DBRS: U.S. Bancorp 4Q Financial Performance with Organic Growth Continues to Outperform the Industry
Banking OrganizationsSummary:
• Strong 4Q14 performance including a return on average assets of 1.50%, return on average common equity of 14.4%, roughly in line with the linked quarter 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 as it closely manages expenses over the near term.
• 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) 4Q14 results as reflecting continued strong performance in a challenging operating environment. USB continues to demonstrate strong discipline in controlling expenses, as well as steady organic loan and deposit growth. The Company reported positive operating leverage on a year-over-year (YoY) basis. Positively, USB has continued to show solid credit and capital trends, which are supportive of the rating level.
Despite ongoing, although moderating, net interest margin pressure, net interest income increased quarter-on-quarter (QoQ) reflecting growth in loans and investment securities. Additionally, non-interest income (excluding notable items that boosted 4Q14 revenues) increased on seasonally higher credit and debit card sales volumes and higher commercial products revenue, partially offset by lower corporate payments volume and mortgage revenue. Expense levels, despite increasing QoQ, continue to be well-managed. The QoQ increase was driven by higher marketing and business development expense, higher professional services expense and seasonally higher costs related to investments in tax advantaged projects and the legal accruals. While remaining best-in-class, the efficiency ratio (excluding notable items) worsened to 53.8% from 52.4% QoQ as a result of just modest QoQ revenue growth and increased expenses.
Credit continues to be strong. Specifically, net charge-offs decreased and non-performing assets (NPAs) continued on a downward trajectory. Given the improvement in credit and its overall level of reserve coverage, the Company released a modest $20 million in reserves this quarter, lower than the linked quarter. DBRS notes that, unlike some peers, USB has not been overly reliant on reserve releases to boost earnings.
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 of 9.0%, unchanged from the linked quarter, and well-above the fully phased-in 7% regulatory requirement and the Company’s 8% target. The Company returned 66% of earnings to shareholders in 4Q14, in line with its target of returning 60% to 80%. With average quarterly deposits at 112% 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. Based on its interpretation of the final U.S. Liquidity Coverage Ratio (LCR) rule, the Company is compliant with the fully implemented LCR requirement.
DBRS rates U.S. Bancorp’s Issuer & Senior Debt rating at AA with a Stable trend.
Note:
All figures are in U.S. dollars unless otherwise noted.