April 19, 2017 / 8:46 PM / 9 months ago

Fitch: Another Strong Quarter for US Bancorp

(The following statement was released by the rating agency) CHICAGO, April 19 (Fitch) U.S. Bancorp's (USB) first quarter 2017 (1Q17) net income was essentially flat sequentially and up 6.3% relative to the year-ago quarter. 1Q17 earnings benefited from a lower tax rate of 27% associated with stock based compensation under new accounting guidance effective in January 2017, which Fitch Ratings estimates to be $32.5 million. Adjusting for the tax benefit, Fitch estimates net income would have been down 4.97% sequentially, but up 6.64% year-over-year USB's return on average assets (ROAA) was solid at 1.35%, up 3 basis points relative to both the sequential and year-ago quarters. USB's return on average equity (ROAE) was also strong at 13.3% in 1Q17, up from 13.1% in the sequential quarter and 13.0% in the year ago quarter. Excluding the tax benefit, USB's 1Q17 ROAA would have been 1.29% and its 1Q17 ROAE would have been 11.5%, which Fitch considers to both be strong and consistent results. USB's total net revenue declined 2% sequentially but was up 5.7% year-over-year. The company's net interest income (NII) was essentially flat sequentially as a 5 basis point increase in the company's net interest margin (NIM)of 3.03% at 1Q17 from higher interest rates was offset by two fewer days in the quarter. Relative to the year-ago quarter NII grew 3.7% as good asset growth of 4.9% offset a surprising 3 basis point decrease in the company's NIM due to lower reinvestment rates in the securities portfolio. USB's average deposit balances were essentially flat sequentially at $328.4 billion, or 74% of total average liabilities and equity. USB estimates that its deposit repricing assumption will initially be 20%, and over time rise to 50%. This means that should short-term interest rates continue to rise, it is likely that USB's NIM will expand as deposit repricing will lag asset repricing, thereby generating some NII growth in future quarters. The bigger influence on overall net revenue was performance in USB's various non-interest income businesses. Overall non-interest income was down 4.2% sequentially but up 8.4% year-over-year. The sequential decline was due to seasonally lower debit and credit card revenue and merchant processing revenue. Additionally, the company's mortgage banking revenue declined 13.8% sequentially amid incrementally higher long-term interest rates. Alternatively, the year-over-year increase was due to broad based improvements across many of USB's businesses including higher credit and debit card revenue, higher trust and investment management fees, and stronger mortgage banking net income. Overall non-interest expense declined 2% sequentially as seasonally higher compensation and benefits expense was offset by lower professional services and marketing costs. On a year-over-year basis USB's expenses increased by 7.1% primarily due to higher compensation and benefits expense. The company's efficiency ratio ticked up to 55.6% in 1Q17, slightly higher than 55.3% sequentially and 54.6% year-over-year. Nevertheless, Fitch still considers this to be a strong result, and expects the ratio to trend down over the course of the year as there is some levelling off of risk-management and compliance related expenses. Loans were essentially flat sequentially, growing 0.2%, but up 4.1% relative to the year-ago quarter. USB had strong loan growth both sequentially and year-over-year in residential mortgage balances, but CRE and commercial and industrial loan growth slowed. CRE loans were down 0.5% sequentially and up 1.8% year-over-year, as management has taken a more cautious approach to certain segments of CRE exposure such as retail. C&I loan growth was down 0.1% sequentially as many large corporate borrowers accessed the capital markets rather than their lines of credit. Relative to the year-ago quarter C&I loans were up 4.4% due to strong middle market growth. USB's overall asset quality metrics remain strong, though Fitch notes that they are likely at cyclical troughs. Overall net charge-offs (NCOs) ticked up slightly to 0.50% in 1Q17 from 0.47% in the sequential quarter and 0.48% in the year-ago quarter. This slight increase was due to some continued seasoning of the company's credit card portfolio. However, overall non-performing assets (NPAs) of $1.5 billion declined 6.7% sequentially and 13.0% year-over-year. As such, the ratio of NPAs to period end loans plus other real estate owned (ORE) declined to 0.55%. The improvements in NPAs were broad based, but more pronounced in the C&I portfolio, which experienced substantial energy related credit paydowns. The overall allowance for credit losses in 1Q17 was $4.36 billion, or 1.60% of period end loans. This quarter's $355 million provision included a $10 million build in the allowance. In 1Q17, USB's fully phased-in Basel III CET1 ratio under the standardized approach increased to 9.2%, up 10 basis points sequentially and unchanged from the year-ago period, and above its 8.5% internal target. This sequential growth was due to continued growth in retained earnings offset by the company returning 78% of earnings to shareholders via dividends and buybacks. 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