DBRS: U.S. Bancorp Net Income Flat QoQ; Continues to Outperform

Summary:
• Solid 3Q15 performance including net income of $1.5 billion which equated to an industry leading return on average assets of 1.44% and a return on average common equity of 14.1%, both modestly lower than the linked quarter.
• 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’s Issuer & Senior Debt rating at AA with a Stable trend.

DBRS, Inc. (DBRS) views U.S. Bancorp’s (USB or the Company) 3Q15 results as reflecting ongoing strong performance in an operating environment that remains challenging. USB continues to demonstrate strong expense discipline, as well as steady organic loan and deposit growth. Moreover, USB has continued to show solid credit and capital trends, which are supportive of its rating level.

Net interest income increased quarter-on-quarter (QoQ) reflecting growth in average total loans and an additional day in the quarter. While still pressured, the net interest margin was stable QoQ. Meanwhile, non-interest income increased on higher other income, commercial products revenue, as well as seasonally higher corporate payments products revenue, partially offset by lower mortgage revenue. Expense levels increased QoQ, yet DBRS still views overall expenses as well-managed. As a result, the efficiency ratio was up modestly to 53.9% linked quarter although remaining best-in-class. Management expects the efficiency ratio to remain in the low 50% range as it continues to actively manage expenses.

Credit continues to be strong. Specifically, non-performing assets (NPAs) continued on a downward trajectory and net charge-offs remain at low levels. DBRS views both ratios as near cyclical lows and expects loan recoveries to decline and NPA levels to normalize over the intermediate term. Given the ongoing improvement in credit and its overall level of reserve coverage, the Company released a modest $10 million in reserves this 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 80% of earnings to shareholders in 3Q15, at the top-end of management’s target range of returning 60% to 80%. The Company maintains a robust funding profile with average quarterly deposits at 116% of average loans.

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.