Fitch: U.S. Bancorp Continues Solid Earnings Generation in 4Q'11

Fitch: U.S. Bancorp Continues Solid Earnings Generation in 4Q'11

Fitch Ratings notes that U.S. Bancorp's (USB) results continue to outpace those of many of its rivals. USB reported net income of $1.35 billion in fourth quarter 2011 (4Q'11), a solid 6.0% increase from net income of $1.27 billion in the sequential quarter. These earnings equated to a strong 1.62% return on assets and 16.8% return on common equity.

USB's revenue was boosted by 1.9% growth in net interest income (NII), as higher levels of earning assets and lower deposit costs continued to drive growth in NII during the quarter.

However, given the continued growth in low-yielding securities and the heightened competition for loans, average earning asset yields dropped 11 basis points to 4.42%. This was greater than the 7 basis point reduction in rates paid on interest bearing liabilities, causing the net interest margin (NIM) to decline 5 basis points to 3.60% from the sequential quarter.

The bigger impact to earnings in the quarter, however, was the 12% growth in the company's non-interest income. This was largely due to a $53 million increase in mortgage banking revenue, and a $263 million gain as a result of a merchant processing settlement. Excluding the latter, USB's non-interest income was essentially flat from the sequential quarter.

Fitch notes that it still believes this result is significant given that credit and debit card revenue declined by $58 million in the wake of the Durbin amendment and that corporate payments seasonally declined by $32 million during the quarter.

USB's overall expenses were 8.9% higher due primarily to an accrual of $130 million related to mortgage servicing litigation. In addition, compensation and professional services expenses increased by $36 million and $31 million, respectively, compared to the sequential quarter. However, since some of this additional expense was absorbed by the higher revenue numbers, particularly related to non-interest income, USB's efficiency ratio remained solid at 52.7%.

USB's total loans increased 2.4% from the sequential quarter, which was driven by a 6.4% increase in commercial loans and a 6.6% increase in residential loans, partially offset by a 4.3% decline in covered loans. Excluding the latter, total loans grew 3.0% from the sequential quarter, which Fitch views positively given the currently weak demand for loans.

Asset quality metrics continue to improve across the board, and have differentiated USB throughout the last credit cycle. USB's net charge-offs (NCOs) ratio excluding covered loans declined to 1.28% in 4Q'11 from 1.42% in 3Q'11, and its overall non-performing assets (NPAs) ratio excluding covered loans declined to 1.54% in 4Q'11 from 1.79% in 3Q'11. Additionally, overall delinquencies excluding covered loans remained flat at 0.43% from the sequential quarter despite a modest increase in home equity delinquencies.

USB's capital position remains solid. As of 4Q'11, USB's Tier 1 capital ratio was 10.8%, its Tier 1 common equity ratio was 8.6%, and its tangible common equity ratio was 6.6%, all of which include a 6 million share buyback during the quarter. Fitch notes that USB's Tier 1 common ratio under Basel III is 8.2% as of 4Q'11.

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Fitch Ratings
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