U.S. Bancorp's Net Climbs 13% -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 18, 2018).

U.S. Bancorp, the biggest regional bank in the country, said Wednesday that the new tax law helped boost its fourth-quarter earnings.

The bank also disclosed that it had set aside money for a potential settlement related to its anti-money-laundering program.

Profit at the Minneapolis-based bank rose 13% to $1.69 billion, from $1.49 billion a year ago. Per share, earnings were 97 cents.

On an adjusted basis, which strips out the tax-related gain and the legal accruals, earnings would have been 88 cents per share. That beat the 87 cents expected by analysts polled by Thomson Reuters. However, shares fell 1.5% on a day when the broader market rose.

One development that seemed to rankle investors: U.S. Bank executives said in a call with analysts that they expected to reinvest about 25% of the bank's tax savings into business initiatives such as technology, automation and higher wages for entry-level employees. But they didn't specify how much of the tax savings they expected to return to shareholders.

Chief Financial Officer Terry Dolan said in an interview that he expected long-term shareholders to view the bank's spending as a favorable development that would eventually build profits. It is the short-term investors, he said, who were selling the shares on Wednesday. "We're thinking longer term about the changes that are impacting the banking business," Mr. Dolan said.

Mr. Dolan also said in the interview that he expected the other 75% of the bank's tax savings to flow through to the bottom line and be returned to investors through dividends and buybacks.

Earnings were hurt by the potential anti-money-laundering settlement. The bank said it set aside $608 million for "regulatory and legal matters." The Office of the Comptroller of the Currency has previously flagged U.S. Bank's anti-money-laundering program for deficiencies, and the bank said it expects to pay civil monetary penalties to resolve this.

The bank had also previously disclosed that it was being i nvestigated by the Manhattan U.S. attorney's office for its relationship with a former customer, race-car driver Scott Tucker, who was convicted of fraud related to payday loans. The bank said it is working on a settlement, which it expects to include a deferred prosecution agreement and payment of a penalty.

Revenue rose 4% to $5.64 billion, helped by rising interest rates and increased lending. Like its peers, U.S. Bank has benefited from higher interest rates, which allow it to charge more on loans. The bank's net interest income grew 6%. The Federal Reserve raised short-term rates three times last year.

Average loans grew 2.6% over the year, driven by consumer lending.

In a call with analysts, U.S. Bank Chief Executive Andy Cecere said the new tax law was "a very positive development." U.S. Bank already announced that it, like some of its peers, will raise wages for lower-paid employees and donate to charity with some of its tax savings.

Mr. Cecere was upbeat, saying that the new tax law could create jobs and encourage consumers to spend, and hinting at how regulators were looking more favorably on the banking industry. "The economy appears to be on firm footing," Mr. Cecere said. "The regulatory environment is becoming more supportive of growth."

The new tax law is expected to help banks over the long term, by lowering the corporate tax rate from 35% to 21%. But the new law is having a disparate impact across bank earnings this quarter. U.S. Bank and PNC Financial Services Group Inc., for example, received a short-term earnings boost. But Citigroup Inc., which reported results Tuesday, had its quarterly earnings wiped out by the tax law.

The tax law hurt Citigroup's earnings because of that bank's deferred tax assets, which are past losses that the company can use to defray future tax bills. With a lower tax rate, those assets are no longer as valuable.

U.S. Bank, however, has deferred tax liabilities, or taxes it expects to pay in the future. The new, lower tax rate is a boon for those future earnings. U.S. Bank's net deferred tax liability was $588 million at the end of the third quarter.

Write to Christina Rexrode at christina.rexrode@wsj.com

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January 18, 2018 02:47 ET (07:47 GMT)