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Fitch: U.S. Bancorp Delivers Solid 4Q'13 Results

January 27, 2014

U.S. Bancorp's (USB) fourth quarter 2013 (4Q'13) earnings were essentially flat from the sequential quarter and up 3.0 percent from the year ago quarter, according to Fitch Ratings. USB's results equated to a solid 1.62 percent return on average assets (ROA) and a 15.4 percent return on average equity (ROE), which continues to place USB's results at the top of the banking industry. Total revenue was flat from the sequential quarter as a modest increase in net interest income (NII) was offset by a decline in non- interest income primarily due to lower mortgage banking income during the quarter. The company's net interest margin (NIM) declined three basis points to 3.40 percent from the sequential quarter as continued compression in asset yields was offset by lower borrowing costs. Non-interest expenses, while higher than the sequential quarter due to increased compensation, professional services, and marketing expenses, were still reasonable as they equated to a still good 54.9 percent efficiency ratio. Fitch continues to note that USB's main competitive advantages are its low cost funding advantage, which allows it a pricing advantage in winning new lending relationships, and its overall low cost structure, which has helped to support returns during the challenging low interest rate environment over the last few years. USB's average loans grew 1.5 percent from the sequential quarter and 5.7 percent from the year-ago quarter. The growth was primarily in commercial loan balances, construction and development loans, higher on balance sheet residential mortgages, and high auto loan balances, all partially offset continued reductions in covered loans. Fitch would expect some additional incremental loan growth for USB over the course of the next year. Credit quality continues to be very strong with both the non- performing asset (NPA) ratio excluding covered loans and the net charge-off ratio (NCO) continuing to decline. In 4Q'13 the NPA ratio excluding covered assets declined to 0.80 percent, and the NCO ratio declined to 0.53 percent of average loans. Fitch continues to believe that overall credit quality is likely nearing or at a cyclical trough, and that there will be some reversion in USB's credit quality metrics over a medium-term time horizon. Fitch also expects USB's credit quality at that time to be better than most industry peers. Given the slow growth macro environment which has constrained loan growth, USB continues to actively return capital to owners via dividends and share buybacks. In 4Q'13, USB's total payout ratio was 65 percent, which was lower than the 77 percent in 3Q'13, but still on the higher side. Fitch would expect the payout ratio to remain on the high side without opportunities for meaningful loan growth or acquisitions. USB's capital position remains sound, particularly given its strong capital generation ability. The Tier 1 common (CET1) ratio modestly increased to 9.4 percent at 4Q'13, up from 9.3 percent in 3Q'13. Additionally, USB's pro forma CET1 ratio under the Basel III standardized approach increased to 8.8 percent at 4Q'13, up from 8.6 percent at 3Q'13. Additional information is available at 'fitchratings.com '. --'Global Financial Institutions Rating Criteria' ( Aug. 15 , 2012); --'Rating FI Subsidiaries and Holding Companies' ( Aug. 10 , 2012). Applicable Criteria and Related Research : Global Financial Institutions Rating Criteria http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=686181 Rating FI Subsidiaries and Holding Companies http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=679209 ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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