Fitch: U.S. Bancorp's Diversified Franchise Drives Solid 2Q'14 Earnings Performance

CHICAGO--()--U.S. Bancorp's (USB) second quarter 2014 (2Q'14) stated net income was $1.5 billion, up relative to both the sequential and year-ago quarters. This equated to a 1.60% return on assets (ROA) relative to a 1.56% ROA in the sequential quarter and a 1.70% ROA in the year-ago quarter. Fitch continues to view USB's results favorably and believes the strength of earnings is largely to due to the company's low cost structure and diversified franchise relative to peer banks. These factors help to support USB's ratings, which are some of Fitch's highest for global financial institutions.

USB's net interest income (NII) grew modestly relative to the sequential and year-ago quarters due to growth in earning asset balances and growth in low-cost deposits. The company's net interest margin (NIM) clocked in at 3.27%, down from both the sequential and year-ago quarters. Given low asset yields, competition for loans, and deposit costs likely at an absolute floor, Fitch continues to expect USB's NIM to modestly compress as long as interest rates remain at their current levels.

Toward the end of the quarter, USB completed its acquisition of the Chicago-area branches of Charter One Bank from the RBS Group. This was primarily a deposit acquisition, and brought an additional $4.8 billion of deposits onto the balance sheet. Given still tepid loan growth industry wide, Fitch expects that a large proportion of these deposits are invested in low- yielding securities, which could further compress the company's NIM in the next quarter, since they will include a full quarter's results. That said, Fitch also believes that this transaction enhances USB's funding profile, whose strength will become more evident in a higher interest rate environment whenever that may occur.

USB's non-interest income showed good growth across most categories, particularly in the sequential quarter but also relative to the year-ago quarter. Fitch also notes that USB's strong contribution to overall revenue from non-interest income, which was 47% in 2Q'14, continues to be a ratings differentiator for the company. Fitch expects growth areas in non-interest income over time to be in wealth management offerings as well as merchant processing revenue.

Expenses rose in 2Q'14, up 8.2% compared to the sequential quarter and 7.7% in the year-ago quarter. This was due largely to a settlement with the Department of Justice (DOJ) as well as higher professional services and marketing spend, particularly to the sequential quarter. For the quarter, expense growth modestly outpaced revenue growth indicating some negative operating leverage for the quarter. Nevertheless, USB's efficiency ratio of 53.1% remained strong, in Fitch's opinion.

Asset quality metrics continue to improve for USB as well as the rest of the banking industry. While USB's provision expense increased due to some comparatively good loan growth, particularly in traditional commercial loans and in construction and development loans, provision was still $25 million less than net charge-offs. Fitch continues to believe that asset quality metrics are near a cyclical trough and that there will be some reversion in these metrics, but that it may take a few years to develop. Given USB's track record through the financial crisis, Fitch generally believes that its asset quality metrics will be comparatively better than peer banks when the reversion in these metrics begins.

USB continues to generate ample capital via earnings, and given the low growth environment continues to return a significant portion of earnings to shareholders. In 2Q'14, USB returned 75% of second quarter earnings to shareholders via dividends and buybacks, all while maintaining satisfactory regulatory capital levels. The company's fully phased-in Common Equity Tier 1 (CET1) ratio under the Basel III standardized approach (USB's binding constraint) was relatively unchanged relative to the sequential quarter at 8.9%.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Justin Fuller, CFA, +1-312-368-2057
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar, +1-312-368-5472
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Justin Fuller, CFA, +1-312-368-2057
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar, +1-312-368-5472
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com