US Bank shrinks credit reserve, grows digital

U.S. Bank’s third quarter reflected a decline in credit loss provisions, an increase in auto outstandings, tightening of credit standards, and low delinquency and charge-off rates.

U.S. Bank’s total provision for credit losses sat at $635 million in the third quarter, a decrease of $1.1 billion, or 63.4%, from the second quarter, indicating the bank is prepared for any potential credit deterioration to come, according to the earnings supplement. By comparison, the lender’s second quarter was marked by a 43% increase from the first quarter in credit loss provisions. Auto makes up 6.2% of U.S. Bank’s entire loan portfolio.

Auto outstandings grew to $19.2 billion, a 2.6% increase from last quarter and a 2% decrease from the same period in 2019, with 96% of loans still originated through indirect channels and 4% through direct, according to the earnings presentation. U.S. Bank did not break out origination volumes for the quarter.

U.S. Bank’s auto loans had a weighted average FICO of 794 in the third quarter, reflecting the lender’s tightening of credit underwriting, according to the earnings presentation.

While the bank pulled back on its credit loss provisions this quarter, early stage auto delinquencies are on the rise. Loans 30-89 days past due came in at 0.68%, a 12-basis point increase from last quarter and a decrease of 36 bps year over year. However, 90-day delinquencies fell to 0.05%, a decrease of 2 bps from last quarter and 6 bps YoY, and net charge-offs also declined to 0.23%, a decrease of 9 bps from last quarter and 16 bps from the same reporting period last year.

However, U.S. Bank leaders expect charge-offs will increase in the coming months, Terry Dolan, chief financial officer, said on the earnings call. “Part of [low delinquency rates] certainly is due to the stimulus plans, the unemployment benefits … which is creating a bit of a bridge,” Dolan said. “I do expect that at some point in 2021, we’ll start to see an acceleration of credit deterioration … once those benefits start to wear down.”

Consumer spending also remains below pre-COVID levels and unemployment is likely to increase as companies act on differed reductions, Chief Executive Andy Cecere added. U.S. jobless claims hit their highest level since August, totaling 898,000 in the week ended Oct. 10, up 53,000 from the prior week, according to U.S. Labor Department data.

U.S. bank also saw an increase in the percentage of total loan sales completed through solely digital means to 54% as of Aug. 31, an 18-point increase from the same period in 2019. “Digital remains a focused investment area for us and its more activity moves to the digital channel that will drive customer loyalty and topline growth, as well as cost savings and efficiency opportunities,” Cecere said.

Shares of U.S. Bancorp [NYSE: USB] were trading at $39.14 at market close, up 2.41% since market open. U.S. Bancorp has a market capitalization of $58.96 billion.

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