DBRS: U.S. Bancorp Revenue Up Linked Quarter on Growth, Seasonality; Continues to Outperform

Summary:
• Solid 2Q15 performance including a return on average assets of 1.46%, return on average common equity of 14.3%, modestly higher than the linked quarter as USB remains one of the strongest performing banking companies globally.
• USB franchise fundamentals are strong and the Company remains well-positioned for additional organic growth as it closely manages expenses over the near term.
• On May 15, 2015, DBRS confirmed U.S. Bancorp’s Issuer & Senior Debt at AA with a Stable trend.

DBRS, Inc. (DBRS) views U.S. Bancorp’s (USB or the Company) 2Q15 results as reflecting ongoing strong performance in an operating environment that remains challenging. USB continues to demonstrate strong discipline in controlling expenses, as well as steady organic loan and deposit growth. Positively, USB has continued to show solid credit and capital trends, which are supportive of its rating level.

Net interest income increased modestly quarter-on-quarter (QoQ) reflecting growth in average earning assets partially offset by ongoing, although moderating, net interest margin pressure,. Additionally, non-interest income increased on seasonally higher credit and debit card sales volumes, merchant processing services, deposit service charges and higher trust and investment management fees, partially offset by lower mortgage revenue. Expense levels, which DBRS views as well-managed, increased modestly QoQ. The QoQ increase was driven by higher professional services expenses related to mortgage servicing and compliance related matters and higher marketing and business development expenses, partially offset by seasonally lower payroll taxes. The efficiency ratio improved to 53.2% from 54.3% QoQ as a result of the positive operating leverage this quarter and remains best-in-class.

Credit continues to be strong. Specifically, non-performing assets (NPAs) continued on a downward trajectory and net charge offs, while up QoQ on lower recoveries, remain at low levels. DBRS views both ratios near cyclical lows as loan recoveries continue to decline and NPA levels normalize. Given the ongoing improvement in credit and its overall level of reserve coverage, the Company released a modest $15 million in reserves this quarter, unchanged from 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 9.2%, unchanged from the linked quarter, and well-above the fully phased-in 7% regulatory requirement and the Company’s 8% target. The Company returned 76% of earnings to shareholders in 2Q15, in line with management’s target of returning 60% to 80%. The Company maintains a healthy funding profile with average quarterly deposits at 116% of average loans. Additionally, based on USB’s interpretation of the final U.S. Liquidity Coverage Ratio (LCR) rule, the Company previously disclosed that it 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.