Fitch: Good Performance in USB's 3Q15 Results
OREANDA-NEWS. U.S. Bancorp's (USB) third quarter 2015 (3Q15) continued to be strong and support Fitch Ratings' upgrade of the company's Viability Rating (VR) to 'aa' earlier this month.
USB's 3Q15 return on average assets (ROAA) came in at 1.44% and its return on average equity (ROAE) was a strong 14.1%.
Given the impact low interest rates are having on earnings across the banking industry as well as the continued increase in compliance and regulatory costs, Fitch considers USB's continued strong earnings performance to be noteworthy.
This quarter included a couple of non-recurring items, which were cumulatively neutral on the company's results. USB reclassified its student loan portfolio to held for investment from held for sale, and this caused a $58 million charge giving the disruption in the student loan market this quarter. Additionally, USB recorded $60 million of costs related to mortgage banking compliance. This was offset by $135 million of gains related to the sale of stock in Visa during the quarter.
Net interest income (NII) was up relative to both the sequential and year-ago quarters thanks to a stable net interest margin of 3.04% relative to the sequential period, and a larger balance sheet relative to the year-ago quarter.
Similarly, non-interest income expanded relative to the sequential and prior-year's quarter thanks in part to higher trust and investment management fees as well as higher merchant processing revenue. This was partially offset by lower mortgage banking revenue.
USB's expenses grew due to higher compensation and benefits expense as well as the non-recurring items noted above. The company's efficiency ratio on a tax equivalent basis inched up to 53.9%, which still compares very favorably to peers.
Given that interest rates continue to remain low, which constrains revenue growth, Fitch expects USB's management to be even more vigilant on expense management in the fourth quarter of 2015 and into 2016.
Areas of focus include continued management of the company's employee base and other discretionary expense items such as travel, printing and postage, and optimizing professional service contracts.
Asset quality for USB--as well as the rest of the industry--remains good. Both non-performing loans and net charge-offs remain low and near what Fitch believes to be a cyclical trough. Fitch would expect some reversion in asset quality metrics over time, but would still expect USB's credit performance to be better than peers.
USB indicated that is beginning to observe some aggressive lending in certain areas of Commercial Real Estate (CRE) and that it would be slightly pulling back on growing loans in this space.
Fitch continues to consider USB's capital and liquidity position as appropriate for the company's risk profile.
USB continues to grow deposits more quickly than loans and the company's loan to deposit ratio was 85% at the end of 3Q15.
USB's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach (USB's binding constraint ratio) was flat relative to the sequential quarter at 9.2%. Fitch would note that USB also returned approximately 80% of current quarter earnings to shareholders via both buybacks and dividends.
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