DBRS: U.S. Bancorp 2Q14 Strong Performance Trend Continues; Solid Loan Growth

Summary:
• Strong 2Q14 performance including a return on average assets of 1.60%, return on average common equity of 15.1%, and adjusted core revenue growth of 3%.
• USB franchise fundamentals are strong and the Company remains well-positioned for additional organic 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) 2Q14 results as reflecting continued strong performance. One-time items in the quarter, which were previously announced and were largely offsetting, included a $200 million FHA Department of Justice settlement and a $214 million gain on Visa Inc. Class B common stock sale. Once again, the Company achieved positive operating leverage for the quarter, as USB continues to demonstrate strong discipline in controlling expenses as well as substantial organic loan and deposit growth. Positively, USB has continued to show solid credit and capital trends which are supportive of the rating level. USB also continues to invest in growing its franchise, including enhancing mobile and other technology initiatives, as well as its recently completed Chicagoland branch purchase from RBS Citizens, which doubled its deposit share in that market.

Despite ongoing net interest margin pressure, net interest income increased quarter-on-quarter (QoQ) reflecting growth in loans and investment securities, as well as the higher day count this quarter. Additionally, with a diversified product set, USB saw good broad-based growth in non-interest income that benefitted from seasonally higher transaction volumes. DBRS notes that mortgage banking revenue, while down substantially compared to last year, was up QoQ due to a favorable change in the valuation of mortgage servicing rights. Expense levels continue to be well-managed and were relatively stable sequentially. As a result of revenue growth and relatively stable expenses, the efficiency ratio (excluding one-time items) improved to 51.3% from 52.9% QoQ.

Credit continues to be strong. Specifically, net charge-offs increased modestly on a linked quarter basis and non-performing assets (NPAs) continued to decline. NPAs (excluding covered assets) are now at a modest 0.75% of loans and other real estate. Given the improvement in credit and its overall level of reserve coverage, the Company released $25 million in reserves this quarter. DBRS notes that the pace of reserve releases is decreasing as the loan portfolio grows and the improvement in asset quality slows.

USB maintains ample capitalization with an estimated Common Equity Tier 1 capital ratio to risk-weighted assets under the Basel III fully implemented standardized approach transition rules of 8.9%, slightly below the linked quarter and above the fully phased-in 7% regulatory requirement. The Company returned 75% of earnings to shareholders in 2Q14, in line with its target of returning 60% to 80%. 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 confirmed U.S. Bancorp’s Issuer & Senior Debt rating of AA with a Stable trend on May 16, 2014.

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