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U.S. Bancorp Tops, Keeps Mood Upbeat

Zacks Equity Research

U.S. Bancorp’s (USB) first-quarter 2012 earnings of 67 cents per share were 3 cents ahead of the Zacks Consensus Estimate. Results were ahead of the prior-year quarter’s earnings of 52 cents. Moreover, it compared favorably with earnings of 64 cents per share (excluding certain one time items) in the prior quarter.  

The better-than-expected results at U.S. Bancorp were driven by year-over-year growth in revenue, which was supported by increases in net interest income, fee-based revenue and reduced credit costs. Capital position also remained strong. These positives were partially offset by an increase in non-interest expenses.  

U.S. Bancorp’s revenues came in at $4.9 billion, up 9.1% year over year and also exceeding the Zacks Consensus Estimate of $4.77 billion. However, on a sequential basis, revenues were down 3.4%, primarily due to the $263 million merchant settlement gain in the prior quarter, partly offset by strong mortgage banking revenue.

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 $481 million, down 3.2% sequentially and 36.3% year over year.

Quarter in Detail

U.S. Bancorp’s tax-equivalent net interest income was $2.7 billion, up 7.3% from the prior-year quarter, attributable to an increase in average earning assets and growth in lower cost core deposit funding.

Average earnings assets were up 9.5% year over year. However, net interest margin of 3.60% remained unchanged sequentially and was down 9 basis points (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 partially offset by a decrease in the cash balances held at the Federal Reserve and the credit card balance transfer fees classification change.

U.S. Bancorp’s average total loans climbed 6.4% year over year, owing to growth in residential mortgages, total commercial loans, credit card loans and total commercial real estate loans. These increases were partially offset by declines in total other retail and covered loans. 

Average total loans, excluding covered loans, increased 8.7% year-over-year. Average total deposits were up 11.7% from the prior-year quarter, primarily reflecting growth in non-interest-bearing deposits and savings deposits.

U.S. Bancorp’s non-interest income edged up 11.3% year over year to $2.2 billion. This uptick was primarily driven by higher mortgage banking revenue, merchant processing services revenue, commercial products revenue and deposit service charges. These were partially offset by a fall in credit and debit card revenue and ATM processing services revenue.

On the negative side, non-interest expense increased 10.6% year over year to $2.6 billion at U.S. Bancorp. Higher compensation expense, employee benefits costs, marketing and business development expense and other expense associated with regulatory and insurance-related costs 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 1.17% of average loans outstanding, down 11 bps sequentially and 64 bps year over year. The sequential decrease in charge-offs was principally attributable to improvement in the commercial real estate, credit card, and other retail portfolios.

U.S. Bancorp’s nonperforming assets as a percentage of related assets (excluding covered assets) were 1.22%, down 10 bps sequentially and 70 bps year over year. This year-over-year decrease was due to the fall in the construction and development nonperforming portfolios, as well as improvement in other commercial and commercial mortgage portfolios.

Capital Position

U.S. Bancorp’s capital position remained strong in the reported quarter. Capital generated from earnings resulted in improved metrics. Tier 1 capital ratio of 10.9% was slightly up from 10.8% reported both in the prior quarter and the year-ago quarter.  The Tier 1 common equity to risk-weighted assets ratio was 8.7% as of March 31, 2012, ahead of 8.6% as of December 31, 2011, and 8.2% as of March 31, 2011. 

All regulatory ratios continue to be in excess of “well-capitalized” requirements.  Additionally, using anticipated Basel III guidelines, the Tier 1 common equity to risk-weighted assets ratio was 8.4% as of March 31, 2012, up from 8.2% as of December 31, 2011, and 7.7% as of March 31, 2011.

U.S. Bancorp also posted an improvement in book value per share, which increased to $16.94 as of March 31, 2012, from $16.43 at the end of the prior quarter and $14.83 at the end of the prior-year quarter.

Capital Deployment Update

Notably, U.S. Bancorp cleared the stress test this year and following the Fed’s approval of its capital plan, has hiked its dividend 56% and also announced a new 100 million share repurchase authorization. During the reported quarter, the U.S. Bancorp repurchased around 16 million shares of common stock, of which approximately 3 million shares were bought back under the new 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, the company has returned 66% of its earnings to its shareholders in the reported quarter and this is within the range of its long-term goal of returning 60% - 80%. 

Peer Performance

Among U.S. Bancorp’s peers, JPMorgan Chase & Company (JPM) and Wells Fargo & Company (WFC), which kicked off the earnings season for the banking sector this time by reporting their earnings last Friday, reported better-than-expected earnings in the first quarter based on top line improvement.

JPMorgan Chase reported first quarter earnings per share of $1.31, topping the Zacks Consensus Estimate of $1.17. Results for the reported quarter were primarily benefited by improved revenue and slowdown in provision for credit losses, which more than offset higher non-interest expense.

Wells Fargo’s first quarter 2012 earnings of 75 cents per share were 2 cents ahead of the Zacks Consensus Estimate. Results were primarily driven by a higher top line. The company reported a growth in mortgage banking revenue. It also reported $400 million (pre tax), attributable to improved portfolio performance. However, an increase in operating expenses was on the downside.

Though Citigroup Inc.’s (C) results were full of noise this time, revenues came up pretty well. We believe better-than-expected earnings based on revenue growth at the major Wall Street Banks which has exposures to nearly every banking business is a good indicator of an overall economic environment.

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, we believe the company’s solid capital position, improving credit quality and increase in lending activities should help propel its earnings forward.  Moreover, the stress test clearance along with the company’s capital redeployment efforts serves as a positive catalyst.

U.S. Bancorp shares are maintaining a Zacks #1 Rank, which translates into a short-term “Strong Buy” rating. Following the solid earnings announcement, the stock is also trading at a premium reflecting investors’ upbeat mood.

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