U.S. Bancorp (USB) has yet again delivered encouraging results in its third quarter 2012. Aided by growth in revenue as well as positive operating leverage, the company reported earnings per share of 74 cents, marching ahead of the Zacks Consensus Estimate of 73 cents. Moreover, it compared favorably with earnings per share of 71 cents in the prior quarter and 64 cents in the year-ago period.
Notably, U.S. Bancorp realized a gain on a credit card portfolio sale, incurred a charge associated with an investment under the equity method of accounting and posted incremental provision for credit losses for charge-offs as a result of a regulatory clarification regarding the treatment of residential mortgage as well as other consumer loans to borrowers who have exited bankruptcy but carry on making payments on their loans. However, the impact of these items taken together was nil on the company’s third quarter earnings per share.
U.S. Bancorp’s revenues came in at around $5.18 billion, up 2.2% sequentially, 8.0% year over year and also exceeding the Zacks Consensus Estimate of $5.13 billion. Results were supported by increases in net interest income and fee-based revenue. The company achieved positive operating leverage on both sequential and year-over-year basis.
Quarter in Detail
U.S. Bancorp’s tax-equivalent net interest income stood at $2.8 billion, reflecting a 6.1% rise from the comparable quarter last year. This upside was spurred by an elevation in average earning assets, growth in lower cost core deposit funding and the positive impact from lower cost long-term debt. Average earnings assets were up 7.9% year over year driven by growth in average total loans and average investment securities.
However, net interest margin of 3.59% fell 6 basis points (bps) year over year and mainly reflected increased balances in lower yielding investment securities, partly offset by lower rates on deposits and long-term debt. Yet, net interest margin moved up just 1 bps sequentially due to favorable funding costs.
U.S. Bancorp’s average total loans climbed 7.3% year over year, owing to growth in commercial loans, residential mortgages, commercial mortgages, credit card loans and other retail loans. These increases were partially offset by drop in construction and development, home equity and second mortgages as well as covered loans.
Excluding covered loans, average total loans accelerated 9.6% year over year. Notably, the company sold off around $735 million branded consumer and business credit card portfolio in the reported quarter, which reduced average loans by about $485 million in the quarter under review.
Average total deposits were up 11.1% 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 10.4% year over year to $2.4 billion. Higher mortgage banking revenue primarily contributed to this uptick. These were partially offset by legislative-related decreases in credit and debit card revenue and a reclass of ATM processing services revenue.
On the negative side, non-interest expense augmented 5.4% year over year to $2.6 billion at U.S. Bancorp. Higher compensation expense, employee benefits costs and mortgage servicing review-related professional services costs mainly resulted in the year-over-year increase in non-interest expense.
Credit metrics were mixed at U.S. Bancorp in the reported quarter. Quarterly results bore the impact of the regulatory clarification in the treatment of consumer borrowers exiting bankruptcy.
Net charge-offs (excluding covered loans) were 1.04% of average loans outstanding, flat sequentially and down 38 bps year over year. On a year-over-year basis, the company experienced improvement in net-charge-offs in the commercial, commercial real estate and credit card portfolios.
U.S. Bancorp’s nonperforming assets as a percentage of related assets (excluding covered assets) were 1.06%, down 5 bps sequentially and 54 bps year over year. This year-over-year downside was due to the fall in the construction and development portfolio, as well as owing to the 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 in the second quarter.
Provision for credit losses at U.S. Bancorp increased 3.8% sequentially but dropped 6.0% year over year to $488 million in the reported quarter.
Excluding a change in reporting for collateralized loans to consumers who have filed for bankruptcy, overall credit quality of its loan portfolio continued to improve. As a result, management expects the downward trend in net charge-offs and nonperforming assets to continue in the fourth quarter, with the net charge-off ratio remaining below 1%.
During the quarter under review, U.S. Bancorp’s capital ratios improved. Tier 1 capital ratio of 10.9% was up from 10.7% reported in the prior quarter and 10.8% in the year-ago quarter. The Tier 1 common equity to risk-weighted assets ratio was 9.0% as of September 30, 2012, ahead of 8.8% as of June 30, 2012, and 8.5% as of September 30, 2011.
All regulatory ratios of U.S. Bancorp 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 8.2% as of September 30, 2012 compared with 7.9% as of June 20, 2012.
U.S. Bancorp also posted an improvement in book value per share, which increased to $18.03 as of September 30, 2012, from $17.45 at the end of the prior quarter and $16.01 at the end of the prior-year quarter.
Capital Deployment Update
During the third quarter, U.S. Bancorp declared $367 million in common stock dividends and bought back common stock worth $581 million in total. Reflecting U.S. Bancorp’s capital strength during the third quarter, the company was able to return 67% of its earnings to its shareholders as dividends and share repurchases. Also, this is within the range of its long-term goal of returning 60-80%.
Among U.S. Bancorp’s peers, Citigroup Inc. (C), after reporting decent results in the prior quarter, posted somewhat encouraging third quarter 2012 results. Earnings per share came in at $1.06 for the quarter, comfortably surpassing the Zacks Consensus Estimate of 98 cents on lower loan loss provisions, higher Global Consumer Banking revenues and a drop in expenses.
Moreover, last Friday, JPMorgan Chase & Company (JPM) reported earnings per share of $1.40, beating the Zacks Consensus Estimate of $1.20 as well as prior-year quarter’s earnings of $1.02 per share. Despite the impact of a number of legal and regulatory issues as well as fundamental pressures like low interest rate and sluggish loan demand, JPMorgan’s earnings were aided by a marked improvement in capital market activity and healthy mortgage business.
Likewise, Wells Fargo & Company (WFC), which achieved its eleventh consecutive quarter of growth in earnings per share, reported earnings of 88 cents per share in third quarter 2012, improving from 82 cents earned per share in the prior quarter and 72 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by a penny. Results at Wells Fargo benefited from improvements in non-interest income as well as cost control measures.
We believe that U.S. Bancorp’s attractive core franchisee, diverse revenue stream and strong performance in the past years are impressive. Solid capital position, improving credit quality and increase in lending activities augur well. It adheres to a conservative growth stratagem and has made small but strategic acquisitions. Exposure to mortgage buybacks and legal hassles are also minimal.
Yet regulatory issues along with the expectation of a continued low interest rate environment are likely to limit the stock’s upside potential in the upcoming quarters. Moreover, the shares of U.S. Bancorp have a Zacks #2 Rank, which translates into a short-term Buy rating.
More From Zacks.com