Quality of the earnings analysis is equally important
We’ve looked at U.S. Bank’s (USB) accounting performance. There’s a second and equally important aspect of earnings analysis. It’s an analysis of returns. A return analysis indicates efficiency and quality of earnings with respect to its peers.
In the next parts in this series, we’ll discuss some of the most important indicators. This will give us an idea about the efficiency and quality of U.S. Bank’s 4Q14 results.
Bank efficiency ratio
For a bank, operational efficiency is its ability to turn human and non-human resources into revenue. A quick, easy, and intuitive measure of operational efficiency is the bank efficiency ratio. The bank efficiency ratio is non-interest expenses divided by the bank’s revenue. A lower ratio shows that a bank is more operationally efficient. Numbers below 60% are desirable for a bank.
U.S. Bank has the best bank efficiency ratio
U.S. Bank led the industry in terms of the bank efficiency ratio. At the end of 4Q14, the sector efficiency ratio was 68.66%. For 4Q14, U.S. Bank’s efficiency ratio was 54.3%. This was an improvement from an efficiency ratio of 54.9% in 4Q13. In terms of the efficiency ratio, U.S. Bank is stronger than Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase (JPM).
If we remove the one-time gain items, the bank efficiency ratio improves more to 53.8%. These one-time items include revenue of $124 million on the equity sale of Nuveen Investments and expenses of $88 million for charitable contributions and legal accruals. However, the bank efficiency ratio declined somewhat from the best levels achieved in 3Q14. This makes U.S. Bank one of the best banks in the Financial Select Sector SPDR (XLF).