Oct 17 - U.S. Bancorp (USB) reported third quarter 2012 (3Q'12) net income
of $1.47 billion, up 4.2% from the sequential quarter, and which equated to a
very strong 1.70% return on assets (ROA) during the quarter, according to Fitch
Ratings. Fitch notes that USB's operating performance continues to exceed that
of peers, and is reflective of USB's strong ratings (long-term Issuer Default
Rating of 'AA-'), which puts USB in a category of some of Fitch's highest rated
USB's earnings were driven by a strong net interest margin (NIM) of 3.59%, which
was essentially unchanged from the sequential quarter. Fitch notes that this is
impressive given the currently low interest rate environment that is pressuring
NIM for most other banks. USB was able to keep its NIM strong as it lowered
funding costs, particularly on its long-term debt, as well as generating some
additional earning asset yields from its loan growth, primarily in the
residential mortgage and commercial loan space.
Non-interest income also modestly increased primarily due to strong mortgage
banking originations and income amid the rally in mortgage rates during the
quarter. While wealth management is still a relatively smaller part of USB's
non-interest income, Fitch would expect this to grow over time, which Fitch
believes will help stem the volatility that mortgage banking income can have on
earnings. Additionally, USB's non-interest expenses were essentially flat, and
the company's efficiency ratio remained very strong at 50.4%.
As previously alluded to, USB continues to generate loan growth better than many
peers, which was evident this quarter as commercial loans grew 2.24% from the
sequential quarter, and mortgage loans grew 4.96% from the sequential quarter,
both partially offset by a decline in covered loans of 7.45% from the sequential
quarter. Given USB's strong competitive positioning, Fitch would expect some
additional loan growth over the balance of the year.
On balance, USB's credit quality continues to improve across most loan
categories. However, given regulatory guidance regarding Chapter 7 bankruptcies
that has impacted the entire industry in 3Q'12, USB did see a moderate increase
in net-charge offs (NCOs) in both its residential mortgage and home equity
portfolios. Fitch would note that this increase in NCOs is very manageable,
particularly in context of the company's strong earnings profile.
Fitch notes that USB's capital position remains strong. The company's Tier 1
common ratio under Basel 1 increased to 9.0% in 3Q'12, up from 8.8% at 2Q'12.
Fitch would note that this increase in capital ratio also includes dividends of
$367 million and buybacks of $581 million, which equated to a 64% total payout
on the quarter. While Fitch would typically view this as on the higher side,
given USB's very strong earnings profile and good credit quality metrics, the
higher payout ratio is reasonable.
Fitch would also note that USB's Tier 1 common ratio under Basel 3 proposals was
8.2% at 3Q'12, up from 7.9% at 2Q'12.
Justin Fuller, CFA
70 W. Madison Street
Chicago, IL 60602
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