Fitch: Strong Mortgage Banking Drives U.S. Bancorp's Results
U.S. Bancorp's (USB) reported fourth quarter 2012 (4Q'12) net income of $1.42 billion, down slightly from the sequential quarter, but up 5.2% from the year-ago quarter, according to Fitch Ratings. This equated to a very strong 1.62% return on assets (ROA) on the quarter. Fitch notes that this high level of operating performance continues to be reflective of USB's strong ratings (long-term IDR of 'AA-'), which places USB as one of Fitch's highest rated banks, globally.
USB's continued strength in mortgage banking continued to be a large contributor to earnings. In 4Q'12, USB earned $476 million in mortgage banking income, down slightly from the sequential quarter, but still very strong compared to historical results. This was likely due to a mix of higher mortgage originations from refinancing activities amid the decline in mortgage rates as well as some larger players having exited the mortgage market.
The growth in mortgage banking also benefited USB's loan growth compared to both the sequential quarter as well as the year-ago quarter. To wit, in 4Q'12 residential mortgages held on balance sheet increased 5.3% from the sequential quarter and 19% from the year ago quarter. In junction with somewhat similar growth rates in commercial lending, partially offset by reductions in covered loans, USB's total loans in 4Q'12 grew 1.5% from the sequential quarter and 6.4% from the year ago quarter. Fitch views this growth positively.
Fitch notes that USB's credit quality continues to improve across most lending categories. Overall, both the company's non-performing asset ratio and net-charge off ratio declined from both the sequential quarter and year-ago quarter. While Fitch views this positively, it would also note that as USB's new loans begin to season, continued improvement in credit metrics could begin to abate at some point.
USB's liquidity continues to be strong with 6.6% sequential growth in attractive non-interest bearing demand deposits and 3.7% sequential growth in savings deposits, more than offsetting the planned reduction in higher cost certificates of deposits. This mix shift accompanied by the impact of long-term debt re-pricing improved the rate paid on interest bearing liabilities by 4 basis points (bps) to 0.84% in 4Q'12. This helped partially offset the 9 bps reduction in asset yields to 4.15%, causing the company's net interest margin to only marginally decline and remain strong at 3.55% in 4Q'12.
Fitch believes USB's capital position remains sound despite additional buybacks and continued dividends. The company's Tier 1 common equity ratio under Basel I definitions was unchanged at 9% in 4Q'12, and the Tier 1 common equity ratio using proposed rules for Basel III was also essentially unchanged at 8.1% at 4Q'12.
Additional information is available at 'www.fitchratings.com'.
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies
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