Fitch: Solid 3Q16 Earnings for U.S. Bancorp

CHICAGO--()--U.S. Bancorp's (USB) third quarter 2016 (3Q16) earnings were good and remain near the top of its large regional peer group and the industry according to Fitch Ratings. This level of operating performance continues to support USB's high ratings.

USB's annualized return on average assets (ROA) was a still good 1.36% in 3Q16, down from 1.43% in the sequential quarter, and down from 1.44% in the year-ago quarter. Additionally, the company's return on average equity (ROE) remained above Fitch's estimated range of the company's cost of equity of between 10%-12%, which Fitch views favorably. The ROE was 13.5% in 3Q16, down from 13.8% in the sequential quarter, and down from 14.0% in the year-ago quarter.

USB's total net revenue was down 2% from the sequential quarter, but up 4.7% from the year ago quarter. There was continued modest growth in net interest income (NII) in both periods amid continued balance sheet growth, and more mixed performance in non-interest income.

USB's balance sheet has continued to grow over the course of the year. Total average loans (including covered loans) were up 1.1% relative to the sequential quarter and 7.6% relative to the year-ago quarter. The year-over-year growth was primarily driven by higher commercial, construction and development, as well as credit card loans. The latter benefited from two portfolio acquisitions.

Deposit growth for USB remained stronger than loan growth, with total deposits increasing 3.6% from the sequential quarter and 10.0% from the year-ago quarter. As a result the company's loan to deposit ratio ticked down to 79.9% in 3Q16.

The additional funding generated continues to be placed into cash and investment securities, with cash balances having a more meaningful increase during the quarter.

NII on a taxable equivalent basis grew 1.6% from the sequential quarter and 4.3% from the year-ago quarter. This was due to the previously noted balance sheet growth partially offset by a shrinking net interest margin (NIM) as the company altered the mix of its investment portfolio over the last year with a larger proportion of lower yielding treasury securities and a larger allocation to cash this quarter.

USB's NIM was 2.98% in 3Q16, down from 3.02% in the sequential quarter, and 3.06% in the year-ago quarter. Fitch would continue to expect the NIM to modestly grind down unless the Federal Reserve raises short-term interest rates again towards the end of the year.

As noted, the company's non-interest income was down 4.2% from the sequential quarter, but up 5.1% from the year-ago quarter.

The sequential decline was due primarily to an unfavorably sequential comparison as the linked quarter include a $180 million gain related to an equity investment in Visa Europe as well as lower revenue from commercial products partially offset by improved mortgage banking income amid the rally in mortgage rates towards the beginning of the quarter.

Relative to the year-ago quarter USB's non-interest income benefit from the previously noted higher mortgage banking income as refinancing activity surged during the quarter.

Fitch notes that USB continues to manage expenses carefully, with total expenses in 3Q16 down 2% relative to the sequential quarter, but up 5.6% relative to the year-ago quarter. There is some noise in this numbers primarily due to litigation accruals that occurred in the sequential quarter.

In 2Q16, USB incurred $110 million of litigation accruals related to regulatory and legal matters as well as a $40 million charitable contribution. Excluding these items from the sequential comparison, USB's 3Q16 non-interest expenses relative to the sequential quarter would have increased 3.1%. This increase was due to higher compensation expenses as well as the impact of the FDIC's deposit insurance surcharge.

Relative to the year-ago quarter USB's expenses were up due to higher compensation costs as well as higher technology costs. Fitch views technology as an important differentiator for USB, and as such, would view a higher tech spend generally favorably.

While the company did not achieve positive operating leverage relative to either the sequential or year-ago quarters, its efficiency ratio remained good at 54.5% in 3Q16.

Credit quality for USB was stable in 3Q16, as both net charge-off ratio (NCOs) and non-performing asset ratio (NPAs) remained relatively stable over the course of the last four quarters. Fitch continues to believe that credit quality for USB--as well as the rest of the industry--remains at or near a cyclical trough, and Fitch would expect some reversion in credit metrics over a medium-term time horizon.

In 3Q16, USB's Basel III Common Equity Tier 1 (CET1) ratio was unchanged relative to the sequential quarter both under the standardized and advanced approaches. The fully phased-in Basel III CET1 ratio under the standardized approach was 9.3% (USB's binding constraint) and under the advanced approach was 12.1%.

This was due to 79% of earnings being returned to shareholders via dividends and share buybacks, as well as the balance sheet growth noted above.

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Media Relations
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Media Relations
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com