We are a few weeks into earnings season and it should be abundantly clear that financial institutions are firing on all cylinders. In fact, financials are leading the broader market for the first time since 1993. Yet, loan losses have been absolutely enormous. What gives?
The Great Giveaway is the essence of recent market performance in a nutshell. Let’s look at U.S. Bancorp for a second as an illustration. In March, Warren Buffett mentioned in some CNBC interviews that he felt the underlying earnings power of his major holdings in financial shares, Wells Fargo and U.S. Bancorp, was pretty robust. Both have come out with some pretty bullish announcements since then. U.S. Bancorp announced its earnings yesterday. This is how Deal Book reported the event.
U.S. Bancorp, one of the 10 largest U.S. banks, reported higher-than-expected quarterly earnings on Tuesday on record revenue from mortgages, sending its shares up almost 21 percent, Reuters said.
The strong mortgage activity helped to offset losses from lease financing, construction and development loans, and credit cards.
The bank also put aside $1.3 billion for loan losses, $833 million more than a year earlier, as declining home prices affected both consumer and commercial loan portfolios. Chief Executive Richard Davis expects to set aside similar amounts in the next two quarters, before loan losses start to moderate toward year end.
“I don’t expect us to stop reserve-building until which time we see strength in the reduction of (losses),” he said on a call with analysts.
Shares soared on the results to finish up 20.9 percent at $19.27.
“Our credit costs are elevated like the rest of the industry but we were able to offset that with our core businesses,” Chief Financial Officer Andrew Cecere told Reuters in an interview.
The bank in November took over failed California lenders Downey Financial and PFF Bancorp, with support from the federal government.
“I would expect to see more of the same, but nothing large,” Mr. Cecere told Reuters, when asked about future acquisitions.
