DBRS: U.S. Bancorp 1Q14 Strong Performance Despite Seasonally Lower Revenues

Summary:
• Solid 1Q14 performance of 1.56% return on average assets and 14.6% return on average common equity, however, revenues are down 1.5% as compared to 4Q13 primarily due to seasonality in the payments and other businesses, as well as continued 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.

DBRS Inc. (DBRS) views U.S. Bancorp’s (USB or the Company) 1Q14 results as reflecting steady strong performance in a still difficult operating environment. The Company recorded positive operating leverage for the quarter, as declines of 1.0% in net interest income and 2.2% in non-interest income were more than offset by a 5.1% reduction in noninterest expense. Additionally, USB continued to show solid credit and capital trends, as well as steady loan and deposit growth. DBRS considers the Company, whose fundamentals are supportive of its rating level, as well-positioned to benefit from a growing economy. Additionally, USB continues to invest in its growing franchise, including enhancing mobile and other technology initiatives, as well as its pending Chicagoland branch purchase from RBS Citizens, which will double its deposit share in that market.

With a diversified product set, USB was able to offset some of the seasonal pressure on non-interest income with growth in corporate payment products, trust and investment management fees and other fees. DBRS notes that mortgage banking revenue, while down substantially compared to last year, was flat quarter-on-quarter (QoQ). Expense levels continue to be well-managed and efficiency improved QoQ to 52.9% from 54.9% in 4Q13. Lower costs from professional services, tax-advantaged projects and marketing and business development helped drive the decline in expenses.

Credit continues to be well managed. Net charge-offs increased reflecting a decline in recoveries QoQ, even though non-performing assets continued to decline. Non-performing assets (including covered loans) are now at a modest 0.84% of loans and other real estate. Given the improvement in credit and its overall level of reserve coverage, the Company released $35 million in reserves this quarter.

USB maintains ample capitalization with a Common Equity Tier 1 capital ratio under the Basel III standardized approach transition rules of 9.7%. This is a 30 basis point increase from the Basel I Tier 1 Common Equity ratio as of the prior quarter end. The Company’s fully phased in Basel III standardized approach Common Equity Tier 1 capital ratio is up 20 basis points from the prior quarter end, above the fully phased-in 7% regulatory requirement. The Company returned 67% of earnings to shareholders in 1Q14, in line with its target of returning 60% to 80%. Following the Federal Reserve’s non-objection to its capital plan, USB announced a $2.3 billion new share repurchase plan and expects to recommend a 6.5% increase in its common stock dividend. With average deposits at 109% 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.]