Despite sluggish loan growth, U.S. Bancorp lifted revenue by more than 2% during the third quarter and 4% from a year earlier, and it generated positive operating leverage as higher interest rates boosted profitability.
The Minneapolis-based banking company, the fifth-largest by assets in the U.S., said Oct. 18 that its top line was bolstered by higher net interest income that reflected the positive impact of rising rates. Federal Reserve policymakers raised their benchmark rate late in 2016 and two more times in the first half of this year. Several big banks, including U.S. Bancorp, followed suit and repriced floating-rate loans at higher levels, boosting the interest income they earn on lending.
U.S. Bancorp said its third-quarter net interest income rose 3.8% from the previous quarter and climbed 8.3% from a year earlier to nearly $3.2 billion. Its net interest margin expanded by 6 basis points during the third quarter to 3.10%. Interest recoveries on past loans contributed 2 basis points to the improvement, Vice Chairman and CFO Terrance Dolan said during an earnings call, with higher rates on modest loan growth driving most of the remainder.
That helped the company post higher net income for the third quarter. U.S. Bancorp posted net income applicable to common shares of $1.49 billion, or 88 cents per share. That was up from 85 cents the previous quarter and 84 cents a year earlier.
The higher interest rates proved timely for U.S. Bancorp, as loan volume only nudged ahead during the third quarter and noninterest income was essentially flat. The company said third-quarter average loans increased by 0.8% from the previous quarter. Executives had, at the start of the third quarter, looked for sequential growth as strong as 1.5% — which would have easily beat the 0.9% advance in the second quarter — but pay-downs on commercial real estate loans and easing demand from borrowers cut into growth.
Executives had cautioned in September that loan demand had slowed as some leery commercial borrowers pulled back amid uncertainty around tax reform in Washington, D.C. With no major legislation passed this year, business owners were more dubious during the third quarter than earlier in 2017 that President Donald Trump will be able to galvanize congressional support for a large corporate tax cut and other pro-business measures.
Stephens analyst Terry McEvoy said large banks as a group have reported some pull-back in demand in recent months. "For sustainable, accelerated loan growth, commercial borrowers need more confidence in tax reform and some clarity on other initiatives," he said in an interview.
U.S. Bancorp executives said on the earnings call that they remain in wait-and-see mode on the tax reform front.
Meanwhile, the bank said its third-quarter noninterest expenses increased 0.5% from the previous quarter and 3.7% from a year earlier. Executives described the increases as carefully managed, and they noted that revenue growth outpaced expenses, resulting in the positive operating leverage.
Low credit costs, too, remained a positive. The bank reported a provision for credit losses of $360 million, up from $350 million, mostly to guard against potential losses in Florida and Texas markets ravaged by recent hurricanes. But, Dolan said, "after an assessment of our credit exposures within the impacted areas, we do not expect any impact to the provision for credit losses in future quarters."
Executives noted that overall credit costs remain low relative to historic norms, and nonperforming assets declined in the third quarter. NPAs at end of the third quarter were $1.25 billion, down from $1.35 billion in the linked quarter and down from $1.66 billion a year earlier.
"They are definitely as good or better than almost anybody on the credit quality front," Vining Sparks analyst Marty Mosby said in an interview.
Looking ahead, Dolan said U.S. Bancorp expects credit quality to remain stable in the fourth quarter. He said executives look for linked-quarter average loans to grow at a pace similar to the third-quarter growth rate, and absent an expectation of more interest recoveries, the NIM is likely to be essentially flat. Fee revenue likely also will be on par with the third quarter, he said.