DBRS: U.S. Bancorp 3Q14 Strong Performance Trend Continues; Solid Loan Growth

Summary:
• Strong 3Q14 performance including a return on average assets of 1.51%, return on average common equity of 14.5%, as USB remains one of the strongest performing banking companies.
• 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) 3Q14 results as reflecting continued strong performance in a difficult operating environment. USB continues to demonstrate strong discipline in controlling expenses, as well as substantial organic loan and deposit growth. The Company reported positive operating leverage on a YoY basis. Positively, USB has continued to show solid credit and capital trends, which are supportive of the rating level.

Despite ongoing net interest margin pressure, net interest income increased modestly quarter-on-quarter (QoQ) reflecting growth in loans and investment securities. Additionally, non-interest income (excluding notable items that boosted 2Q14 revenues) increased on seasonally higher corporate payments volumes and higher deposit service charges, partially offset by an unfavorable change in the valuation of mortgage servicing rights and lower commercial products revenue. Expense levels, despite increasing QoQ (excluding the 2Q14 FHA/DOJ settlement), continue to be well-managed and best-in-class. The QoQ increase was driven by higher mortgage servicing-related expenses, Charter One merger integration costs (which closed in late 2Q14) and seasonally higher costs related to investments in tax advantaged projects. As a result of just modest QoQ revenue growth and relatively stable expenses, the efficiency ratio (excluding notable items) improved to 52.4% from 53.1% QoQ.

Credit continues to be strong. Specifically, net charge-offs decreased modestly on a linked quarter basis and non-performing assets (NPAs) were essentially flat. NPAs (excluding covered assets) are now at a modest 0.74% 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, unchanged from the linked quarter. DBRS notes that the pace of reserve releases has slowed due to loan portfolio growth and slowing asset quality improvement.

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 9.0%, slightly above the linked quarter, and well-above the fully phased-in 7% regulatory requirement and the Company’s 8% target. The Company returned 78% of earnings to shareholders in 3Q14, in line with its target of returning 60% to 80%. With average deposits at 111% 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 during 2Q14.

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