US Bancorp (USB) has reported third quarter earnings of $603 million or 30 cents per share. Results were ahead of the Zacks Consensus Estimate of 26 cents, and reflected higher revenue and an increase in fee income.
However, credit losses and nonperforming assets continued to trend higher in the quarter, reflecting continued stress in the commercial, commercial real estate, residential real estate and consumer loan portfolios. We note that the rate of deterioration has somewhat moderated in the quarter.
Quarterly results were, however, impacted by a $415 million of provision for credit losses in excess of net charge-offs, net securities losses of $76 million and a gain of $39 million associated with the company’s investment in Visa Inc. (V). These items reduced earnings by 19 cents per share.
Results for the quarter were driven by record total net revenue of $4.3 billion, representing an increase of 2.2% sequentially and 25.8% year-over-year. Results reflected a growth in interest income and fee income.
Credit metrics continued to deteriorate in the quarter, though the rate of deterioration has moderated. Net charge-offs were 227 basis points (bps) of average loans outstanding, up 24 bps sequentially and 108 bps year-over-year.
Non-performing assets as a percentage of related assets were 2.39%, up 19 bps sequentially and 151 bps year-over-year. As a result, provisions for credit losses increased to $1.5 billion from $1.4 billion reported in the prior quarter and $748 million in the year-ago period.
Profitability metrics improved sequentially. Return on average assets and return on average common equity were 0.90% (up 19 basis points sequentially but down 4 bps year-over-year) and 10.0% (up 580 bps sequentially but down 80 bps year-over-year), respectively. Book value was 12.38 per common share at Sept. 30, 2009 compared to 11.86 at June 30, 2009 and 11.50 at Sept. 30, 2008.
During the quarter, US Bancorp repurchased the warrant that was previously issued to the US Department of the Treasury for $139 million.
US Bancorp’s Tier 1 capital ratio was 9.5% compared to 9.4% in the prior quarter and 8.5% in the year-ago period. The Tier 1 common equity ratio was 6.8% at Sept. 30, 2009, compared with 6.7% at June 30, 2009, and 5.7% at Sept. 30, 2008. Total risk-based capital ratio was 13.0%, same as at the end of the prior quarter and up from 12.3% at the end of the year-ago period.
Tax-equivalent net interest income was $2.2 billion, up 2.5% sequentially and 9.7% from the prior-year quarter. The year-over-year growth was driven by an 8.9% increase in average earning assets. Net interest margin was 3.67%, up 7 basis points sequentially and 2 bps year-over-year.
The increase in average earning assets was driven by a 9.3% year-over-year growth in average loans. Average total deposits were up 1.9% sequentially and 24.6% year-over-year, reflecting acquisitions.
Non-interest income increased 1.8% sequentially and 48.2% year-over-year to $2.1 billion. The year-over-year increase was driven by growth in mortgage banking revenue. Also contributing to the growth were higher payments-related income and commercial products revenue.
Non-interest expense decreased 3.6% sequentially but was up 13.2% year-over-year. The tangible efficiency ratio improved to 45.3% from 48.7% in the previous quarter and was almost constant compared to 45.5% in the year-ago period.
We have been encouraged by the company’s exit from the Treasury’s Capital Purchase program. Despite the dilutive impact, the capital bolstering initiatives are also viewed positively as these will not only reduce government intervention but also help in maintaining a strong capital base in a soft economic environment.
US Bancorp is also focused on expanding its business. The company has recently announced a number of diverse and strategically important acquisitions this quarter. These opportunistic acquisitions bode well going forward.
Nevertheless, we expect the overall uncertainties for the industry, competitive market conditions and higher credit costs to continue weighing on the shares of US Bancorp in the coming quarters. However, we expect the company to post growth in core earnings and benefit from its diversified revenue base and strategic acquisitions. Hence, we have a Neutral recommendation on the shares.
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