U.S. Bancorp Profits Edge Higher Even As Revenue Takes A Hit

| About: U.S. Bancorp (USB)
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U.S. Bancorp (NYSE:USB) reported its performance figures for the first quarter of the year early this Tuesday, and the banking group’s results mirrored that of its larger peer Wells Fargo (NYSE:WFC) in almost all respects. [1]

The fifth-largest commercial bank in the U.S. witnessed a decline in both interest and non-interest revenues for the period, resulting in total revenues of under $4.9 billion – a sequential decline from the $5.1 billion figure for Q4 2012. A marked reduction in provisions and non-interest expenses allowed the bank to marginally surpass the earnings figure for last quarter ($1.39 billion vs. $1.38 billion).

The bank’s results were plagued by the same issues, which were brought into focus by JPMorgan (NYSE:JPM) and Wells Fargo last Friday: shrinking net interest margins and declining mortgage revenues. This is a particularly bad thing for U.S. Bancorp, which is almost entirely focused on traditional loans-deposits services for its revenues unlike its bigger competitors - making its top-line heavily dependent on net interest margins. Moreover, the bank focused considerably on the mortgage industry over recent years to surpass banking giants Bank of America (NYSE:BAC) and Citigroup (NYSE:C) in mortgage originations. Declining fortunes in the mortgage industry would only drag down the bank’s revenues further over subsequent quarters.

We stick to our $35 price estimate for U.S. Bancorp’s stock for now, which is about 10% ahead of its current market price.

Falling Net Interest Margin Figures Hurt The Most

As can be seen from the chart above, U.S. Bancorp relies on the traditional loans-deposits banking model for almost 90% of its value (all divisions except for wealth management and "Product Fees, Securities Gain and Other"). This should go a long way in helping gauge the impact of declining net interest margin (NIM) figures on the bank’s total value. And even as the low-interest rate environment puts pressure on the NIM and cuts the interest income, things have been worse in Q1 on the non-interest (fee-based) income front too.

The table below summarizes U.S. Bancorp’s reported net NIM figures for each of the last nine quarters:

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013
3.69% 3.67% 3.65% 3.60% 3.60% 3.58% 3.59% 3.55% 3.48%

Incidentally, Wells Fargo also reported NIM of 3.48% for Q1 2013 - although it witnessed a faster decline from 4.05% in Q1 2011. You can better understand the partial impact of falling net interest margins on the bank’s total value by making changes to the chart, which represents U.S. Bancorp’s NIM on commercial loans.

The Mortgage Business Seems To Have Peaked

U.S. Bancorp’s mortgage banking business reaped the benefits of the bank’s focus on this business over the last few years as low interest rates and the government-backed Home Affordable Refinance Programs (HARP) drove homeowners to the bank in large numbers to refinance their existing mortgages. U.S. Bancorp continues to eat into the market share of competitors like Bank of America and Citigroup, which reduced their mortgage banking activities to rein in losses from their existing portfolio.

But with the big banks almost exhausting loans that can be refinanced, and with demand for fresh mortgages yet to pick up, the overall effect is seen as a marked dip in origination volumes for the industry. U.S. Bancorp originated mortgages worth $21.7 billion this quarter – lower than the peak figure of $22.1 billion last quarter, and the first decline in origination figures after 6 consecutive quarters of growth. The resulting decline in revenues is rather sharp, with mortgage banking revenues falling to $401 million from $476 million in Q4 2012 and $452 million in Q1 2012.

Disclosure: No positions.