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U.S. Bancorp Profit Climbs 63% on Interest Income

U.S. Bancorp profit climbs on higher interest income
U.S. Bancorp Chief Executive Officer Richard Davis. Photographer: Andrew Harrer/Bloomberg

U.S. Bancorp, the fifth-biggest U.S. bank, posted a 63 percent increase in second-quarter profit as income from lending and fee-generating businesses grew after the purchase of failed lenders.

Net income advanced to $766 million, or 45 cents a share, from $471 million, or 12 cents, in the same period a year earlier, Minneapolis-based U.S. Bancorp said today in a statement. Twenty-seven analysts surveyed by Bloomberg had an average profit estimate of 38 cents a share.

Chief Executive Officer Richard Davis, 52, has overseen the lender’s U.S.-assisted purchases of failed banks and thrifts, with more than 200 offices and assets topping $35 billion over the past two years. Demand for credit from business customers continued to drop during the quarter and U.S. unemployment may increase to 10 percent later this year from the current 9.5 percent, Davis said today on a conference call.

“Housing prices probably aren’t done falling,” Davis said. With unemployment rising and the housing market unstable, “you won’t see a robust change in consumer sentiment.”

U.S. Bancorp said the financial-services reform bill signed today by President Barack Obama will cut the bank’s debit-card overdraft revenue by $230 million to $280 million this year, slightly less than the lender had previously projected. Regulators will “make sure merchants don’t overplay their hand” under the new rules, Davis said.

Net Income Increases

Net interest income rose 14.5 percent to $2.4 billion from $2.1 billion in the same period a year earlier, U.S. Bancorp said. The net interest margin, the difference between what a bank pays on deposits and charges for loans, widened to 3.9 percent from 3.6 percent, the lender said.

While total loans increased 4 percent to $191.2 billion because of the bank’s Federal Deposit Insurance Corp.-related purchases, commercial lending declined 14 percent on weak demand from business customers, the lender said. Fee income gained 2.7 percent to $2.1 billion, aided by higher fees from merchant processing and business lending.

The lender set aside $1.14 billion in the second quarter to cover bad debts, a decrease from $1.4 billion in the year-earlier period. Loans U.S. Bancorp doesn’t expect to be repaid rose to $1.11 billion from $929 million a year earlier.

Credit Quality

“We believe the company has reached the inflection point in credit quality and we expect net charge-offs and nonperforming assets to be lower in the third quarter,” Davis said in the statement.

U.S. Bancorp said it’s waiting for more evidence of a “sustainable economic recovery and guidance from our regulators” before raising its quarterly dividend, which was slashed by 88 percent to 5 cents in March 2009.

U.S. Bancorp’s return on assets and return on equity have outpaced nine other large U.S. banks since Jan. 1, 2008, according to a May investor presentation.

Standard & Poor’s Corp. analyst Matthew Albrecht cut U.S. Bancorp’s price target to $26 from $31, noting the shares have a higher price-to-book value ratio than other large regional banks. He rates the shares at “hold.”

The shares were upgraded today to “underperform” from “sell” by Credit Agricole Securities analyst Mike Mayo. “We recognize that U.S. Bancorp’s quarter was cleaner and it is slightly less exposed to deleveraging than some of its peers,” Mayo wrote in a report today.

U.S. Bancorp declined 8 cents to $23.07 at 4:15 p.m. in New York Stock Exchange Composite trading. The shares have gained 2.5 percent this year.

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