) reported an earnings surprise of 1.3%, which was primarily
attributable to the company's strong top-line performance. The
company's second-quarter 2014 earnings per share of 78 cents
outpaced the Zacks Consensus Estimate by a penny. Moreover, this
compared favorably with 76 cents earned in the prior-year quarter.
Shares of U.S. Bancorp increased marginally in the pre-market
session, indicating that investors have been bullish on the
results. The price reaction during the trading session will give a
better idea about whether U.S. Bancorp has been able to meet
Notably, in the second quarter U.S. Bancorp reached a settlement
with the U.S. Department of Justice (DOJ) worth $200 million
resolving claims associated with origination of faulty mortgage
loans insured by the Federal Housing Administration (FHA). Prior to
this, the company sold 3.0 million shares of the Class B common
stock of Visa Inc., which recorded a net pre-tax gain of $214
million. Therefore, the sale of Visa Class B shares neutralized the
DOJ settlement charges, thereby not affecting earnings per share.
Higher revenues, a strong capital position, improving credit
quality and growth in average loans and deposits were the positives
for the quarter. However, higher non-interest expenses
reflected undisciplined expense management.
Net income attributable to U.S. Bancorp was $1.5 billion in the
quarter, up around 1% year over year.
Furthermore, segment-wise, on a year-over-year basis, quarterly net
income in Wholesale Banking and Commercial Real Estate and Consumer
and Small Business Banking segments fell 11.9% and 17.6%,
respectively, while, Payment Services, Wealth Management and
Securities Services and Treasury and Corporate Support segments
reported a rise of 5.6%, 16.7% and 19.9%, respectively.
Performance in Detail
U.S. Bancorp's net revenue came in at around $5.2 billion in the
quarter, up 4.9% year over year and surpassed the Zacks Consensus
Estimate of $4.9 billion. Results were primarily driven by increase
in both net interest and non-interest income.
U.S. Bancorp's tax-equivalent net interest income stood at $2.7
billion in the quarter, reflecting a 2.7% rise from the comparable
last-year quarter. The upsurge was mainly due to increased average
earning assets and persistent growth in lower cost core deposit
funding. These positives were partially offset by reduced loan fees
as well as lower rates on new loans and securities.
Average earning assets were up 7.7% year over year, driven by
growth in average total loans and average investment securities.
Yet, net interest margin of 3.27% fell 16 basis points year over
year and mainly reflected reduced rates on investment securities
and new loans, partly mitigated by lower rates on deposits
and reduced higher cost long-term debt.
U.S. Bancorp's non-interest income moved up 7.4% year over year to
$2.4 billion. Increased other income due to the Visa sale along
with higher fee income in mostly revenue categories led to the
rise. Yet, reduced mortgage banking revenue was on the downside.
U.S. Bancorp's average total loans climbed 6.8% year over year to
$240.5 billion, owing to growth in commercial loans, residential
mortgages, total commercial real estate, retail leasing and credit
card loans. These increases were partially offset by a drop in home
equity and second mortgages and covered loans. Excluding covered
loans, average total loans rose 8.3% year over year.
Average total deposits were up 6% from the prior-year quarter to
$262.4 billion. The upsurge stemmed from growth in
non-interest-bearing deposits, savings deposits as well as
Non-interest expense increased 7.7% on a year-over-year basis to
$2.8 billion at U.S. Bancorp. DOJ settlement and elevated
compensation expense primarily led to the rise. These negatives
were partially offset by lower employee benefits and other
Credit metrics improved at U.S. Bancorp in the reported quarter.
Net charge-offs (excluding covered loans) stood at $347 million,
down 7% year over year. On a year-over-year basis, the company
experienced improvement in net-charge-offs in the residential
mortgage and other retail portfolios.
U.S. Bancorp's nonperforming assets (excluding covered assets) were
$1.8 billion, down 5.3% year over year. Total allowance for credit
losses was $4.4 billion, down 4.3% year over year. Provision for
credit losses decreased 10.5% year over year to $324 million in the
During the quarter under review, U.S. Bancorp maintained a solid
capital position. Effective Jan 1, 2014, the regulatory capital
requirements for the company follows Basel III, subject to certain
transition provisions from Basel I over the next four years to full
implementation by Jan 1, 2018.
Additionally, as of Apr 1, 2014, the company exited its parallel
run qualification period, resulting in its capital adequacy. The
transitional common equity tier 1 capital ratio was 9.6% as of Jun
30, 2014 compared with 9.7% as of Mar 31, 2014.
The tier 1 capital ratio was 11.3% compared with 11.1 % as Jun 30,
2013. The tangible common equity to tangible assets ratio was 7.5%,
in line with the prior-year quarter.
All regulatory ratios of U.S. Bancorp continued to be in excess of
"well-capitalized" requirements. Moreover, based on the Basel III
fully implemented advanced approach, the Tier 1 common equity to
risk-weighted assets ratio was estimated at 11.7% as of Jun 30,
U.S. Bancorp posted an improvement in book value per share, which
increased to $20.98 as of Jun 30, 2014 from $18.94 at the end of
the prior-year quarter.
Capital Deployment Update
Reflecting the company's capital strength during the second
quarter, U.S. Bancorp returned 75% of earnings to shareholders
through common stock dividends of $445 million and the stock
buyback of $631 million. This was within the range of its long-term
goal of returning 60-80%.
We believe that U.S. Bancorp's attractive core franchisee, diverse
revenue streams and strong performance in the past years are
impressive. A solid capital position, improving credit quality and
increase in lending activities augur well for the company. It
adheres to a conservative growth stratagem and has made small but
Recently, U.S. Bancorp doubled its deposit market share in Chicago
with the closure of the acquisition of the Chicago branch network
of the Charter One Bank franchise owned by RBS Citizens Financial
Group, a subsidiary of
The Royal Bank of Scotland Group plc
). With this deal, U.S. Bank now has over 160 branches in Chicago.
Moreover, the latest hike of 6.5% in the quarterly common stock
dividend marks U.S. Bancorp's 4th dividend increase since 2011,
reflecting its commitment to return value to shareholders with
strong cash generation capabilities.
However, the top-line headwinds are expected to persist, given the
protracted economic recovery. Also, a low interest-rate environment
would keep U.S. Bancorp's margins under pressure. Moreover, absence
of credible improvement in the mortgage market remains a negative.
Increase in expenses also remains a concern.
Though there are concerns related to the impact of legal issues and
its global exposures, equity-centric activities in the U.S. are
expected to support U.S. Bancorp's results in the upcoming quarters
with continued recovery in the capital markets. The shares of U.S.
Bancorp currently carry a Zacks Rank #3 (Hold).
Performance of Other Major Banks
The second-quarter earnings season kick-started with
Wells Fargo & Company
). Driven by prudent expense management, Wells Fargo earned $1.01
per share in second-quarter 2014, thereby surpassing 98 cents
earned in the year-ago quarter. However, the reported figure was in
line with the Zacks Consensus Estimate.
Continuing the positive note,
) reported impressive second-quarter 2014 results. Adjusted
earnings per share came in at $1.24, outpacing the Zacks Consensus
Estimate of $1.08. However, earnings were below the year-ago figure
by a penny.
Results in the reported quarter were impacted by credit valuation
adjustment (CVA) and debt valuation adjustment (DVA). Moreover,
results included charges worth $3.8 billion ($3.7 billion
after-tax) related to the aforementioned deal. Including these,
Citigroup reported net income of $181 million or 3 cents per share
in the second quarter compared with $4.2 billion or $1.34 per share
in the prior-year quarter.
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