OREANDA-NEWS. The strength and consistency of U.S. Bancorp's (USB) earnings performance continues to support the company's high ratings (Viability Rating of 'aa-'), according to Fitch Ratings. The second quarter of 2015 (2Q15) continued this trend with the company delivering a return on average assets (ROA) of 1.46% and a return on average equity (ROE) of 14.3% in 2Q15.

In Fitch's view, the strength of USB's results is due to a dual cost advantage relative to peer institutions. First, USB enjoys a cost of funding advantage relative to peers primarily driven by its low-cost deposit base. Secondly, USB operates a very efficient bank where operating expense management is ingrained in the company's corporate culture. These advantages are supported by a management team that in Fitch's view continues to extend the competitive advantages noted above and to further solidify the company's strong culture.

Overall revenue growth for USB was up 2.8% relative to the sequential quarter but down 2.8% relative to the year ago quarter, which included a gain related to the sale of stock in Visa, Inc. Given that net interest income remained relatively flat relative to both prior periods noted above, the large delta was primarily due to changes in non-interest income. Specifically relative to the sequential quarter there was strong growth in credit and debit card revenue as well as merchant processing revenue. Additionally there was also less of an impact from lower mortgage banking revenue, which significantly impacted non-interest income in the year-ago quarter.

USB's non-interest expenses remained essentially flat relative to the sequential quarter but modestly down relative to the year-ago quarter. As such, the company's efficiency ratio clocked in at a good 53.2% in 2Q15.

Total average loans (excluding covered loans) for USB were relatively flat relative to the sequential quarter, though the company did transfer all of its student loans to be classified as held for sale at the end of the first quarter of 2015, partially skewing the sequential quarter comparison. Excluding this transfer, loan growth relative to the sequential quarter would have been up 0.7%. Compared to the year-ago quarter total average loans (excluding covered loans) were up 3.8%, and excluding the student loan transfer described above, total average loans would have been up 5.3%.

The main growth areas for USB's loan portfolio continue to be growth in commercial and industrial (C&I) loans as well as strong growth in construction and development loans. Fitch would note that much of this growth is due to higher lending commitments as utilization rates appear to have remained relative steady.

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

USB's liquidity and capital position remain sound. The company continues to accumulate low cost deposits, which increased 8.9% relative to the sequential quarter and 2.6% relative to the year ago quarter. This deposit growth is important because it has generally been in deposits deemed 'friendly' to Liquidity Coverage Ratio (LCR) calculations. Additionally, its low-cost nature will be important in a rising interest rate scenario -- should rates eventually rise at some point -- as it may allow USB to more slowly re-price its deposit funding relative to peer institutions.

The company's fully phased-in estimate Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach (USB's binding constraint) was 9.2% at the end of 2Q15. While Fitch continues to note that this ratio remains below some peer averages, it is more than offset by USB's strong capital generation ability.