U.S. Bancorp's (USB) fourth quarter 2014 (4Q'14) earnings remained strong, according to Fitch Ratings. The company's 4Q return on average assets (ROA) was good at 1.50%, essentially unchanged from the sequential quarter but down from 1.62% in the year-ago quarter. Similarly the company's return on average equity (ROE) was 14.4% in 4Q'14, essentially unchanged from the sequential quarter, but down from 15.4% in the year-ago quarter. Nevertheless, Fitch continues to consider USB's earnings performance to be near the top of the banking industry and supportive of Fitch's high ratings on the company.
A bright spot in USB's 4Q'14 earnings, in Fitch's view, was good loan growth. USB's total loans, excluding covered loans which continue to run-off, grew 1.2% from the sequential quarter but a strong 7.2% from the prior-year's quarter. This year-over-year increase was largely due to good growth in commercial loans, construction and development loans, residential mortgages, and credit card balances.
Fitch believes that USB was able to win new lending commitments because of its cost advantages, including both low deposit and operating costs, which allow it to profitably lower prices to win new relationships and maintain renewal business. Further, Fitch believes that over time USB can enhance the profitability of these relationships through aggressive cross-selling of some of its complementary products for clients.
Fitch notes that the credit quality of USB - as well as the rest of the banking industry - continues to be at or near a cyclical trough. As such, the company's total net charge-offs (NCO) declined to $308 million in 4Q'14, down from $336 million in 3Q'13, and $312 million in 4Q'13. Given this, the company had an effective reserve release as provision was $20 million less than NCOs.
This declining provision expense, coupled with good non-interest income growth and relatively flat net-interest income offset some higher non-interest expense particularly relative to the year-ago quarter. Growth in non-interest income, particularly relative to the prior-year's quarter, was driven largely by higher trust and investment management fees and higher investment product fees, both of which helped offset lower mortgage banking income.
USB's net interest income increased modestly, as higher levels of earning assets offset some continued margin compression. As of 4Q'14, USB's net interest margin (NIM) declined to 3.14%, down 2 basis points (bps) from the sequential quarter, and 26 bps from the year-ago quarter. Fitch would expect continued margin compression until short-term rates eventually rise.
A low-cost operating model continues to be a hallmark of USB's franchise. Despite some growth in overall expenses, particularly in professional services as well as marketing and business development, the company's efficiency ratio remained good, in Fitch's opinion, at 54.3% in 4Q'14. Fitch would expect some continued expense growth in the next year. If short-term interest rates increase in 2015, which would boost revenue, Fitch would expect USB to deliver positive operating leverage; if rates do not increase it may be slightly more challenging.
USB did have some one-time items in 4Q'14 which largely offset each other. This includes a gain on its investment in Nuveen Investments, partially offset by $35 million of expense related to charitable contributions and $53 million of incremental legal expense.
Given USB's strong capital generation, Fitch considers the company's capital ratios to be adequate for its rating category. As of 4Q'14, USB's fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach was 9%.
Fitch also notes that USB is in compliance with the fully implemented Liquidity Coverage Ratio (LCR), which was enhanced over the last year with the build of High Quality Liquid Assets (HQLA) in the company's securities portfolio.
There was also one management change for USB, which coincided with the quarterly results. Andy Cercere, formerly Chief Financial Officer (CFO), has assumed the role of Chief Operating Officer (COO). The new CFO is Kathy Rogers, who, Fitch would note, has a long tenure at the company. Fitch would expect this transition to be seamless and consistent with longer-term succession planning.
Additional information is available at 'www.fitchratings.com'.
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