U.S. Bancorp Reports Solid Q4 Earnings on High Revenues - Analyst Blog

U.S. Bancorp’s (USB) fourth-quarter 2014 earnings per share of 78 cents beat the Zacks Consensus Estimate by a penny. Moreover, results were above the prior-year quarter earnings of 76 cents.

Including certain one-time items, net income attributable to U.S. Bancorp was $1.5 billion or 79 cents per share in the quarter. Higher revenues, a strong capital position, lower nonperforming assets and growth in average loans and deposits were the positives for the quarter. However, increase in expenses was recorded.

For full-year 2014, earnings per share reached $3.08 per share, slivering past the Zacks Consensus Estimate by a penny. Moreover, earnings compared favorably with the prior-year earnings of $3.00 per share.

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 0.7% and 21.6%, respectively, while, Payment Services, Wealth Management and Securities Services and Treasury and Corporate Support segments reported a rise of 25.1%, 53.5% and 7.2%, respectively.
 

US Bancorp - Earnings Surprise | FindTheBest

Performance in Detail

For full-year 2014, the company reported revenue of $20.2 billion, up 2.9% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $19.9 billion.

U.S. Bancorp’s net revenue came in at around $5.2 billion in the quarter, up 5.7% year over year. Results were primarily driven by an increase in both net interest and non-interest income. Moreover, revenue outpaced the Zacks Consensus Estimate of $5 billion.

U.S. Bancorp’s tax-equivalent net interest income stood at $2.8 billion in the quarter, reflecting a 2.4% 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.

Average earning assets were up 11.1% year over year, driven by growth in average total loans and average investment securities. Yet, net interest margin of 3.14% fell 26 basis points year over year and mainly reflected reduced rates on investment securities and new loans, partly mitigated by lower funding costs.

U.S. Bancorp’s non-interest income moved up 9.9% year over year to $2.4 billion. Increased fee income in most revenue categories led to the rise. Moreover, results included the impact of the Nuveen gain.

U.S. Bancorp’s average total loans climbed 5.9% year over year to $246.4 billion, owing to growth in commercial loans, residential mortgages, total commercial real estate, retail leasing and other retail loans. These increases were partially offset by a drop in covered loans. Excluding covered loans, average total loans rose 7.1% year over year.

Average total deposits were up 7.2% from the prior-year quarter to $275.5 billion. The increase stemmed from growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.

Non-interest expense increased 4.5% on a year-over-year basis to $2.8 billion at U.S. Bancorp. Elevated compensation expense and higher professional services primarily led to the rise. These negatives were partially offset by lower employee benefits and other intangibles.

Credit Quality

Credit metrics at U.S. Bancorp were a mixed bag in the reported quarter. Net charge-offs (excluding covered loans) stood at $305 million, down around 1% year over year. On a year-over-year basis, the company experienced improvement in net charge-offs in the residential mortgages and home equity and second mortgages portfolios, partially offset by deterioration in commercial loan net charge-offs and reduced recoveries in commercial real estate portfolio.

Total allowance for credit losses was $4.4 billion, down 2.2% year over year. U.S. Bancorp’s nonperforming assets (excluding covered assets) were $1.8 billion, down 2.8% year over year.  However, provision for credit losses increased 4% year over year to $288 million in the reported quarter.

Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. Effective Jan 1, 2014, the regulatory capital requirements for the company comply with 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 advanced approach of Basel III became effective. The transitional common equity tier 1 capital ratio was 9.7% as of Dec 31, 2014 compared with 9.4% as of Dec 31, 2013, under standardized approach.

The tier 1 capital ratio was 11.3% compared with 11.2% as Dec 31, 2013. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9% as of Dec 31, 2014, compared with 8.8% as of Dec 31, 2013.

All regulatory ratios of U.S. Bancorp continued to be in excess of “well-capitalized” requirements. Moreover, based on the Basel III transitional advanced approach, the Tier 1 common equity to risk-weighted assets ratio was estimated at 12.4% as of Dec 31, 2014 and as of Sep 30, 2014. The common equity tier 1 capital to risk-weighted assets ratio under the Basel III advanced approach fully implemented was 11.8% as of Dec 31, 2014 and as of Sep 30, 2014.

The tangible common equity to tangible assets ratio was 7.5%, compared with 7.7% as of Dec 31, 2013.

U.S. Bancorp posted an improvement in book value per share, which increased to $21.68 as of Dec 31, 2014 from $19.92 at the end of the prior-year quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the fourth quarter, U.S. Bancorp returned 66% of earnings to shareholders through common stock dividends of $439 million and stock buyback worth $495 million. Notably, in 2014, the company returned 72% of earnings to shareholders through dividends and share buybacks. Both were within the range of its long-term goal of returning 60–80% to shareholders.

In Conclusion

We believe that U.S. Bancorp’s attractive core franchisee, diverse revenue streams and strong performance in the past years have been impressive. A solid capital position and increase in lending activities augur well for the company. It adheres to a conservative growth stratagem and has made small but strategic acquisitions.

Moreover, the latest hike of 6.5% in the quarterly common stock dividend in Jun 2014 marks U.S. Bancorp’s fourth 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.

Though 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, there are concerns related to the impact of legal issues and its global exposures. The shares of U.S. Bancorp currently carry a Zacks Rank #3 (Hold).

Performance of Other Major Banks

The fourth-quarter earnings season kick started with Wall Street biggies – Wells Fargo & Company (WFC) and JPMorgan Chase & Co. (JPM). Amid a challenging industry backdrop, Wells Fargo’s fourth-quarter 2014 earnings met expectations. The financial bigwig came out with earnings per share of $1.02, meeting the Zacks Consensus Estimate. Also the reported figure came above the year-ago figure of $1.00.

JPMorgan came out with adjusted earnings of $1.45 per share, ahead of the Zacks Consensus Estimate as well as the prior-year quarter earnings of $1.30 per share. Earnings exclude an impact of $990 million related to after-tax legal expenses. Considering this significant one-time item, the company has earned $1.19 per share.   

Another banking major – Citigroup Inc. (C) reported adjusted earnings per share of 6 cents for fourth-quarter 2014, missing the Zacks Consensus Estimate of 9 cents. Further, earnings came significantly below the year-ago figure of 82 cents per share. Including the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA), Citigroup reported net income of $350 million, which was significantly down from $2.5 billion reported in the prior-year quarter.

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