U.S. Bancorp's (NYSE:USB) balance sheet had no problem at all handling the economic wallop the Federal Reserve threw at it in the first round of this year's stress tests. Not that the outcome is surprising at all.
Unlike the Federal Reserve's Comprehensive Capital Analysis and Review -- which comes out next week -- the Dodd-Frank stress tests do not determine whether or not the banks involved can pay higher dividend or pay out stock. But since they use essentially the same modeling and stress-case scenarios, they're a good way for investors to get a sense for how the banks will perform in the CCAR, and whether they'll be able to increase capital distributions.
Perhaps the key metric the Fed and investors are looking at in the results of the stress tests is the Tier 1 common capital ratio, and, in particular, how that low that ratio falls under the hypothetical stressed conditions.
Here's a look at how that number looked for USB -- both pre-test actual and under stressed conditions -- as compared to similar numbers during last year's CCAR tests.
The regional banking giant looked strong coming out of last year's CCAR, and it looks even stronger under this year's Dodd-Frank test. Notably, the minimum stressed level from last year's CCAR does not include the company's proposed capital actions at the time. The results from the Dodd-Frank test this year, however, include the impact of the 56% dividend increase and the share buybacks that the bank has done over the past year.
Projected net income
How do the regulators get to the stressed capital ratios? A big piece of the puzzle is using the stress-scenario inputs to estimate how much of a profit -- or, in most cases, a loss -- the bank will register over the nine-quarter test period.
If you needed any more convincing of U.S. Bancorp's strong position, look no further than the fact that the Fed projects it would report an aggregate profit over the nine-quarter stress-test period. On a pre-provision net revenue of $21 billion, USB was projected to keep a $3.6 billion profit.
That's particularly notable considering that on the whole, the group of banks tested reported a combined $194 billion loss.
One step further...
Finally, if we break down U.S. Bancorp's loan losses, we can see where the Fed projects the bank would take the biggest balance-sheet hits in the hypothetical stressed scenario.
In this stress-test scenario, USB misses out on the big hit the Wall Street banks took from the hypothetical global market shock. That helped keep its losses lower than some of its larger competitors'. That said, credit card and commercial and industrial loans are still big targets for losses when the economy turns south, so USB's exposure to those loan types are where much of its stress-case losses were seen coming from.
Another year, another stress-test victory for U.S. Bancorp. Today's results don't give investors much to be surprised about, but they also don't give them much to be disappointed about. As we head into the CCAR results next week, as long as USB's management doesn't get crazy -- a label I've never seen used for the bank's leaders -- investors should expect its capital plans will get the green light from regulators.
Matt Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.