U.S. Bancorp USB reported first-quarter 2015 earnings per share of 76 cents, in line with the Zacks Consensus Estimate. The earnings compared favorably with 73 cents per share earned in the prior-year quarter.
Results reflected higher revenues, rise in average loans and deposit balances, and a decline in provisions. However, these were offset by an increase in non-interest expenses. Credit quality and capital position continued to show strength during the quarter.
Net income attributable to U.S. Bancorp was $1.4 billion in the quarter, up around 2.4% year over year.
Furthermore, segment-wise, on a year-over-year basis, quarterly net income at Wholesale Banking and Commercial Real Estate fell 20.4%, while Consumer and Small Business Banking increased 4.9%. Further, Payment Services, Wealth Management and Securities Services and Treasury and Corporate Support segments reported improvement of 10.1%, 13.5% and 8.3%, respectively.
Performance in Detail
U.S. Bancorp’s net revenue came in at around $4.85 billion in the quarter, up 2% year over year. However, the figure lagged the Zacks Consensus Estimate of $4.93 billion. Results were primarily driven by increase in both net interest and non-interest income.
U.S. Bancorp’s tax-equivalent net interest income was $2.8 billion in the quarter, reflecting a 1.7% rise from the comparable prior-year quarter. The rise was driven by an increase in average earning assets and lower cost core deposit funding.
Average earning assets were up 10.6% year over year, mainly on growth in average total loans and average investment securities. However, net interest margin of 3.08% fell 27 basis points year over year and mainly reflected reduced rates on investment securities, and new loans, lower fees from loan related to the winding up of the CAA product, and change in the composition of loan portfolio. These were, however, partly offset by a decline in funding cost.
U.S. Bancorp’s non-interest income moved up 2.2% year over year to $2.2 billion. The rise was primary attributed to higher fee-related income and gains from equity investments. Yet, lesser revenue from commercial products and corporate payment products was the downside.
U.S. Bancorp’s average total loans climbed 5.1% year over year to $248 billion, owing to growth in all categories, except residential mortgages, retail leasing and covered loans. Excluding covered loans, average total loans increased 6.7% year over year.
Average total deposits were up 8.1% from the prior-year quarter to $278.5 billion. The upsurge stemmed from growth in non-interest-bearing deposits and savings deposits, partially offset by a fall in interest-bearing time deposits.
Non-interest expense increased 4.8% on a year-over-year basis to $2.7 billion at U.S. Bancorp, driven by elevated compensation and employee benefit expenses. These negatives were partially offset by costs related to marketing and business development, professional services, occupancy and other intangibles.
Credit Quality
Credit metrics continued to improve at U.S. Bancorp in the reported quarter. Net charge-offs (excluding covered loans) were $279 million, down 17% year over year. On a year-over-year basis, the company experienced improvement in net-charge-offs in the commercial real estate, residential mortgage and other retail portfolios.
U.S. Bancorp’s nonperforming assets (excluding covered assets) were $1.7 billion, down 15.2% year over year. Total allowance for credit losses was $4.4 billion, down 3.2% year over year. Provision for credit losses decreased 13.7% year over year to $264 million in the reported quarter.
Capital Position
During the quarter, U.S. Bancorp maintained a solid capital position. Effective Jan 1, 2015, 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.
Additionally, as of Apr 1, 2014, the company exited its parallel run qualification period, resulting in its capital adequacy. The transitional common equity tier 1 capital ratio was 9.6% as of Mar 31, 2015 compared with 9.7% as of Mar 31, 2014.
The tier 1 capital ratio was 11.1% as of Mar 31, 2015 compared with 11.4 % as Mar 31, 2014. The tangible common equity to tangible assets ratio was 7.6%, down from 7.8% 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 advanced approach to Basel III full implementation, the Tier 1 common equity to risk-weighted assets ratio was estimated at 11.8% as of Mar 31, 2015.
U.S. Bancorp posted an improvement in book value per share, which increased to $22.20 as of Mar 31, 2015 from $20.48 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 70% of first-quarter earnings to shareholders through common stock dividend of $438 million and stock buyback of $518 million. This was within its long-term goal of returning 60–80%.
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 and improving credit quality also augur well. It adheres to a conservative growth stratagem and has made small but strategic acquisitions.
Moreover, the company’s plan to hike its annual dividend by 4.1% in the second quarter of 2015, following the Federal Reserve’s approval, reflects its commitment to return value to shareholders with strong cash generation capabilities.
However, the top-line headwinds are expected to persist, and a low interest-rate environment would continue to keep U.S. Bancorp’s margins under pressure. Increase in expenses also poses a concern.
Though there are concerns related to the impact of legal issues and its global exposure, 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.
Currently, U.S. Bancorp carries a Zacks Rank #3 (Hold).
Performance of Other Major Banks
The first-quarter earnings season kick-started with Wells Fargo & Company WFC. Driven by prudent expense management, Wells Fargo earned $1.04 per share, surpassing the Zacks Consensus Estimate of 98 cents. However, earnings came a penny below the year-ago quarter figure.
Continuing the positive note, JPMorgan Chase & Co. JPM reported impressive first-quarter results. Adjusted earnings per share came in at $1.45, outpacing the Zacks Consensus Estimate of $1.39. Moreover, earnings were 13.3% above the year-ago figure.
The primary factor affecting the results was an after-tax legal expense of $487 million. This has caused a 13-cent per share earnings decline. This confirms that the company is on track to clear its pending legal charges.
Commerce Bancshares, Inc. CBSH reported first-quarter earnings of 61 cents per share, which outpaced the Zacks Consensus Estimate of 57 cents. Higher non-interest income and lower provisions primarily led to the earnings beat.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment