U.S. Bancorp second-quarter profit showed that it remains one of the better-performing large banking companies, but its report also made clear that it is not immune from the pressures dogging its peers.
The results showed scars from deteriorating credit and the profit, $950 million, or 53 cents a share, was off 18% from a year earlier, falling 6 cents short of the average forecast of analysts polled by Thomson Reuters.
The Minneapolis company recorded a substantial jump in chargeoffs and mounting losses on credit cards. It also cited securities losses and, like the handful of other banking companies that have reported second-quarter earnings, it reported rising delinquencies in commercial loans.
Throughout the decade the $246.5 billion-asset U.S. Bancorp has been a conservative lender, pushing for steady rather than rapid growth while most other large-cap banks loosened standards to capitalize on the soaring demand for credit that accompanied the housing boom that peaked in 2006. That U.S. Bancorp could be absorbing notable losses because of consumer stress caught analysts' eyes.
"We've viewed U.S. Bancorp as a bellwether, so signs now that they have issues beyond real estate, reflecting more of the weakness of the broader economy, is evidence that credit problems for banks will spread further," said Peter J. Winter, an analyst with Bank of Montreal's BMO Capital Markets Corp. "Just as companies are getting caught up on their reserves for real estate, now there's concern we could see another whole round of building reserves."
Saddled with securities and credit losses — fueled by rising defaults on mortgages and credit cards — the parent of U.S. Bank said that it tripled its credit-loss provision from a year earlier, to $596 million and that it had net securities losses of $63 million. The securities losses were down from $251 million the first quarter, when U.S. Bancorp took a big one-time hit, but they remain a concern, the company said.
U.S. Bancorp said these two trouble spots reduced earnings by about 11 cents a share. Net chargeoffs in the quarter doubled from a year earlier, to $396 million.
Richard K. Davis, U.S. Bancorp's chairman and chief executive officer, said the company remains well capitalized, with a Tier 1 ratio of 8.5%. He said its dividend is safe and that it is poised to capitalize on the weakness around it to gain market share.
"As customers seek stability … our bank is a benefactor of a flight to quality," Mr. Davis said on a conference call Tuesday. "Our business model is intact" and "we remain focused on the opportunity to grow our business and to acquire new customers."
Average deposits grew 14% from a year earlier, to $135.8 billion, and net revenue rose 7.5%, to $3.8 billion, partly reflecting growth in market share and fee income. Net interest income grew 16% from a year earlier, driven by 10% growth in average earning assets and an improvement in the net interest margin, to 3.61%, from 3.44% a year earlier, the company said.
"This directional change provides significant momentum," said Mr. Davis, who credited lower interest rates and said he expects the margin to remain stable.
Though Mr. Davis said U.S. Bancorp is ready and able to make fill-in acquisitions this year, he said it is "not very interested" in major deals at a time of economic uncertainty. As for smaller deals, he said, "We are not shopping, but we are listening."
Analysts agreed that U.S. Bancorp overall remains on solid footing and is in a strong position to cherry-pick customers from weakened competitors. But they also zeroed in on signs that the turmoil rocking the banking sector could drag well into next year or beyond.
U.S. Bancorp said its credit card chargeoffs increased 72% from a year earlier, to $139 million. It said this was partly because of growth in the portfolio and seasonal increases, but also because of growing balances in general and "the adverse impact of current economic conditions on consumers."
"It is a big area of concern," said Richard X. Bove, an analyst with Ladenburg Thalmann & Co. "Consumers are losing jobs and facing higher costs and when that happens credit card balances go up and people struggle to pay them off."
Mr. Davis said federal stimulus checks helped consumers keep up with daily expenses during the second quarter, but he said that benefit will wear off in the third quarter and that consumers may feel pressure to use credit cards to cover routine costs. "This is a question mark that we're going to watch the next 60 to 90 days," he said.
U.S. Bancorp also reported rising commercial loan losses, which doubled in the second quarter from a year earlier, to $51 million. Noninterest income was flat from a year earlier, as noninterest expenses grew 10%, to $1.8 billion, reflecting in part higher credit collection costs. Nonperforming assets grew 34%, to $1.1 billion, as a "result of stress in residential home construction and related industries and the impact of the economic slowdown on other commercial customers," the company said.
U.S. Bancorp's results were released on a day that Federal Reserve Board Chairman Ben Bernanke, in prepared testimony for the Senate Banking Committee, warned of risks that threaten to curtail consumer spending. "The effects of the housing contraction and of the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power even as they have boosted inflation," Mr. Bernanke said.