DBRS Comments on U.S. Bancorp’s 3Q13 Earnings – Senior at AA Unchanged

DBRS, Inc. (DBRS) has today commented on the ratings of U.S. Bancorp (USB or the Company), including its Issuer & Senior Debt rating of AA. The ratings are unchanged following the release of the Company’s 3Q13 earnings and the trend on all ratings remains Stable. For the quarter, USB reported net income to common shareholders of $1.4 billion, in line with recent results. The Company continues to generate strong, industry-leading returns, including a ROCE of 15.8% and ROAA of 1.65%, differentiating USB from many of its competitors and peers. Additionally, capital remains solid, funding remains ample, and asset quality indicators continue to improve; all of which support the Company’s high ratings.

In DBRS’s view, USB’s solid quarterly results reflect the strength of the Company’s franchise but also illustrate revenue headwinds largely from declining mortgage banking activity facing USB and the entire industry. USB saw a modest decline (1.2%) in revenue growth QoQ and a more substantial 5.6% decrease YoY. Meanwhile, DBRS-adjusted income before provisions and taxes (IBPT) decreased 9.5% YoY and a more modest 2.4% QoQ. The Company saw a decrease in revenue on a linked quarter basis primarily due to weaker mortgage banking revenue, offset partially by an increase in net interest income and other non-interest income growth.

For 3Q13, net interest income increased reflecting both a stable linked quarter net interest margin (NIM; at 3.43%) and an increase in average earning assets from growth in loans in the quarter. The Company had expected a stabilization of NIM in 3Q13 given the interest rate environment, improving reinvestment rates, and the outlook for loan growth.

Growth in other areas of non-interest income, reflecting USB’s diversified business model, and flat expenses helped to offset the decline in mortgage banking revenue. Mortgage banking revenue fell 36.8% YoY and 17.2% QoQ to $328 million. Mortgage production volume declined almost 15% in the quarter while applications contracted 44%. Positively, seasonally higher sales volumes in corporate payment products and an increase in deposit service charges due to volume and pricing changes helped to offset the decline in mortgage banking. Noninterest expense increased on a linked quarter basis by a very modest 0.3% largely reflecting higher occupancy and equipment expense and higher costs related to tax-advantaged projects. These were partially offset by lower compensation and marketing expenses as compared to the previous quarter. In addition, the Company’s efficiency ratio increased modestly to 52.4% from 51.7%. USB’s operating efficiency remains an important competitive advantage for the Company and is expected to remain in the low 50% range.

The 3Q13 results also evidenced positive underlying balance sheet trends. Average loans (excluding covered loans) increased 2.2% in the quarter, and were up 7.5% YoY. Growth over the quarter was driven by 2.2% growth in average commercial loans and 4.8% growth in average residential mortgages. DBRS also notes that average total deposits grew 2.0% QoQ to $252.4 billion.

Credit continues to improve at USB, evidenced by further improvement in most key credit metrics. Net charge-offs (NCOs) totaled $320 million (excluding covered loans) declining $53 million QoQ and represented 0.58% of average loans; remaining below what the Company sees as its normalized range of 1.0% annually. Nonperforming assets (excluding covered assets), fell 2.1% from 2Q13, to $1.9 billion and represent just 0.85% of loans and other real estate owned. Given current favorable asset quality trends, USB released $30 million of reserves in the quarter, the same as the previous two quarters. In DBRS’s view, USB’s $4.6 billion allowance for credit losses continues to provide solid coverage at 235% of nonperforming assets (ex-covered loans) and 1.99% of total loans at 3Q13.

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 market activities and its comparatively smaller mortgage servicing business. Evidencing this contained impact, the Company’s estimated Basel III Tier 1 Common ratio (using the standardized approach) was 8.6%, only 70 bps below its Basel I Tier 1 common ratio of 9.3%. 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. The Company continues to target returning 60% to 80% of earnings to shareholders and returned 77% of earnings to shareholders in 3Q13 through its common stock dividend and share repurchases.

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

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