U.S. Bancorp Reports In line - Analyst Blog

U.S. Bancorp (USB) reported fourth quarter 2010 earnings attributable to common shareholders of $974 million or 49 cents per share. However, excluding significant items, earnings came in at 46 cents per share, in line with the Zacks Consensus Estimate.

Quarterly results of U.S. Bancorp's reflected growth in revenues, as a result of the business growth initiatives taken by the company, including acquisitions. Credit metrics also showed improvements. However, the positives were partially offset by an increase in expenses.

Fourth quarter 2010 results included a $103 million gain ($41 million after-tax) from the exchange of the long-term asset management business of FAF Advisors, Inc. an affiliate of the company, for an equity interest in Nuveen Investments and cash consideration. Moreover, the results include a provision for credit losses lower than net charge-offs by $25 million, partially offset by net securities losses of $14 million.

For full year 2010, earnings attributable to common shareholders came in at $3.3 billion or $1.73 per share, up from earnings of $2.2 billion or 97 cents per share. Full year 2010 earnings also came in 4 cents above the Zacks Consensus Estimate of $1.69 per share.

Revenues were strong at $4.7 billion, up 2.9% sequentially and 7.9% year over year, primarily reflecting growth in both interest and fee-based revenue. Revenues also came in above the Zacks Consensus Estimate of $4.5 billion.

U.S. Bancorp also reported a decrease in provision for credit losses, both sequentially and year over year with both net charge-offs and nonperforming assets revealing a declining trend. Provision for credit losses was $912 million, down 8.3% sequentially and 34.3% year over year.

Inside the Headline Numbers

Tax-equivalent net interest income was $2.5 billion, up 0.9% sequentially and 5.9% from the prior-year quarter, primarily driven by an increase in average earning assets. Average earnings assets were up 3.2% sequentially and 5.9% year over year.

However, net interest margin of 3.83% was down 8 basis points sequentially and flat year-over-year. The sequential decline reflects the reduction in the yield on residential mortgages and investment securities and the impact of the new legislation on credit card yields. Net interest margin was flat year-over-year, as the impact of favorable funding rates was offset by a reduction in the yield on residential mortgages and investment securities.

Average loans were up 1.5% sequentially and 2.0% year over year supported by increases in all major loan categories. Average deposits increased 4.2% sequentially and 5.2% year over year.

Non-interest income increased 5.3% sequentially and 10.2% year over year to $2.2 billion. The company experienced strong year-over-year growth in payments-related fee income, commercial products revenue and mortgage banking revenue.

However, non-interest expense increased 4.2% sequentially and 11.5% year over year to $2.5 billion. The year-over-year increase reflects the impact of acquisitions, compensation and employee benefits expense. The tangible efficiency ratio deteriorated to 50.6% from 49.9% in the prior quarter and 46.8% in the year ago quarter.

Credit Quality

U.S. Bancorp's credit metrics improved from the prior quarter. Net charge-offs (excluding covered loans) were 209 bps of average loans outstanding, down 17 bps sequentially and 45 bps year over year. Nonperforming assets as a percentage of related assets (excluding covered assets) were 1.87%, down 15 bps sequentially and 38 bps year over year.

Capital Ratios

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 and return on average common equity were 1.31% (up 5 bps sequentially and 45 bps year over year) and 13.7% (up 90 bps sequentially and 410 bps year over year), respectively.

U.S. Bancorp also posted an improvement in book value per share, which increased to $14.36 as of December 31, 2010, from $14.19 at the end of the prior quarter and $12.79 at the end of the prior-year quarter.

Tier 1 capital ratio also improved to 10.5% from 10.3% in the prior quarter and 9.6% in the year-ago quarter. Tier 1 common equity ratio increased to 7.8% from 7.6% reported in the prior quarter and 6.8% in the year ago quarter.

U.S. Bancorp's management and board of directors are confident of the company's capital position and expect it to be one of the first banks to get the regulatory approval to increase dividend. On January 7, the company, along with its peer banks, submitted a Comprehensive Capital Plan to the Federal Reserve System.

Acquisitions

U.S. Bancorpcompleted the purchase of Bank of America Corp.'s (BAC) U.S. and Europe-based securitization trust administration businesses on December 30, 2010. This transaction included $1.1 trillion of assets under administration and provided U.S. Bank with approximately $8 billion of deposits at close.

The acquisition strengthens the company's position as a leader in the structured finance trust business and is a great complement to its corporate and municipal trust business. Moreover, the acquisition provides the bank with a prospect of expanding its presence in the European market with offices in Ireland and London, England.

Additionally, on December 31, the company completed a transaction in which it exchanged the long-term asset management business of FAF Advisors, Inc. for an equity stake in Nuveen Investments. This deal involved a business in which U.S. Bancorp did not have the scale and distribution capabilities to compete effectively.

Competitor

U.S. Bancorp's close competitor, JPMorgan Chase & Company (JPM) has reported impressive fourth quarter results. Last week, the company reported fourth quarter earnings of $1.12 per share, substantially ahead of the Zacks Consensus Estimate of $1.00. The better-than-expected fourth quarter earnings resulted from higher non-interest revenue and a slowdown in provision for credit losses.

Our Take

We expect U.S. Bancorp to post growth in core earnings and benefit from its diversified revenue base and strategic acquisitions. The company is one of the biggest retail banks in the U.S. and is one of the nation's top 10 banks. Ithas weathered the economic downturn relatively well and is expected it to be one of the first few banks to increase dividend. The improvement in revenue and credit quality is encouraging.

Nevertheless, we believe that the regulatory issues would continue to pose as headwinds. Additionally, the protracted economic recovery and a substantially competitive landscape challenge the company.

Though results of U.S. Bancorp were in line, the market seems to be in a negative mood following the absence of robust fourth quarter earnings results in general. Also, Wells Fargo & Company's (WFC) reported its fourth quarter 2010 results today and operating earnings came in at 61 cents per share, a penny below the Zacks Consensus Estimate. Hence the overall sentiment seems to be negative.

U.S. Bancorp shares are maintaining a Zacks #4 Rank, which translates into a short-term Sell recommendation.

 
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