Press Release

DBRS Comments on U.S. Bancorp’s 4Q12 Earnings – Senior at AA Unchanged

Banking Organizations
January 17, 2013

DBRS, Inc. (DBRS) has today commented that the ratings of U.S. Bancorp (USB or the Company), including its Issuer & Senior Debt rating of AA, are unchanged following the release of the Company’s 4Q12 earnings. The trend on all ratings remains Stable. For the quarter, USB reported net income to common of $1.3 billion, 3.9% lower than 3Q12 and 2.7% higher than 4Q11.

In DBRS’s view, USB’s solid fourth quarter results highlight the strength of the Company’s franchise but also highlight the difficult operating environment for even the best bank operators. Year over year (YoY), USB was able to grow revenues and adjusted income before provisions and taxes (IBPT), but sustained declines on a linked quarter basis primarily due to weaker mortgage revenue. The Company continues to generate good returns, including an ROCE of 15.6% in 4Q12, which differentiates it from many of its competitors. At the same time, capital remains solid, funding remains robust, and credit continues to normalize; all of which are constructive for fixed income investors and supportive of the rating.

Specifically, revenues, which are well-diversified by product and split 54%/46% between spread and fee income in 4Q12, increased 5.4% from 4Q11 to $5.1 billion (excluding the $263 million settlement recorded at 4Q11).IBPT was up 9.8% to $2.4 billion over the same time. For the full year 2012, adjusted revenues grew 6% to $20.0 billion and IBPT grew 8.8% to $9.7 billion. DBRS sees these indicators of strengthening USB core revenues as a reflection of its strong and well-managed franchise. Over the fourth quarter, net interest income was flat as a 4 basis point (bps) decline in net interest margin (NIM) to 3.55% due to lower earning asset yields was offset by a healthy 1.1% ($3.3 billion) growth in average earning assets. DBRS expects moderate net interest margin (NIM) pressure in the coming quarter, in the mid-single digit range, given the relatively low reinvestment rate.

While mortgage revenues declined 8% from the prior quarter (and included a $16 million increase to rep and warranty reserves), the Company still benefited from a strong mortgage banking quarter at $476 million in revenues where originations grew 2.7% but gain on sale margins declined. Seasonally higher credit and debit card along with higher trust and investment management fees also contributed to fee income but were more than offset by one-time items both QoQ and YoY. On a DBRS-adjusted basis (excluding one-time items and securities gains/losses), USB was able to generate strong operating leverage YoY as the 5.4% growth in DBRS-adjusted revenues outpaced a more modest 1.6% rise in DBRS-adjusted expenses, however, the same DBRS-adjusted basis produced negative operating leverage QoQ as expenses declined 0.1% (roughly flat excluding the $80 million mortgage foreclosure settlement) while revenues fell 1.3%. As a result, the efficiency ratio increased to 52.6% from 50.4% but remained the envy of other large U.S. banks. Going forward, professional services expenses associated with the mortgage servicing review, estimated at $50 million quarterly, will decline given the aforementioned announced foreclosure settlement.

Fourth quarter results also evidenced positive underlying balance sheet trends. Average loans (excluding covered loans) increased 2.0% in the quarter, and were up 8.6% YoY. Growth over the quarter was driven by 2.8% growth in average commercial loans and 5.3% growth in average residential mortgages. USB again added mortgage loans to the portfolio in the quarter (average balances up $2.2 billion). DBRS also notes that average total deposits grew 1.9% QoQ to $243.8 billion. 90% ($4.5 billion) of the average growth was in non-interest bearing deposits and most of the remaining increase was in the $488 million growth of average saving balances.

Credit continues to improve at USB, evidenced by further improvement in most key credit metrics but management has been signalling that commercial loan metrics have mostly normalized, residential mortgage and home equity have a year or two to go to normalization and reserve releases are nearing their end. Total net charge offs (NCOs) of $468 million declined $70 million QoQ and were 0.85% of total average loans; below what the Company sees as its normalized range of 1.0% annually. Nonperforming assets (excluding covered assets), fell 4.6% from 3Q12, to $2.1 billion. Accruing 90+ day delinquencies (excluding covered loans) were $660 million, up 2.5% from the end of 3Q12. Given current trends, USB released $25 million of reserves in the quarter, half of the $50 million in the third quarter and one-fifth of the $125 million in the fourth quarter of 2011. In DBRS’s view, USB’s $4.7 billion allowance for credit losses continues to provide solid coverage. At December 31, reserves covered 218% of nonperforming assets (ex-covered loans) and were 2.12% of total loans.

USB’s financial fundamentals and capital position remain sound and support the Company’s rating levels and Stable trend. DBRS sees USB as less impacted by Basel III than larger U.S. banks given its limited capital markets activities and its comparatively smaller mortgage servicing business. Evidencing this contained impact, the Company’s estimated Basel III Tier 1 Common ratio (on a fully implemented basis) was 8.1%, down 10 bps QoQ and only 90 bps below its Basel I Tier 1 common ratio of 9.0%. DBRS views USB’s current capital levels as continuing to provide substantial loss absorption capacity given its moderate risk profile and strong organic capital generation capacity.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]