U.S. Bancorp Capitalizes On Strong Loan Growth To Report Record 2014 Results

-5.71%
Downside
44.00
Market
41.49
Trefis
USB: U.S. Bank logo
USB
U.S. Bank

U.S. Bancorp’s (NYSE:USB) risk-averse business model may not be as exciting as those of its larger competitors, but with the U.S. banking giant demonstrating the strength of its operations almost every single quarter since the economic downturn, it has remained an investor favorite over the years. The bank’s results for fourth quarter and full-year 2014 which were released on Wednesday, January 21, go a long way in proving that investors’ confidence in its ability to generate steady profits is not misplaced. [1] The country’s largest regional banking group eked out its highest-ever net interest income figure of $2.74 billion for Q4 2014 despite the negative impact of shrinking net interest margins seen across the banking industry, as its loan portfolio swelled by well over 5% in 2014. Besides strong growth in its payments business, U.S. Bancorp also benefited from a $124 million gain on its equity interest in Nuveen Investments. In fact, the bank witnessed a year-on-year increase in revenues across each of its offerings except for commercial products. Improving credit conditions also helped the bottom line, as it allowed the bank to record its second-lowest loan provision figure since the downturn of $288 million (the lowest for the last six years being the slightly lower $277-million figure for Q4 2013).

We maintain a $45 price estimate for U.S. Bancorp’s stock, which is about 5% ahead of the current market price.

See our complete analysis for U.S. Bancorp

Relevant Articles
  1. Trailing The Broader Index By 24%, Is U.S. Bancorp Stock Ready To Rebound?
  2. What To Expect From U.S. Bancorp Stock?
  3. U.S. Bancorp Stock Is Undervalued
  4. What To Expect From U.S. Bancorp Stock?
  5. Where Is U.S. Bancorp Stock Headed?
  6. Is U.S. Bancorp Stock Attractive At The Current Levels?

Jump In Interest Revenues Despite Shrinking Interest Margins

U.S. Bancorp’s business model, due to its reliance on traditional banking operations, is very sensitive to interest rates. This is why the biggest concern among investors about its performance over recent quarters has been the sequential decline in its net interest margin (NIM). Due to the extended low interest-rate environment, safe investment options with reasonably high rates of return have been difficult to come by, which has squeezed margins.

The chart below summarizes U.S. Bancorp’s reported NIM as well as net interest income figures for each quarter since early 2010:

As seen here, the bank’s NIM fell from 3.9% to 3.14% between Q1 2010 and Q4 2014, with a large part of this decline witnessed since late 2012. This has been due to lower interest income from variable sources, a steady growth in interest-bearing customer deposits and also because of actions undertaken by the bank to ensure regulatory liquidity requirements. While the bank’s loan portfolio has grown steadily over this period, this has resulted in considerable fluctuations in U.S. Bancorp’s net interest income figure over recent years.

Despite the headwinds, the bank’s net interest income reached a record $2.74 billion for Q4 2014 – largely thanks to strong growth in interest revenues from U.S. Bancorp’s credit card portfolio. Credit card interest revenues reached $479 million for Q4 2014 – a 10% jump year-on-year even as interest revenues for most loan categories fell compared to Q4 2013. You can understand the partial impact of falling net interest margins on the bank’s total value by making changes to the chart below, which represents U.S. Bancorp’s NIM on credit card loans.

Payment Services Offset Decline In Commercial Products Revenue

With the mortgage industry falling from its peak levels in early 2012, U.S. Bancorp has put in significant effort over recent years to grow its cards and payment business. Growing card payment volumes helped card fee revenues increase to $272 million in Q4 2014 – the highest since the impact of tighter regulations on credit and debit cards dragged down card revenues in late 2011. Retail credit card payment volumes crossed $17 billion for the first time in Q4 2014 while debit card payments crossed $15 billion. Aided by 1.13 billion merchant transactions over the quarter, the bank’s merchant processing revenues were also a strong $384 million – a 5% improvement year-on-year. On the other hand, revenues from commercial products fell from $243 million in Q4 2013 to $219 million in Q4 2014 – a 10% decline.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Notes:
  1. 4Q 2014 Earnings Release, U.S. Bancorp Press Releases, Jan 21 2014 []