U.S. Bancorp
(
USB
) has delivered encouraging results in its second quarter of 2012.
Aided by a growth in revenue and lower provision for credit losses,
the company reported earnings per share of 71 cents, topping the
Zacks Consensus Estimate of 69 cents. Moreover, it compared
favorably with earnings per share of 67 cents in the prior quarter
and 60 cents in the year-ago period.
U.S. Bancorp's revenues came in at $5.1 billion, up 2.8%
sequentially, 8.1% year over year and also exceeding the Zacks
Consensus Estimate of $4.95 billion. Results were supported by
increases in net interest income and fee-based revenue.
However, on the negative side, expenses also advanced and, to
some extent, dwarfed the positive impact on profit from the
top-line growth.
Provision for credit losses at U.S. Bancorp decreased both
sequentially and year over year, with net charge-offs showing a
declining trend. Provision for credit losses was $470 million, down
2.3% sequentially and 17.8% year over year.
Quarter in Detail
U.S. Bancorp's tax-equivalent net interest income stood at $2.7
billion, reflecting a 6.6% rise from the comparable quarter last
year. This upside was spurred by an increase in average earning
assets and growth in lower cost core deposit funding. Average
earnings assets were up 9.4% year over year.
However, net interest margin of 3.58% fell 2 basis points (bps)
sequentially and 9 bps year over year. The year-over-year decline
was primarily due to higher balances in lower yielding investment
securities and a drop in loan yields. These were, however,
partially offset by lower deposit rates, a decrease in the average
cash balances held at the Federal Reserve and the credit card
balance transfer fees classification change in the prior
quarter.
U.S. Bancorp's average total loans climbed 7.7% year over year,
owing to growth in total commercial loans, residential mortgages,
credit card loans and total commercial real estate loans. These
increases were partially offset by drops in total other retail and
covered loans.
Excluding covered loans, average total loans accelerated 10.0%
year over year. Average total deposits were up 10.5% from the
prior-year quarter, primarily reflecting growth in
non-interest-bearing deposits and savings deposits.
U.S. Bancorp's non-interest income moved up 9.7% year over year
to $2.4 billion. Solid mortgage banking revenue as well as higher
merchant processing services revenue primarily contributed to this
uptick. These were partially offset by reductions in credit and
debit card revenue and ATM processing services revenue.
On the negative side, non-interest expense increased 7.3% year
over year to $2.6 billion at U.S. Bancorp. Higher compensation
expense, employee benefits costs, mortgage servicing review-related
professional services costs and other expense, which included the
Visa accrual, resulted in the year over year increase in
non-interest expense.
Credit Quality
Credit metrics continued to improve at U.S. Bancorp. Net
charge-offs (excluding covered loans) were 1.04% of average loans
outstanding, down 13 bps sequentially and 59 bps year over year.
The sequential decrease in charge-offs was principally attributable
to improvement in the commercial and commercial real estate and
other retail portfolios.
U.S. Bancorp's nonperforming assets as a percentage of related
assets (excluding covered assets) were 1.11%, down 11 bps
sequentially and 66 bps year over year. This year-over-year
downside was due to the fall in the construction and development
portfolio, as well as by improvement in commercial mortgages and
other commercial loan portfolios. These were partially offset due
to a rise in nonperforming other retail loans primarily as a result
of the policy change for junior lien lines and loans.
As a result of the positive trends in nonperforming assets, as
well as the favorable changes in early and late-stage delinquencies
and criticized assets, U.S. Bancorp's management anticipates
further improvement in credit quality in the third quarter.
Capital Position
During the quarter under review, U.S. Bancorp posted mixed
capital ratios, which were although decent overall. Tier 1 capital
ratio of 10.7% was down from 10.9% reported in the prior quarter
and 11.0% in the year-ago quarter. The Tier 1 common equity to
risk-weighted assets ratio was 8.8% as of June 30, 2012, slightly
ahead of 8.7% as of March 31, 2012, and 8.4% as of June 30,
2011.
All regulatory ratios continued to be in excess of
"well-capitalized" requirements. Moreover, using proposed rules for
the Basel III standardized approach released in June 2012, the Tier
1 common equity to risk-weighted assets ratio was around 7.9% as of
June 30, 2012.
U.S. Bancorp also posted an improvement in book value per share,
which increased to $17.45 as of June 30, 2012, from $16.94 at the
end of the prior quarter and $15.50 at the end of the prior-year
quarter.
Capital Deployment Update
During the second quarter, U.S. Bancorp declared $369 million in
common stock dividends and bought back common stock worth $401
million in total.
Notably, U.S. Bancorp cleared the stress test this year and
following the Fed's approval of its capital plan, announced a 56%
hike in dividend along with a new 100 million share repurchase
authorization.
We believe that the stress test clearance well justifies U.S.
Bancorp's capital strength and its solid business model. As a
matter of fact, year-to-date, the company has returned 62% of its
earnings to its shareholders and this is within the range of its
long-term goal of returning 60-80%.
Peer Performance
Among U.S. Bancorp's peers,
Citigroup Inc.
(
C
), after reporting a mixed bag in the prior quarter, posted
somewhat encouraging results in the second quarter of 2012.
Earnings per share came in at 95 cents for the quarter, comfortably
surpassing the Zacks Consensus Estimate of 88 cents on lower loan
loss provisions, higher transaction services revenues and a drop in
expenses.
Another peer,
JPMorgan Chase & Co.
(
JPM
), reported second quarter earnings per share of $1.21, way ahead
of the Zacks Consensus Estimate of 78 cents. Notably, its results
included $4.4 billion in its Chief Investment Office's synthetic
credit portfolio.
Excluding significant nonrecurring items, JPMorgan's earnings
came in at $1.20 per share. Lower non-interest expenses and a
substantial slowdown in provision for credit losses aided its
results. However, the positives were partially offset by lower
revenue.
Likewise,
Wells Fargo & Company
(
WFC
), which achieved its tenth consecutive quarter of growth in
earnings per share, recorded earnings of 82 cents per share in the
reported quarter. Results were a cent ahead of the Zacks Consensus
Estimate as the company benefited from improvements in mortgage
banking as well as credit quality. Lower non-interest expenses also
attributed to the profit growth.
In Conclusion
We believe that U.S. Bancorp has weathered the economic downturn
relatively well. Its core franchisee is attractive and the diverse
revenue stream is encouraging. Going forward, we expect strategic
acquisitions to abet its top-line growth.
Though regulatory issues and low interest rate environment
remain headwinds for U.S. Bancorp, we believe the company's solid
capital position, improving credit quality and increase in lending
activities should help propel its earnings forward. Moreover,
impressive capital deployment efforts following the stress test
clearance also boost investors' confidence.
Currently, the shares of U.S. Bancorp has a Zacks #3 Rank, which
translates into a short-term Hold rating.
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
Report
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
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