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U.S. Bancorp (USB) Reports Q3 Earnings as Expected

U.S. Bancorp’s (USB) third-quarter 2014 earnings per share of 78 cents were in line with the Zacks Consensus Estimate. However, results were above the prior-year quarter earnings of 76 cents.

Net income attributable to U.S. Bancorp was $1.5 billion in the quarter, slightly up on a year-over-year basis. Higher revenues, a strong capital position, lower nonperforming assets and growth in average loans and deposits were the positives in the quarter. However, increase in expenses was recorded.

Furthermore, segment-wise, on a year-over-year basis, quarterly net income in Wholesale Banking and Commercial Real Estate and Consumer and Small Business Banking segments fell 17.6% and 17.7%, respectively, while Payment Services, Wealth Management and Securities Services and Treasury and Corporate Support segments reported a rise of 12%, 75% and 14.3%, respectively.

Performance in Detail

U.S. Bancorp’s net revenue came in at around $5 billion in the quarter, up 2% year over year. Results were primarily driven by an increase in both net interest and non-interest income. However, revenue was in line with the Zacks Consensus Estimate.

U.S. Bancorp’s tax-equivalent net interest income stood at $2.7 billion in the quarter, reflecting a 1.3% rise from the comparable last-year quarter. The upsurge was mainly due to increased average earning assets and persistent growth in lower cost core deposit funding. These positives were partially offset by reduced loan fees as well as lower rates on new loans and securities.

Average earning assets were up 10% year over year, driven by growth in average total loans and average investment securities. Yet, net interest margin of 3.16% fell 27 basis points year over year and mainly reflected reduced rates on investment securities and new loans, partly mitigated by lower funding costs.

U.S. Bancorp’s non-interest income moved up 3% year over year to $2.2 billion. Increased fee income in most revenue categories led to the rise. However, mortgage banking revenue displayed a downside.

U.S. Bancorp’s average total loans climbed 6.3% year over year to $243.9 billion, owing to growth in commercial loans, residential mortgages, total commercial real estate, retail leasing and other retail loans. These increases were partially offset by a drop in covered loans. Excluding covered loans, average total loans rose 7.7% year over year.

Average total deposits were up 6% from the prior-year quarter to $271 billion. The increase stemmed from growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.

Non-interest expense increased 1.9% on a year-over-year basis to $2.6 billion at U.S. Bancorp. Elevated compensation expense and higher professional services primarily led to the rise. These negatives were partially offset by lower employee benefits and other intangibles.

Credit Quality

Credit metrics at U.S. Bancorp were a mixed bag in the reported quarter. Net charge-offs (excluding covered loans) stood at $335 million, up 4.7% year over year. On a year-over-year basis, the company experienced deterioration in net charge-offs in the commercial and commercial real estate portfolios, partially offset by improvement in other retail portfolio.

Provision for credit losses increased 4.4% year over year to $311 million in the reported quarter. However, U.S. Bancorp’s nonperforming assets (excluding covered assets) were $1.8 billion, down 5.3% year over year. Total allowance for credit losses was $4.4 billion, down 4.3% year over year.

Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. Effective Jan 1, 2014, the regulatory capital requirements for the company comply with Basel III, subject to certain transition provisions from Basel I over the next four years to full implementation by Jan 1, 2018. Additionally, as of Apr 1, 2014, the advanced approach of Basel III became effective. The transitional common equity tier 1 capital ratio was 9.7% as of Sep 30, 2014 compared with 9.3% as of Sp 30, 2013, under standardized approach.

The tier 1 capital ratio was 11.3% compared with 11.2% as Sep 30, 2013. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9% as of Sep 30, 2014, compared with 8.6% as of Sep 30, 2013.

All regulatory ratios of U.S. Bancorp continued to be in excess of “well-capitalized” requirements. Moreover, based on the Basel III transitional advanced approach, the Tier 1 common equity to risk-weighted assets ratio was estimated at 12.4% as of Sep 30, 2014 compared with 12.3% as of Jun 30, 2014. The common equity tier 1 capital to risk-weighted assets ratio under the Basel III advanced approach fully implemented was 11.8% as of Sep 30, 2014, compared with 11.7% as of Jun 30, 2014.

The tangible common equity to tangible assets ratio was 7.6%, compared with 7.4% as of Sep 30, 2013.

U.S. Bancorp posted an improvement in book value per share, which increased to $21.38 as of Sep 30, 2014 from $19.31 at the end of the prior-year quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the third quarter, U.S. Bancorp returned 78% of earnings to shareholders through common stock dividends of $441 million and stock buyback worth $654 million. This was within the range of its long-term goal of returning 60–80% to shareholders.

In Conclusion

We believe that U.S. Bancorp’s attractive core franchisee, diverse revenue streams and strong performance in the past years have been impressive. A solid capital position and increase in lending activities augur well for the company. It adheres to a conservative growth stratagem and has made small but strategic acquisitions.

Moreover, the latest hike of 6.5% in the quarterly common stock dividend in Jun 2014 marks U.S. Bancorp’s fourth dividend increase since 2011, reflecting its commitment to return value to shareholders with strong cash generation capabilities.

However, the top-line headwinds are expected to persist, given the protracted economic recovery. Also, a low interest-rate environment would keep U.S. Bancorp’s margins under pressure. Moreover, absence of credible improvement in the mortgage market remains a negative.

Though equity-centric activities in the U.S. are expected to support U.S. Bancorp’s results in the upcoming quarters with continued recovery in the capital markets, there are concerns related to the impact of legal issues and its global exposures. The shares of U.S. Bancorp currently carry a Zacks Rank #4 (Sell).

Performance of Other Major Banks

The third-quarter earnings season was kick-started by Wall Street biggies – Wells Fargo & Company (WFC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM). Driven by top-line growth, Wells Fargo earned $1.02 per share in third-quarter 2014, ahead of 99 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate.

JPMorgan came out with earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39. The number also compared favorably with $1.42 earned in the year-ago quarter. Earnings exclude the impact of 26 cents per share related to the after-tax Firmwide legal expense. Considering this significant one-time item, the company has earned $1.36 per share.

Citigroup reported yet another impressive quarter. Adjusted earnings per share for third-quarter 2014 came in at $1.15, outpacing the Zacks Consensus Estimate of $1.12. Further, earnings compared favorably with the year-ago figure of $1.02 per share.

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