OREANDA-NEWS. U.S. Bancorp continued to deliver good performance in the first quarter of 2015 (1Q'15) with a return on average assets (ROAA) of 1.44% and a return on average equity (ROAE) of 14.1%. Fitch considers these results to be strong and believes them to be near the top of the banking industry, though also notes that these were modestly lower performance numbers than in the sequential or year-ago quarters.

Relative to the sequential quarter, this slight performance decline was due to revenue which was modestly lower than expense reductions as well as a modestly lower benefit from reserve releases. Relative to the year-ago quarter, the slight performance decline was due to expense growth outpacing revenue growth, and again a modestly lower benefit from reserve releases.

However, in Fitch's view, the main bright spot in USB's 1Q'15 earnings was its loan growth. Relative to the year-ago quarter, total average loans (excluding covered loans) grew a strong 6.7%. This was driven by commercial construction and development lending partially offset by a slight contraction in retail leasing and residential mortgages. On a sequential basis, USB's total average loans (excluding covered loans) grew 1.3%.

In addition, USB also made solid new lending commitments during 1Q'15, including \$29 billion of new and renewed commercial and commercial real estate commitments. Fitch continues to note that it believes USB's strong loan growth, particularly compared to other large banking institutions, is due to its cost competitive advantages, which allow it to profitably lower loan prices to win new relationships and maintain renewal business.

During the quarter, USB continued to augment its low-cost deposit franchise by growing deposits by 6.4% (excluding the Charter One franchise acquisition) relative to the year-ago quarter, and by 1.1% on a linked quarter basis. This was accomplished with the rate paid on interest bearing liabilities remaining constant.

Due to pricing competition for loans in the marketplace as well as the impact of lower interest rates on the growing securities portfolio, USB's net interest margin (NIM) declined to 3.08%, down from 3.14% in the sequential quarter and 3.35% in the year-ago quarter. Fitch would expect continued margin compression for USB, as well as the rest of the industry, until short-term rates eventually rise.

USB's total expenses declined relative to the sequential quarter, but increased by 4.8% from the year ago quarter due in part to employee compensation and benefits. Nevertheless, in Fitch's view the company's efficiency ratio remains strong at 54.3%.

Fitch notes that credit quality for USB continues to improve. Fitch believes that credit quality for USB, and the rest of the industry, is at or near a cyclical trough, and would expect some reversion in credit metrics over a medium-term time horizon. That said, it would also expect USB to continue to have much better credit performance than industry averages.

In Fitch's opinion USB's capital and liquidity position remain sound. USB's fully implemented Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach was 9.2% at 1Q'15 and under the advanced approaches was 11.8% at 1Q'15. Given the company's strong earnings performance, Fitch considers these capital ratios appropriate, even considering that the company returned 70% of 1Q,15 earnings to shareholders via dividends and buybacks.

In addition, USB is in early compliance with both the Liquidity Coverage Rule (LCR) and the Enhanced Supplementary Leverage Ratio (SLR).