard Ramsden
Okay. So let's talk about your priorities for next year. Obviously, when you were here last year, I think the Union Bank transaction, which you had closed --
Andrew Cecere
We just closed the transaction. We're fighting for the conversion, which was successful.
Richard Ramsden
So obviously, that was your priority. That was -- it's gone very well, very successfully. So now that's out of the way, perhaps you can talk a little bit about the 2 or 3 most important strategic priorities you have heading into '24 and '25.
Andrew Cecere
Right. So first and foremost, and John mentioned this, is this concept of capital-efficient growth. We have a number of terrific business lines, a great diversity of opportunity. And our focus is on really working across the bank to leverage those business lines for capital-efficient growth. So growing the customer base and growing the depth of relationship with each of our customers, and that is across every single business line. That's number one.
Number two is prudent expense management. It is a time for all banks, I think, to watch closely. We are very comfortable with our flat expense base year-over-year. Certainly, we're benefited by the Union Bank transaction, but importantly, it allows us to continue to invest. We're in this place because we've invested in technology, which allows for growth and efficiency and expense management. And we can achieve flat expenses while not cutting back significantly in the investment side, which I think is important.
And the third category is what John mentioned as well, is really leveraging that customer base that we acquired with Union Bank. We fully implemented the cost takeouts, and that is good. But with the opportunities really growing that customer depth of the relationship, because of the great sense of expanded product set that we have in the digital capabilities. We had a 100% increase in digital engagement from what they had within the first couple of weeks.
So it's just an example of taking this opportunity being a big player in California, taking 1 million customers and leveraging the opportunity.
Richard Ramsden
So let's talk a little bit more about the Union Bank acquisition and the integration. Maybe you can just reflect on what stood out to you in the process of the integration. What went better than you thought? Where did you see challenges that perhaps you weren't anticipating? And then, look, now you've obviously had more time with the customers of Union Bank. How should we think through some of the potential revenue synergies as you get them more integrated into your platform?
Andrew Cecere
Yes. I think that the integration and the conversion went terrifically. And again, if I look back to when we signed the deal to where we are today, it's exceeded expectations across just about every category. So it's been a terrific deal. And it's a great example of the value of scale and investment and leveraging that scale and investment.
So we knew we were acquiring 1 million customers. They're more loyal than I expected. They're more long-standing than I expected. There's also greater opportunity for more card revenue, more corporate payments revenue, more treasury management revenue than I expected. So that's a great opportunity.
I think the other thing that was important is it was a simple lift and shift. There wasn't decisions about this system or that system or this business model or that business model. We knew we were going to take that entire customer base and put them on our platform, which we've invested heavily in. And I think that simplified the integration.
I think from a surprise standpoint, I will tell you, we've all done acquisitions and integrations. I think if I look back, 60 plus in my career, this was the first one that was of size during the digital age. And the rapid nature of the sign-up for individuals to make sure they're on the app and have all the digital capabilities wasn't weeks or days, it was hours.
And you can think about that, and that sort of makes sense. If you think about how important that is to your daily life, you understand why they were really at the front of the line on that Tuesday morning to make sure they were signed up. So the speed of the integration was probably the learning.
Richard Ramsden
Okay. All right. So let's talk a little bit about trends in the payment business, obviously, a very important differentiator for you. I know you've made a few investments over the last years, TravelBank, talech, I think are two. Maybe you could talk a little bit about those acquisitions, how those have panned out for you because I think Union Bank's obviously dominated the news flow.
And how should we think about the opportunity set for you to do more transactions like that going forward? And what would you be looking to achieve out of acquisitions within the payment business from here?
Andrew Cecere
Right. So I think we're all recognizing the nature of embedded payments in the banking relationship and the importance of linking those two things together. It used to be that payments was over here and banking was over here. But if you think about integrating them, it helps businesses run their business. It helps them manage payables and receivables and cash flow and understanding lending needs and/or depository needs or investment needs. So linking those things together is critically important.
So our initiatives around payments have been on two fronts. Number one is embedding it in the software that companies use to run their business, tech-led, as we call it, which is now 30% of our sales activity. And the second is weaving together banking and payments in a dashboard setting to help them run their businesses. So it's a huge initiative for our business banking group between payments and retail and business banking, our corporate and commercial, all those aspects. So simply stated, linking banking to payments to help companies run their business, part of that embedded concept and -- really deepens relationships and strengthens the retention.
Richard Ramsden
Okay. So let's talk about some of the trends that you're both seeing but also as we head into next year. And you talked a little bit about this, but let's start off with loan growth. Obviously, that slowed down over the course of the year, both consumer and corporate, I guess, ex card.
Maybe you can unpack a little bit what you're seeing in the fourth quarter. Talk about expectations as you head into next year. Are you expecting a bifurcation between consumer loan demand and corporate loan demand? I think you did mention that corporates are being more cautious, I think, was the --
Andrew Cecere
I'll start and let John add in. I think simply stated, the H.8 data is relatively flat, and we're consistent with that relatively flat, maybe down a little bit. The one area of growth is card because of that spend activity that I talked about. Utilization levels and commercial are relatively flat. CRE is not growing at all. And commercial and corporate are being very careful about growth, which leads to a flat utilization.
John, what would you add?
John Stern
Yes, maybe just to piggyback up what you just said, Andy, I mean we -- when we talk to our customers, and actually, one data point is we do a survey of CFOs. And last year at this time, when they took that survey, it was all about how do I grow revenues? How do I grow in terms of expansion of the business? This year, it flipped in terms of expense management. And so what we're seeing is more how do -- customers saying, how do I cut interest expense? How do I cut in some areas? And that's a reflection of paydowns that we're seeing and things of the like on the commercial side.
I think cards is right. We're seeing good growth there, constructive spend, which is consistent with what Andy has said. I think autos is the other one where we are active in terms of placing rate, but it's not meeting our hurdles. And so we are -- while we're out in the market, we're just not at the same level of others since it's not hitting our return hurdles. And so we're probably less active in that space as well. So those are kind of the puts and takes.
Richard Ramsden
Okay. That's helpful. So let's talk about deposits. Deposit outflows suddenly seem to have slowed. Maybe you can talk a little bit about what you've seen in terms of deposit trends this quarter. Has anything surprised you, given that, obviously, QT has continued, but it hasn't really impacted the banking system? A lot of it does seem to have come out of the RRP. Do you think that trend is going to continue into next year? And maybe you can touch a little bit on the shift between noninterest-bearing and interest-bearing and whether or not you've seen much over the course of this quarter.
Andrew Cecere
Yes. Again, I'll start and ask John to add in. I think if I were going to use a word, it's stable. The H.8 data is stable, down a little bit, consistent with QT. As the Fed balance sheet shrinks, banks' balance sheets will shrink, and that's just math. And -- but it's moderate, and it's stable. Those flows that we saw early -- late -- or late first quarter, early second quarter, I think for the industry and for us, certainly, have stabilized.
We have a great core deposit base, about 50-50 insured, uninsured, but importantly, a lot of the uninsured are operational. We have a lot of these businesses, fund services, corporate trust, treasury management, they generate a lot of deposits. And so they're relatively stable. I think for us and for all banks, we're very focused on that right balance of loans and deposits. And as loan growth starts to neutralize, you'll have deposit growth following, and that's what we're seeing as well.
John, what would you add?
John Stern
Yes. I would lean on that comment in terms of diversification of our businesses. We have a great business on the commercial side. We service companies in all geographies, in all parts of -- in all different types of industries. And so we have great visibility into what is going on. And I think the word stabilization is really something in terms of -- that we're seeing in terms of both the NIB mix shift as well as rate and all that sort of thing has really started to stabilize here as we look down the future.
Richard Ramsden
I mean just as a quick follow-up on deposits. I mean how would you characterize the competitive environment for deposits today relative to where we were, say, 6 months ago? I mean have you seen --
Andrew Cecere
It's less intense than it was 6 months ago, for sure. And it ebbs and flows. But I think for all of us, it's interesting -- me and my peer group have been up here, and we're all saying the same thing on deposits. It's stable. It's still higher cost than it was 2 years ago for sure, but we're seeing relative stability and it gets back to that core customer and embedded-in-your-business model and core processing around deposits. But on the retail side, I think we're all being prudent around this balance between rate and volume.
John Stern
Yes. I think everyone is trying to find the sweet spot for each institution. On the commercial side, it's very steady. You understand exactly what those clients are looking for, you know where the rate is. It's fairly transparent and things like that. On the retail side, you have different banks doing different specials and different money markets, promotions and things like that. So it varies from institution to institution. But broadly speaking, compared to 6 months ago, it's much different and more stable.
Richard Ramsden
Okay. And just in terms of deposit betas, I think you talked about a mid-40s terminal deposit beta. I think since you made that commentary, structures moved all over. So is that still your expectation as we think about --
John Stern
Yes, we were basically at mid-40s in the third quarter. I think what we've seen is a little bit of a creep since that, but I would offer maybe 2 points in terms of beta and rate paid and all that sort of thing.
First of all, I'd say yes, rates have gone up and down and all that sort of thing on the long end. On the short end though, the Fed has effectively stopped or that's what the market is saying anyway. And so July being the last rate hike that the Fed had, our models and our experience would tell us kind of that 5, 6 months after is kind of when things just kind of level off, and that's exactly what we're seeing. And so that gives us comfort on that.
The second thing I would say is that I know there's a lot of focus on betas, and is it going to be 46 or 47 or whatever. Sometimes what we do is we look at it holistically from an interest-bearing liability standpoint. And so we had a lot of growth of deposits in the third quarter.
Part of that reason was because we saw an opportunity to -- even though the rate might have been a little bit higher and accelerated our beta a little bit quicker than what we would have otherwise anticipated, what we were doing is also bringing -- had the ability to bring down short-term borrowings, which had a much higher rate. And so it allowed us to really manage the interest-bearing liability component, which is kind of the other piece that we look at.
Andrew Cecere
So as to optimize overall rate --
John Stern
Yes, that's right.
Richard Ramsden
I mean just a quick follow-up. I mean look, again, this uncertainty around rates makes it very difficult to forecast. But does your thought process around terminal deposit betas change if we don't get rate cuts next year? And maybe you can just talk a little bit about how you would expect deposit betas to really behave if we do get into, I guess, a more rapid Fed rate reduction environment.
John Stern
Sure. So if we're higher for longer, let's say we just stay at a higher rate, it's possible that betas could creep up. But there's a lot of puts and takes now. You're right, a part of the cycle where like, let's take the retail example, you have people that were early on adapters on CD rates and really going into that, sometimes those folks renew or they put it back in the money market, which is a lower rate. So that actually helps. There might be other people that are going the other way. And so you get that -- you're at that point of rotation that is kind of neutralized, if you will. Same thing on the corporate side and actually, that happens a lot faster.
So I think there might be a wiggle up, a wiggle down in terms of rate if you're higher for longer. But then let's take on the other side. I think if rates -- if there are cuts, then of course, then many of our deposits are -- what we would call as managed rate or the ability to change those rates as needed. And I think that's -- that gives us a lot of flexibility, particularly as you think about the other side of our balance sheet, the asset side, which is about 50-50 in terms of mix of floating versus fixed rate.
Richard Ramsden
Okay. So look, we've talked about a lot of the different moving pieces around NII. So maybe we can just talk about NII and expectations for heading into next year. Obviously, a number of your peers have talked about NII troughing at some point in the middle of next year and starting to grow largely driven by the asset side of the balance sheet. I appreciate you're probably going to give more guidance in January. But just broadly, how are you thinking about the trajectory of NII from here?
John Stern
Yes. Maybe I'll take it in 2 pieces, I think, and I -- maybe NIM just to start. I think we have great confidence that net interest margin will trough or bottom out in the fourth quarter, given all the trends that we were just talking about and things of that variety. I think that's very supportive for net interest income to trough as well in the fourth quarter. The one wildcard is just what the industry is experiencing and what we've talked about is just on the loan demand side of things.
Richard Ramsden
Okay. The other piece I just want to talk about, which does feed through into NII is just your ALM strategy. And I think more and more investors, I think, are asking this question or outlook, what is your ALM strategy? What's your ALM philosophy? And how has that evolved just given how rapidly rates have gone up as well as some of the potential regulatory changes around AOCI, maybe interest rate stress testing, maybe around how HTM securities get treated from an LCR perspective? So maybe you could talk a little bit about that and talk about how you're thinking about protecting against rising or falling interest rates as we head into next year.
John Stern
Yes. Well, maybe I'll first start by saying as we sit here today, where rates go is anyone's guess. We were just talking to some of my team and the chances of a 100-basis point move in 3 months is like 3%. We basically had an up and down in 3 months over that period of time, and that's a really rare feat.
So in terms of that backdrop, making sure we are as neutral as possible from an interest rate risk sensitivity and NII sensitivity is really important for us. And so how we manage that, of course, is through the investment portfolio. It's also through the loan book and all those sorts of things.
And so maybe just to give you some color, obviously, on the investment portfolio side, we are wanting to protect against higher rates because that will ultimately impact capital levels at some point. And so we've taken some opportunity here with rates a little bit lower is to add additional hedges on to that. That would add some more asset sensitivity to us. On the other side to keep us neutral, we'll do some receive-fix swaps at various points, and that will help us, and that hedges our commercial loans. And so in the instance of a rapid decline in rates, then you have that protection on the loan side of things.
And so holistically, we look at all that when we are looking at hedges, when we're looking at the mix of loans that are occurring and how our deposit profile is shifting. And our goal right now is given the nature of the volatility that we are seeing in that space, we want to be as neutral as possible.
Richard Ramsden
Okay. That's really, really helpful. So let's talk about operating leverage. I think you did mention that the industry is more focused on expenses now. And obviously, you've come out and talked about flat core expenses year-on-year. Maybe you can unpack a little bit what is happening below the surface in terms of continued investment spend versus efficiency saves. Maybe talk a little bit about how some of the inflationary pressures have changed over the course of the year. A number of your peers have talked about much lower levels of staff turnover and therefore, the need for higher severance. So maybe you could comment on that as well.
Andrew Cecere
Sure. So we have articulated an expectation and we will achieve flat expense on a year-over-year basis. Part of that is the benefit of the Union Bank transaction, but we also have operational efficiencies across a number of units, a couple of -- a number of initiatives across the company.
We've centralized operations, and we're trying to leverage technology and centralization to take more expense out of the operations functions across the bank sort of holistically. We're also trying to optimize our space in the office space, and we'll have opportunities there. So there are a number of initiatives that we have that will continue to whittle down what I would say core operating expense, while at the same time, continue the investment.
Now importantly, we're not spending more on investment, we're at the part of the curve that we're sort of flat, so at same levels. And importantly, we migrated a number of years ago to spending more on offense than defense on revenue-generating activities, which have served us well. So we're going to manage to that flat expense. We're going to optimize operations and real estate and office space. We're going to continue investment, and that all adds up to about a flat expense base on a year-over-year basis.
We always strive for positive operating leverage. I think as we look at '24, certainly, the first half of '24 is going to be more challenging because of the comps on a year-over-year in net interest income, which what's happened with deposit costs versus a year ago. However, I think as we get into the second half of '24 and we talked about the inflection point for us and for the industry in terms of rates and this moderation, I think that will be something we're focused on.
Richard Ramsden
And just longer-term, as you've had time to digest the benefits of the Union Bank acquisition as well as obviously some of the events of earlier this year, how are you thinking about the longer-term efficiency ratio and the trajectory of that as --
Andrew Cecere
So our objective is, again, to have over time, positive operating leverage and drive our efficiency ratio down into the 50s and low 50s. That continues to be the objective. And when we did a deal like Union Bank, which is at the margin at a 40% efficiency ratio, that helps us achieve that goal.
It's an interesting dynamic right now. Inflation is high, expenses are high, investment requirements are high. Revenues, in some cases, are challenged because of the reasons we talked about. So having the scale in this environment is really important. Another benefit of a deal like Union Bank, you put on $3 billion of revenue at a much lower cost, it helps build that platform in terms of ongoing leverage.
Richard Ramsden
So let's talk about capital. This has obviously been a real focus for you. First, well, the capital generation is your 130 basis points in a relatively short period of time is really quite impressive. And as you said, you're back to where you were prior to the deal. So maybe you can just update us on any thoughts around capital targets from here, obviously, in the light of new rules, which are coming as well as, obviously, the relief that you talked about from Category II.
And just any thoughts just broadly around capital returns, buybacks, attractiveness of dividends versus perhaps using some of the capital to maybe buy pools of assets, given that obviously some smaller banks are undergoing both capital and funding strain and there are portfolios --
Andrew Cecere
Yes. I'll start, and then John will add in. So first of all, it was a team effort across the bank, a treasury group working together with the business line leaders, and they did a great job. It was a focus of us, and when we focus on something, we get it done and we got it done. So we're back at 9.7%. We accrete capital from earnings 20 to 25 basis points a quarter. That will be the principal area of focus as we continue to think about additional capital levels.
There's new rules. There's new Basel III end game, which is yet to be finalized and defined. There's new potential CCAR stress testing rules. And until we get that final rule set, we won't set a capital target. Once we will -- once we do, we will, but we'll continue to create. Dividends continue to be important, and that is an area of focus, but I don't think we'll be in the buyback game until we get clarity of the rules.
John Stern
I think you nailed it --
Richard Ramsden
Anything in terms of asset acquisition opportunities? Is that something that you think the pace or pipeline of which could change --
Andrew Cecere
I think our opportunity is to, again, focus on serving our clients and extending and expanding relationships with the clients that we have and gaining new clients. So that would be the area of focus for us.
Richard Ramsden
Okay. So let's talk about credit. I know you were a very consistent underwriter over the cycle, but are there any lending categories that you're either particularly focused on? Are you tightening underwriting standards in any key areas and other areas that you think the market is just mispricing risk from your perspective?
John Stern
I think to your point, we are consistent underwriters through the cycle and all those sorts of things. I think -- but we have -- there is risk out there. And so we have turned dials to the extent that you can in certain areas, but it's nominal. It's areas that you would expect, and those are the sorts of things that we're looking to do.
In terms of your -- the latter question that you had, autos is -- again, I talked about it already, but in terms of profile, that's just something that we're -- it's just not a place where the returns are meeting where we would like to be.
Andrew Cecere
So I'd add I agree with John's perspective, and I'd add two points, two areas of focus for us, I think, and for the industry. So number one is card. We have a prime and super prime card book. I think there's levels of weakness at the lower end of the strata, which we don't play a lot in. But as we see some of the stress out there, I think that's an area to pay attention to.
And the second is commercial real estate, particularly office. That represents about 1% of our commitments, 2% of outstandings were reserved to 10%. It will be lumpy, but it's manageable certainly for us. But those are two areas of focus.
Richard Ramsden
Just on commercial real estate, obviously, the focus has been office. I think you're at a 10% reserve now?
Andrew Cecere
10%.
Richard Ramsden
Maybe you can just update us on anything you've seen in terms office delinquencies. But also key question, are you seeing anything outside of office and commercial real estate?
Andrew Cecere
So let me start with the commercial real estate office. The simple answer, it's very idiosyncratic. You can have 3 office buildings and A in a suburb, medical tenant doing great. You can have a B or C in a downtown business district, those are not doing as well. So you really have to peel the onion and manage it group by group, segment by segment and property by property, which is exactly what we're doing. And it's going to be lumpy, particularly for B and C and central districts, multi-tenants. And that's the area of focus. That's a small component of ours, but that's the area I think we'll have the most stress.
The other area that I think a lot of us are talking about or you're getting questions on is multifamily. I would say multifamily will have some stress, but not nearly the level of stress of office for a number of reasons. Remember, a lot of these multifamily structures were started a couple of years ago when rents were here. Rents have gone up a fair bit since then. And even if they don't go up more or come down a little bit, they're still going to be above the underwriting that occurred there. So expenses are higher, but the rents are still strong. So multifamily is an area that we're looking at, but it's not the same intensity as CRE office.
Richard Ramsden
Okay. So we're almost out of time, but let me ask you one last question, which is when you spend time with investors, what do you think is the most misunderstood component of the USB story from an equity investment standpoint? What do you think is the biggest disconnect?
Andrew Cecere
I think there was a tremendous focus on capital. And if I look back 6 months or a year, that was an area of focus for investors overall. And I think we've crossed that line. We've gone over that hurdle. We've done exactly what we said we're going to do, and we're now in a level playing field in the Cat II. So that's important as well.
I think our great opportunity is leveraging those unique business lines that we have for capital-efficient growth. We are different than a lot of our peers in what businesses we have to offer to the clients we serve. And our ability to do that in a capital efficient, high-return, higher-margin business is tremendous. And I think that's the story that we want to make sure we continue to tell.
Richard Ramsden
Great. Well, with that, thank you so much for coming on. See you again hopefully next year.
Andrew Cecere
All right.
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U.S. Bancorp (USB) Presents at Goldman Sachs 2023 US Financial Services Conference (Transcript)