U.S. Bancorp Earnings In Line, Revs Drop - Analyst Blog

U.S. Bancorp USB has reported in-line results in first-quarter 2014. The company's earnings per share came in at 73 cents, flat with the year-ago period results as well as the Zacks Consensus Estimate.

Shares of U.S. Bancorp increased around 1% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the trading session will give a better idea about whether U.S. Bancorp has been able to meet expectations.

A strong capital position, improving credit quality and growth in average loans and deposits were the positives for the quarter.  However, higher non-interest expenses reflected undisciplined expense management. Further, lower top line was a concern.

Net income attributable to U.S. Bancorp was $1.4 billion in the quarter, down 2.2% year over year.

Furthermore, segment-wise, on a year-over-year basis, quarterly net income in Wholesale Banking and Commercial Real Estate and Consumer and Small Business Banking segments fell 9.7% and 20.9%, respectively, while, Payment Services, Wealth Management and Securities Services and Treasury and Corporate Support segments reported a rise of 11.0%, 41.2% and 8.0%, respectively.

Performance in Detail

U.S. Bancorp's net revenue came in at around $4.8 billion in the quarter, down 1.2% year over year but was almost in line with the Zacks Consensus Estimate. Results were primarily impacted by decrease in net interest and non-interest income.

U.S. Bancorp's tax-equivalent net interest income stood at $2.7 billion in the quarter, reflecting a 0.1% dip from the comparable last-year quarter. The drop was mainly due to reduced rates on loans and investment securities, partially offset by a rise in corresponding average balances, continued growth in lower cost core deposit funding and the positive impact from maturities of higher-rate long-term debt.

Average earning assets were up 3.9% year over year, driven by growth in average total loans and average investment securities. Yet, net interest margin of 3.35% fell 13 basis points year over year and mainly reflected reduced rates on investment securities and loans, partly mitigated by lower rates on deposits and reduced higher cost long-term debt.

U.S. Bancorp's non-interest income moved down 2.6% year over year to $2.1 billion. Reduced mortgage banking revenues primarily led to the decline.

U.S. Bancorp's average total loans climbed 6% year over year to $235.9 billion, owing to growth in commercial loans, residential mortgages, total commercial real estate, retail leasing and credit card loans. These increases were partially offset by a drop in home equity and second mortgages and covered loans. Excluding covered loans, average total loans rose 7.6% year over year.

Average total deposits were up 5.1% from the prior-year quarter to $257.5 billion. The upsurge stemmed from growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.

Non-interest expense increased 3% on a year-over-year basis to $2.5 billion at U.S. Bancorp. Elevated compensation expense and higher other expense primarily led to the rise. These negatives were partially offset by lower tax-advantaged projects costs and reduced costs related to other real estate owned.

Credit Quality

Credit metrics improved at U.S. Bancorp in the reported quarter. Net charge-offs (excluding covered loans) stood at $336 million, down 22.2% year over year. On a year-over-year basis, the company experienced improvement in net-charge-offs in the residential mortgage and other retail portfolios.

U.S. Bancorp's nonperforming assets (excluding covered assets) were $1.8 billion, down 10% year over year. Provision for credit losses decreased 24.1% year over year to $306 million in the reported quarter.

Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. Effective Jan 1, 2014, the regulatory capital requirements for the company follows Basel III, subject to certain transition provisions from Basel I over the next four years to full implementation by Jan 1, 2018.  Therefore, the transitional common equity tier 1 capital ratio was 9.7% as of Mar 31, 2014.

The tier 1 capital ratio was 11.4% compared with 11.0 % as Mar 31, 2013. The tangible common equity to tangible assets ratio was 7.8%, up from 7.4% in the prior-year quarter.

All regulatory ratios of U.S. Bancorp continued to be in excess of “well-capitalized” requirements. Moreover, based on the Basel III fully implemented standardized approach, the Tier 1 common equity to risk-weighted assets ratio was estimated at 9.0% as of Mar 31, 2014, up from 8.2% in the prior-year quarter.

U.S. Bancorp posted an improvement in book value per share, which increased to $20.48 as of Mar 31, 2014 from $18.71 at the end of the prior-year quarter.

Capital Deployment Update

Reflecting the company's capital strength during the first quarter, U.S. Bancorp returned 67% of earnings to shareholders through common stock dividends of $420 million and the stock buyback of $482 million. This was within the range of its long-term goal of returning 60–80%.

Further, during the quarter, U.S. Bancorp's capital plan was approved by the Federal Reserve under the 2014 Comprehensive Capital Analysis and Review (CCAR). The company's 2014 plan included a request to increase its capital distributions over the next four fiscal quarters.

Therefore, on the Fed's approval, U.S. Bancorp plans to make a proposal to its board of directors in June to increase the quarterly common stock dividend by 6.5% to 24.5 cents per share to be paid in Jul 2014. At this quarterly dividend rate, the annual dividend will come in at 98 cents per share.

Additionally, U.S. Bancorp's board of directors approved a one-year authorization to buyback up to $2.3 billion of its common stock, which began on Apr 1, 2014 and replaced the prior authorization that expired on Mar 31, 2014.

In Conclusion

We believe that U.S. Bancorp's attractive core franchisee, diverse revenue streams and strong performance in the past years are impressive. A solid capital position, improving credit quality and increase in lending activities augur well for the company. It adheres to a conservative growth stratagem and has made small but strategic acquisitions. Exposure to mortgage buybacks and legal hassles are also minimal.

However, the top-line headwinds are expected to persist, given the protracted economic recovery. Also, a low interest-rate environment would keep U.S. Bancorp's margins under pressure. With the thrust on banking regulations, there will be pressure on fees and loan growth.

Though there are concerns related to the impact of legal issues and its global exposures, equity-centric activities in the U.S. are expected to support U.S. Bancorp's results in the upcoming quarters with continued recovery in the capital markets. The shares of U.S. Bancorp currently carry a Zacks Rank #3 (Hold).

Performance of Other Major Banks

Higher expenses led Northern Trust Corp. NTRS to report first-quarter 2014 earnings of 75 cents per share, missing the Zacks Consensus Estimate of 78 cents. However, this compared favorably with adjusted 71 cents earned in the year-ago quarter. Lower-than-expected results were mainly due to a rise in operating expenses, partially offset by top-line growth.

Among other major regional banks, Fifth Third Bancorp FITB is scheduled to report on Apr 17, while State Street Corp. STT will report on Apr 25.