U.S. Bancorp (USB) has yet again delivered encouraging fourth quarter 2012 results. Aided by growth in revenue as well as positive operating leverage, the company reported earnings per share of 75 cents, inching past the Zacks Consensus Estimate by a penny. Moreover, it compared favorably with earnings per share of 69 cents in the year-ago period.
Notably, including a previously disclosed $80 million expense accrual for a mortgage foreclosure-related regulatory settlement, net income attributable to U.S. Bancorp stood at $1.4 billion or 72 cents per share.
For the full year 2012, earnings per share reached $2.84 per share, marginally below the Zacks Consensus Estimate of $2.86 per share. However, earnings compared favorably with the prior-year earnings of $2.46 per share.
Performance in Detail
U.S. Bancorp’s net revenues came in at around $5.1 billion in the quarter, up 0.2% year over year, but lagged the Zacks Consensus Estimate of $5.2 billion. Results were primarily supported by increases in net interest income and mortgage banking revenue. The company achieved positive operating leverage on a year-over-year basis.
For full year 2012, the company reported revenue of $20.3 billion, up 6.2% year over year and in line with the Zacks Consensus Estimate.
U.S. Bancorp’s tax-equivalent net interest income stood at $2.8 billion in the quarter, reflecting a 4.1% rise from the comparable last year quarter. 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 5.8% year over year driven by growth in average total loans and average investment securities.
However, net interest margin of 3.55% fell 5 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.
U.S. Bancorp’s average total loans climbed 6.4% year over year to $13.2 billion, owing to growth in commercial loans, residential mortgages, commercial mortgages, retail leasing, credit card loans and other retail loans. These increases were partially offset by drop in construction and development, lease financing, home equity and second mortgages as well as covered loans. Excluding covered loans, average total loans accelerated 8.6% year over year.
Average total deposits were up 9.2% from the prior-year quarter to $20.5 billion, primarily reflecting growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.
Non-interest expense declined 0.4% year over year to $2.7 billion at U.S. Bancorp. Reduced other expense and lower net occupancy and equipment expenses resulted in the year-over-year decrease in non-interest expense. These declines were partially offset by higher compensation, employee benefits and professional services expenses.
On the negative side, U.S. Bancorp’s non-interest income moved down 4.2% year over year to $2.3 billion. Lower ATM processing services revenue and reduced other non-interest income led to this decline. These decreases were partially offset by higher mortgage banking revenue and elevated investment products fees and commissions.
Credit metrics improved 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 0.88% of average loans outstanding, down 16 bps sequentially and 40 bps year over year. On both sequential and 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 0.98%, down 8 bps sequentially and 34 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 decreased 9.2% sequentially and 10.9% year over year to $443 million in the reported quarter.
During the quarter under review, U.S. Bancorp’s Tier 1 capital ratio came in at 10.8%, down from 10.9% reported in the prior quarter and in line with the year-ago quarter. The Tier 1 common equity to risk-weighted assets ratio was 9.0% as of Dec 31, 2012, in line with the ratio reported as of Sep 30, 2012, and ahead of 8.6% as of Dec 31, 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 Jun 2012, the Tier 1 common equity to risk-weighted assets ratio was around 8.1% as of Dec 31, 2012 compared with 8.2% as of Sep 30, 2012.
U.S. Bancorp posted an improvement in book value per share, which increased to $18.31 as of Dec 31, 2012, from $18.03 at the end of the prior quarter and $16.43 at the end of the prior-year quarter.
U.S. Bancorp’s lead bank, U.S. Bank, announced the purchase of FSV Payment Systems, a Florida-based prepaid card processing company in November 2012. The deal terms were, however, not made public.
The deal is a strategic fit for U.S. Bancorp’s banking unit as it will strengthen its position in the prepaid market, which has been the company’s priority over the last decade. A reputed organization in the prepaid card market, FSV both manages and processes its own programs.
Therefore, the combined entity, which will capitalize on U.S. Bank’s payment strength and prepaid expertise, will be well positioned to provide efficient end-to-end prepaid programs and services to its clients.
Earlier in November, in an effort to augment its securities services business, U.S. Bancorp’s subsidiary -- U.S. Bancorp Fund Services, LLC -- announced its plan to acquire AIS Fund Administration, which offers fund administration and related services to alternative investment managers. The deal will add about $25 billion in hedge fund assets under administration to the U.S. Bancorp subsidiary.
Capital Deployment Update
During the year 2012, U.S. Bancorp declared $3.4 billion in common stock dividends and repurchased 59 million shares in total. Notably, during the fourth quarter, the company declared $366 million in common stock dividends and bought back common stock worth $413 million in total.
Reflecting U.S. Bancorp’s capital strength during the fourth quarter, the company was able to return earnings to its shareholders as dividends and share repurchases within the range of its long-term goal of returning 60–80%.
Wells Fargo & Company (WFC) achieved the twelfth consecutive quarter of growth in earnings per share by reporting earnings of 92 cents per share in fourth quarter 2012. Results improved from earnings per share of 88 cents in the prior quarter and 73 cents in the year-ago quarter. Also, it beat the Zacks Consensus Estimate by 5 cents.
Results at Wells Fargo benefited from improvement in top line, aided by rise in all segments’ revenue. It also reported $250 million in reserve release (pre-tax), attributable to improved portfolio performance. However, the company experienced rise in non-interest expenses.
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 Rank #3 (Hold). We believe such strong results might lead to positive earnings estimate revisions.
Ensuing this, we look forward to the results of Citigroup, Inc. (C) and Bank of America Corporation (BAC) on January 17.
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