CHICAGO--(BUSINESS WIRE)--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'.
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