U.S.Bancorp (USB) topped the Zacks Consensus Estimates as the company reported second quarter 2011 earnings attributable to common shareholders of $1,167 million or 60 cents per share. This was ahead of the Zacks Consensus Estimate of 53 cents. Results also compare favorably with earnings of 52 cents per share in the prior quarter and 45 cents in the year-ago quarter.
U.S. Bancorp’s revenues came in at $4.69 billion, up 3.8% year over year. The year-over-year increase was primarily driven by growth in both net interest income and fee-based revenue. The revenue figure was also ahead of the Zacks Consensus Estimate of $4.56 billion.
Provision for credit losses decreased both sequentially and year over year, with net charge-offs showing a declining trend. Provision for credit losses was $572 million, down 24.2% sequentially and 49.8% year over year.
Quarterly results at U.S. Bancorp reflect an improvement in credit metrics, as there was a decline in provision for credit losses and a growth in revenue. But these positives were dampened by an increase in expenses.
Behind the Headline Numbers
U.S. Bancorp’s tax-equivalent net interest income was $2.5 billion, up 5.6% from the prior-year quarter, primarily driven by an increase in average earning assets and growth in lower cost core deposit funding. Average earnings assets were up 12.2% year over year.
However, net interest margin of 3.67% was down 23 basis points (bps) year over year, primarily due to higher balances in lower yielding investment securities and growth in cash balances held at the Federal Reserve.
Average loans at U.S. Bancorp were up 4.0% year over year, owing to growth in residential mortgages, commercial loans, commercial real estate loans and retail loans. These increases were partially offset by a decline in average covered loans. Average total deposits were up 14.2% from the prior-year quarter, primarily reflecting growth in noninterest-bearing deposits and savings deposits.
U.S. Bancorp’s non-interest income increased 1.7% year over year to $2.1 billion. The year-over-year increase was primarily attributable to higher payments-related revenue, commercial products revenue and other income, as well as lower net securities losses. The positives were partially offset by a decrease in deposit service charges as the result of company-initiated and regulatory revisions to overdraft fee policies, partially offset by core account growth. In addition, trust and investment management fees as well as mortgage banking revenue also reported declines.
On the negative side, non-interest expense increased 2.0% year over year to $2.4 billion. The year-over-year increase was primarily due to higher compensation, employee benefits and net occupancy and equipment expense, partially offset by a decrease in other expense.
Credit Quality
Credit metrics continued to improve at U.S. Bancorp. Net charge-offs (excluding covered loans) were 163 bps of average loans outstanding, down 18 bps sequentially and 98 bps year over year. The sequential decrease in charge-offs was principally attributable to improvements in the commercial lending, credit card, residential mortgage and other retail portfolios, partially offset by an increase in commercial real estate charge-offs.
Nonperforming assets as a percentage of related assets (excluding covered assets) were 1.77%, down 15 bps sequentially and 40 bps year over year. This year-over-year decrease was driven primarily by construction and land development portfolios, as well as improvement in other commercial portfolios.
Given the current economic conditions, U.S. Bancorp expects nonperforming assets, to trend lower in the third quarter of 2011.
Capital Position
U.S. Bancorp’s capital position remained strong. Capital generated from earnings resulted in improved metrics both sequentially and year over year.
Return on average assets was 1.54%, up 16 bps sequentially and 45 bps year over year. Return on average common equity was 15.9%, up 140 bps sequentially and 250 bps year over year.
U.S. Bancorp also posted an improvement in book value per share, which increased to $15.50 as of June 30, 2011, from $14.83 at the end of the prior quarter and $13.69 at the end of the prior-year quarter.
Tier 1 capital ratio also improved to 11.0% from 10.8% in the prior quarter and 10.1% in the year-ago quarter. Tier 1 common equity ratio increased to 8.4% from 8.2% reported in the prior quarter and 7.4% in the year-ago quarter.
Competitive Landscape
Similar to U.S. Bancorp, results at JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Citigroup Inc. (C) benefited from credit quality improvement. These banks have reduced their loan provisions and results exceeded market expectations. We believe lower credit costs will be the trend in second quarter results.
Our Take
Going forward, we believe that acquisitions of First Community Bank and Bank of America’s U.S. and European-based securitization trust administration businesses augur well. It has weathered the economic downturn relatively well. The dividend hike and share buyback plan in the first quarter 2011 also boosts investors’ confidence. Yet, regulatory issues continue to restrict any robust development at the company.
U.S. Bancorp shares retain a Zacks #3 Rank, which translates into a short-term Hold rating.
CITIGROUP INC (C): Free Stock Analysis Report
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US BANCORP (USB): Free Stock Analysis Report
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