DBRS Comments on U.S. Bancorp’s Q4 ‘09 Earnings – Senior at AA Unchanged

DBRS has today commented on the Q4 2009 earnings of U.S. Bancorp (USB or the Company). The Company continued to remain profitable in the fourth quarter, reporting net income of $602 million for the quarter, an increase of 82.4% from the $330 million in the year ago quarter and essentially unchanged from Q3 2009. Income before provision and taxes (IBPT) of $2.1 billion remained recurrent as USB continues to display strong revenue growth and disciplined cost management with a solid efficiency ratio of 49.1%. DBRS notes that USB’s reserve build declined slightly, in line with modestly slower pace of credit quality deterioration on a linked quarter basis. For the quarter, two items negatively impacted earnings; net securities losses of $158 million and a provision that was $278 million in excess of credit losses (although the total provision was $68 million less than last quarter), or 25% above the quarter’s net charge-offs; however, the Company’s operating performance continues to be appropriate for its rating level.

DBRS sees USB’s strong revenue performance, strong deposit growth, stabilizing credit metrics, and expense management as reflecting the strength of its growing franchise and commensurate to its AA level ratings. Therefore, DBRS ratings for the Company, including its AA rating for Senior obligations and Stable Trend, remain unchanged.

For the quarter, net interest income accounted for approximately $2.4 billion, or about 54%, of USB’s total Q4 2009 revenues and grew 9.4% on a sequential quarter basis. Average earning assets grew by $11.3 billion, attributable to the acquisition of FBOP Corporation’s banking subsidiaries which contributed $9.2 billion of average earning assets. Year-over-year, net interest income increased by $199 million or 9.2%, as a result of 8.6% growth in average earning assets. Net interest margin (NIM) expanded 16 bps to 3.83% and despite a decline in interest rates, core deposit growth was strong in the quarter. Average core balances increased approximately 10% from the third quarter 2009 to $112.6 billion. Average total deposits grew 8.7% on a linked quarter basis offsetting the decrease in overall wholesale funding and contributed to the NIM expansion.

USB’s noninterest income declined $77 million (3.7%) from Q3 2009 to $2.0 billion. Fourth quarter saw a decline in noninterest income, primarily from the $82 million increase in net securities losses (quarter-over-quarter) and the $58 million decrease in mortgage banking revenues due to lower mortgage production. Partially offsetting these items was growth in merchant processing income, commercial loan fees, credit card fees, and other income. On a full-year basis, total noninterest income increased 16.8% to $8.0 billion, contrasted to $6.8 billion in 2008. The positive variance was attributable to growth in payment related revenues, mortgage banking revenues, and commercial products revenue.

For the Company, asset quality in line with expectations, continued to experience some deterioration, albeit at a slower pace. Total charge-offs increased 6.7% to $1.11 billion relative to $1.04 billion in Q3 2009. The bulk of the increase in NCOs was driven by credit costs associated with its real estate portfolios, both in residential mortgages and its commercial real estate (CRE) loans. Excluding FDIC covered assets, fourth quarter NCOs represented 254 bps of average loans compared to 241 bps in Q3 2009. NPAs (excluding FDIC covered assets) increased 5.0% on a linked quarter basis to $3.9 billion at fourth quarter 2009 and increased 11 bps to 2.25% of loans including OREO (but excluding FDIC covered assets) compared to 1.14% a year ago. DBRS notes that deterioration was evident in all categories, particularly in commercial and residential loans related to real estate, and continues to be affected by high unemployment and weak economic conditions. Nonetheless, the Company’s asset quality, credit provisions and risk profile are superior to most of DBRS-rated U.S. Commercial banks. Reserve coverage of NPLs (excluding covered assets) was a strong 153% at December 31, 2009.

DBRS considers USB’s financial fundamentals and capital position as a validation of the Company’s high ratings. Reflecting its general strength, the Company’s Tier 1 ratio was 9.6% at December 31, 2009 and the Tier 1 Common ratio remained steady at 6.8% from the end of the third quarter. All regulatory ratios continue to be above the well-capitalized levels (TARP was redeemed in June 2009) and supports DBRS’ view of USB’s strong internal capital generation ability. Furthermore, DBRS believes the Company’s capital position offers ample loss absorption capacity for its risk profile.

DBRS notes that USB, due to its relatively favorable position, has been able to enhance its franchise through a series of modest acquisitions in the past year. Additionally, the Company has enhanced its merchant card processing and card businesses with recent acquisitions. On October 30, 2009, the Company purchased $18.4 billion of assets of Illinois-based FBOP Corporation in a FDIC-assisted deal. Also, on January 19, 2010, USB purchased $850 million in deposits and certain branch locations of BB&T Corporation's Nevada banking operations. DBRS notes that these transactions will strengthen and expand U.S. Bancorp’s footprint and distribution opportunities.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.