DBRS: U.S. Bancorp 4Q13 Strong Performance, But Core Revenues Weaken In Difficult Environment

Summary:

• Best-of-class 4Q13 performance of 1.62% ROAA and 15.4% ROACE, although DBRS-adjusted core revenues were down 5.4% QoQ and 12.1% YoY primarily due to the mortgage slowdown and margin pressure.
• USB franchise fundamentals remain strong and well-positioned for growth.
• DBRS rates U.S. Bancorp Issuer & Senior debt at AA with a Stable trend.

In DBRS Inc.’s (DBRS) view, U.S. Bancorp’s (USB or the Company) 4Q13 results reflect strong performance in a difficult operating environment. The Company recorded full year negative operating leverage, as declines of 1.3% in net interest income and 5.8% in non-interest income were only partially offset by the 1.7% decline in noninterest expense. Nonetheless, USB performed well with solid credit and capital improvement, as well as continuing robust loan and deposit growth. DBRS considers the Company, whose fundamentals are supportive of its rating level, as well-positioned to benefit from an improving economy. Additionally, USB continues to invest in its growing franchise, most recently with the Chicago area branch purchase from RBS Citizens, which will double its market deposit share.

Mortgage banking revenues declined 30% QoQ to $231 million and 30% for the full year, as interest rates rose and mortgage refinance volumes declined. Over the year, mortgage production and application volumes fell over 60%. With a diversified product set, however, USB has been able to somewhat offset the pressure on non-interest income with growth in commercial products, credit/debit card and trust and investment revenues. Expense levels continue to be well-managed, but the efficiency ratio rose QoQ to a still low 54.9% due to seasonality, accounting changes and marketing costs. DBRS expects 1Q14 expense levels to trend back to lower historical trends.

Credit continues to improve with charge-offs and non-performing assets declining. Non-performing loans (including covered loans) are now at a modest 0.86% of loans (including OREO). DBRS notes that the 90-day delinquent loan ratio (excluding NPAs) and 90-day-or-more accruing loans ratio (excluding covered loans) both ticked up in the quarter, perhaps signaling a slowing of improvement in the future. Given the credit improvement and the level of loan reserve coverage at over twice NPAs, the Company released $35 million in reserves, as the provision fell $21 million to $277 million, enhancing earnings.

USB maintains ample capitalization with a Tier 1 Common ratio under Basel I up 10 bps to 9.4% and its estimated Basel III ratio also up 20 bps to 8.8%, far above its fully phased-in 7% regulatory requirement. With average deposits at 110% of average loans, anchoring a healthy funding profile, the Company also continues to enhance its liquidity profile by purchasing U.S. government agency-backed securities to comply with future regulatory liquidity requirements.

DBRS rates U.S. Bancorp Issuer & Senior debt at AA with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]