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Will Higher Expenses Hurt U.S. Bancorp (USB) Q3 Earnings?


U.S. Bancorp USB is scheduled to report third-quarter 2016 results on Oct 19, before the opening bell.

Last month, the Minneapolis, MN-based bank lowered its long-term financial targets in the wake of persistent global turmoil and the continued low interest rate environment. The company’s second-quarter 2016 earnings beat the Zacks Consensus Estimate aided by higher revenues. However, the quarter witnessed an increase in expenses and provisions.

Notably, U.S. Bancorp delivered positive earnings surprises with an average beat of 1% in the trailing four quarters. Regarding the stock’s performance, the company has not showed any significant momentum as it gained just about 2% over the last three months.

US BANCORP Price and EPS Surprise

US BANCORP Price and EPS Surprise | US BANCORP Quote

Will the upcoming earnings release give a boost to U.S. Bancorp’s stock? This depends largely on whether the firm is able to post a beat in the third quarter. However, our quantitative model doesn’t point to an earnings beat this time. Here’s why.

U.S. Bancorp doesn’t have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing its chances of an earnings beat.

Zacks ESP: The Earnings ESP for U.S. Bancorp is -1.19%. This is because the Most Accurate Estimate of 83 cents is lower than the Zacks Consensus Estimate of 84 cents.

Zacks Rank: U.S. Bancorp’s Zacks Rank #4 further lowers the predictive power of ESP. Note that we caution investors against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Factors to Influence Q3 Results

Expenses to Trend Higher: Expenses might trend upward in the upcoming release due to the increase in FDIC surcharge, which went effective in third-quarter 2016. Notably, management expects expenses to increase 2.5% to 3% mostly due to the FDIC surcharge. Further, expenses related to tax credit business will be seasonally higher in the third quarter.

Continued Pressure on Net Interest Margin (NIM): The persistently low interest rate environment has taken a toll on the bank’s margins. As the Fed did not take any step in raising interest rates further, the company is not likely to record improvement in its NIM in the quarter. Notably, management expects NIM to decline in the third quarter in the range of 3 to 4 basis points.

Muted Loan Growth to Keep Net interest Income (NII) Under Pressure: Driven by increase in earning assets, management had guided an improvement in NII. Average loan growth is expected around 1.5%. However, the broader trend reflects a bleak picture. According to recent data from the Federal Reserve, commercial and industrial loans across the industry were sequentially flat during the quarter. This may have subdued overall loan growth in the third quarter, consequently hurting NII growth.

Mortgage Business Strength to Drive Fee Income: Non-interest income might get a boost by improvement in mortgage banking revenues on the back of normal seasonality in the third quarter and strength in the housing sector. Notably, based on higher application volume, management expects mortgage fees to increase 20% to 30%. Further, for other payments business, credit card remains strong. During the second quarter of this year, excluding Fidelity, the company recorded 6% growth driven by card transaction volume growth of about 7%, and the trend is likely to continue in the third quarter.

Stable Credit Quality with Reduced Energy Allowances: The upcoming release is likely to record a stable credit performance as management had guided stable total provisions and net charge-offs. Further, given the rebound in oil prices after hitting rock bottom in February, the allowances tied with the energy portfolio should not be significant.

Activities of U.S. Bancorp during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at 84 cents over the last seven days. Notably, the estimated figure represents year-over-year growth of 3%.

Stocks that Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

State Street Corporation STT is slated to release results on Oct 26. The company has an Earnings ESP of +0.80% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Raymond James Financial, Inc. RJF has an Earnings ESP of +2.04% and it carries a Zacks Rank #2. The company is slated to release results on Oct 26.

Lazard Ltd. LAZ, another Zacks Rank #2 stock, has an Earnings ESP of +3.90%. It is scheduled to report results on Oct 27.

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