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Fitch: U.S. Bancorp Continues to Lead the Industry with Strong 2Q'13 Earnings
July 17, 2013 / 7:34 PM / 4 years ago

Fitch: U.S. Bancorp Continues to Lead the Industry with Strong 2Q'13 Earnings

(The following statement was released by the rating agency) CHICAGO, July 17 (Fitch) U.S. Bancorp (USB) continues to report solid earnings performance that is at or near the top of the banking industry. In second quarter 2013 (2Q'13), return on average assets (ROA) was a very strong 1.70%, up from 1.65% in the sequential quarter and 1.67% in the year-ago quarter. Similarly, return on equity (ROE) was also strong in 2Q'13 at 16.1%, up from 16.0% in 1Q'13, but down slightly from 16.5% in 2Q'12, as USB has continued to build common equity over the course of the year, which Fitch views positively from a credit perspective. Overall revenue growth was up only modestly from the sequential quarter, and down from the prior year quarter as the protracted low interest rate environment continues to weigh on net interest income, which declined 1.4% from 1Q'13. Some of this slack was picked up by growth in non-interest income of 5.1% from the sequential quarter as higher debit and credit card income, higher merchant processing income, and higher investment management fees given the increase in equity markets offset a decline in mortgage banking income. Fitch expects continued declines over the course of the year amid refinancing burnout and higher mortgage rates which may also slow the purchase-driven mortgage market. USB's expenses ticked up due to higher professional services and marketing expenses, but the efficiency ratio remained very strong at 51.7%. Fitch notes that the company's earnings, similar to others in the banking industry, benefited from lower provision expense, with an effective reserve release given that provision was $30 million less than net-charge offs (NCOs) on the quarter. USB's allowance still remains good at 2.02% of ending loans as of the end of 2Q'13. Given the reserve release as well as the expected slowdown in mortgage banking income, Fitch notes that USB's prospective earnings performance will be more heavily predicated on loan growth than it has been over the prior quarters. To this end, USB's total average loans (excluding covered loans) were only up 1.6% from the sequential quarter, as growth in commercial loans, construction financing, and residential mortgages was offset by declines in card balances and home equity and second mortgages. While competition for loans appears to remain intense across the banking industry, Fitch acknowledges that given USB's strong cost of funding advantage, the rate paid on all interest-bearing liabilities was only 74 basis points in 2Q'13, thus the bank has the ability to be one of the more aggressive competitors in pricing new loans to drive future growth. USB's credit quality remains good, with total NCOs declining to 70 basis points in 2Q'13, down from 79 basis points in the sequential quarter. Fitch notes, however, that there was a modest uptick in credit card NCOs during the quarter, but card losses still remain well below historical averages. Non-performing assets (NPAs) also declined on the quarter. Despite USB being one of the stronger performers in the banking industry in terms of credit quality, Fitch continues to believe that overall credit is at or near a cyclical peak across the industry, and that there will likely be some decline in USB's credit metrics over a medium-term time horizon. However, given USB's strong capital ratios, the company's Tier 1 common ratio increased to a solid 11.1% in 2Q'13, and under Basel 3 proposals was similarly strong at 8.6%, Fitch believes some eventual degradation in credit is very manageable for USB. Additionally, USB continues to be one of the more aggressive returners of capital to shareholders given the weak lending environment. In 2Q'13, USB returned 73% of earnings to shareholders with higher dividends as well as continued share buybacks, the latter of which amounted to $610 million in 2Q'13. Contact: Primary Analyst Justin Fuller, CFA Director +1-312-368-2057 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 here Rating FI Subsidiaries and Holding Companies here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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