U.S. Bancorp Shines Among Regional Banks (Update 1)

Updated with afternoon market action.

NEW YORK ( TheStreet) -- U.S. Bancorp ( USB) on Wednesday continued its winning streak, reporting record net revenue for the fourth quarter, and a strong return on assets of 1.62%.

The Minneapolis lender reported fourth-quarter earnings of $1.35 billion, or 69 cents a share, beating the consensus analyst estimate of 63 cents, according to Zacks.

In comparison, U.S. Bancorp earned $1.27 billion, or 64 cents a share, during the third quarter, and $974 million, or 49 cents a share, during the fourth quarter of 2010.

U.S. Bancorp's shares were down slightly in afternoon trading, to $28.64.

Fourth-quarter net revenue increased 6% from the third quarter and 8% year-over-year to a record $5.1 billion, which CEO Richard Davis said reflected "strong growth in average loans and deposits," with average loans increasing "by 2.4 percent on a linked quarter basis including a strong 5.6 percent increase in average total commercial loans." Davis added that "commercial and commercial real estate commitments grew by 7.2 percent in the fourth quarter over the third quarter, further solidifying our prospects for growth in 2012."
U.S. Bancorp CEO Richard K. Davis

The bottom-line results were boosted by a $176 million release of loan loss reserves.

The revenue growth reflected an increase in mortgage banking revenue to $303 million during the fourth quarter, from $245 million the previous quarter and $250 million a year earlier. Merchant processing fees grew 17% year-over-year, to $378 million, while deposit service charges grew 19% year-over-year, to $171 million, "reflecting product redesign initiatives, as well as higher transaction volume and account growth."

U.S. Bancorp's trust and investment management fee income declined 13% year-over-year to $245 million in the fourth quarter, "primarily due to the sale of the long-term asset management business to Nuveen Investments at the end of the fourth quarter of 2010," but also because of money market investment fee waivers, following the trend for Bank of New York Mellon ( BK) and other custody banks in the low-rate environment.

Despite a decline in the company's net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and wholesale borrowings -- to 3.60% in the fourth quarter, from 3.65% the previous quarter and 3.83% a year earlier, U.S. Bancorp's net interest income grew 2% sequentially and 7% year-over-year, to $2.67 billion in the fourth quarter.

U.S. Bancorp's return on average assets (ROA) has increased steadily from 1.30% in the fourth quarter of 2010 to 1.62% in the most recent quarter, putting the company well ahead of most competing regional banks. The firm also remained profitable all through the credit crisis.

The company estimated that its Basel III Tier 1 common equity ratio was 8.2% as of Dec. 30, which was the same ratio as the previous quarter, but increased from 7.3% at the end of 2010.

Davis said that following the completion of the Federal Reserve's third round of bank stress tests in March, the company looks "forward to moving closer to our long-term goal of returning a majority of our earnings to shareholders in the form of dividends and buybacks."

The quarterly dividend is currently 12.5 cents a share, for a yield of 1.74%, based on Tuesday's closing price of $28.77. The company repurchased roughly 6 million shares during the fourth quarter.

U.S. Bancorp's shares were up 6% year-to-date through Tuesday's market close. The shares trade for 11 times the consensus 2012 EPS estimate of $2.64, with the relatively high forward P/E -- in the current discounted bank stock environment -- reflecting the company's strong, consistent earnings.

Out of 26 analysts covering U.S. Bancorp, 15 rate the shares a buy, nine have neutral ratings, and two analysts recommend selling the shares.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

PNC Financial Services Group on Wednesday reported fourth-quarter net income of $493 million, or 85 cents a share, which missed the consensus earnings estimate of $1.41, mainly because of "$156 million after tax, or $.30 per diluted common share, of residential mortgage foreclosure-related expenses primarily as a result of ongoing governmental matters and a noncash after-tax charge of $129 million, or $.24 per diluted common share, related to redemption of trust preferred securities."

In comparison, the company earned $826 million, or $1.55 a share in the third quarter, and $798 million, or $150 a share, in the fourth quarter of 2010.

The company said "noninterest expense for the first quarter of 2012 is expected to return to third quarter 2011 levels excluding legal and regulatory-related contingencies and integration costs that may be incurred in first quarter 2012."

PNC expects to complete its purchase of RBC Bank (USA) from Royal Bank of Canada ( RY) in March, bringing on 400 branches in southern states, and the company has said that it "does not intend to issue any shares of common stock as part of the purchase price" of $3.45 billion.

During the fourth quarter, the company purchased 27 branches in the Atlanta area from Flagstar Bancorp ( FBC).

Fourth-quarter noninterest income totaled $1.35 billion, declining 1% slightly from the previous quarter but down 21% from a year earlier, "due in part to a gain in 2010 of $160 million related to the sale of a portion of PNC's BlackRock shares." PNC also said that corporate service fees declined by $104 million from a year earlier, "due to a recovery in the value of commercial mortgage servicing rights in the fourth quarter of 2010."

Meanwhile, service fees "declined $53 million year-over-year due to the lower interchange fees on debit card transactions," resulting from the Federal Reserve's implementation of the Durbin Amendment, "partially offset by higher transaction volumes."

When comparing its fourth-quarter results with the previous quarter, PNC said that the $19 million decline "included the regulatory impact of lower interchange fees of $75 million on debit card transactions offset by higher corporate service revenue."

Net interest income was down slightly year-over-year, to $2.2 billion, while the fourth-quarter net interest margin was 3.86%, narrowing slightly from 3.89% the previous quarter and 3.93% a year earlier.

Bottom-line results for the fourth-quarter were boosted by a $160 million reserve release.

While PNC's "kitchen sink" fourth quarter resulted in an ROA of 0.72%, the company's ROA ranged from 1.17% to 1.40% over the preceding five quarters, according to SNL Financial.

With the company's noninterest revenue model in transition and with a large merger to swallow, the shares were down over 2% in afternoon trading, to $59.84.

The shares trade for 9.5 times the consensus 2012 EPS estimate of $6.23.

Analyst sentiment for PNC is quite strong, with 20 out of 25 analysts rating the shares a buy, while the remaining analysts all have neutral ratings.

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

Among the largest 20 U.S. bank holding companies, the only competitor to beat U.S. Bancorp's ROA over the past year has been Capital One ( COF). While the McLean, Va., credit card lender won't report its fourth-quarter results until Thursday after the market closes, Capital One's ROA has ranged from 1.42% to 2.08%, for the five most recent quarters through September, according to SNL Financial.

Capital One has a full plate, expecting soon to receive Federal Reserve approval of its agreement to purchase ING Direct (USA) from ING Groep ( ING) (for roughly $9 billion. During the third quarter, Capital One issued $3 billion in senior notes and closed an underwritten public offering of 40 million shares at a price of $50, which should net the company roughly $1.94 billion by the required settlement date of Feb. 15. The ING deal is expected to be completed during the first quarter.

Following the ING Direct acquisition, which will include about $92 billion in assets and $82 billion in deposits gathered over the Internet, Capital One will have excess liquidity to support its purchase of HSBC's ( HBC) U.S. credit card portfolio for a premium of $2.6 billion. Capital One expects to raise between $750 million and $1.25 billion in common equity to complete the HSBC deal in the second quarter.

According to Zacks, analysts expect Capital One to post fourth-quarter EPS of $1.53, compared to $1.77 the previous quarter and $1.52 a year earlier.

Capital One's shares closed at $48.80 on Tuesday, rising 15% year-to-date. The shares trade for eight times the consensus 2012 EPS estimate of $6.06, and analyst sentiment is strong, with 15 out of 19 analysts rating the shares a buy, while the remaining analysts all have neutral ratings.

The shares were up slightly in afternoon trading, to $48.92.

Interested in more on Capital One? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.