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U.S. Bancorp (USB) Beats on Q1 Earnings, Expenses Flare Up

Zacks

U.S. Bancorp USB reported a positive surprise of 2.5% in first-quarter 2017. The company reported earnings per share of 82 cents, beating the Zacks Consensus Estimate of 80 cents. Results also came ahead of the prior-year quarter earnings of 76 cents.

Shares of U.S. Bancorp dropped slightly in the pre-market session, indicating that investors have been bearish on the results. The price reaction during the full trading session will give a fair idea about the extent of disappointment among investors.

Organic growth was driven by higher revenues, aided by elevated average loans and deposits. Steady capital deployment activities reflected a strong capital position. However, escalating expenses and provisions were a major drag.

Net Income was $1.5 billion, up 7.1% year over year.


Revenue Climbs, Higher Costs & Provisions Recorded

U.S. Bancorp’s net revenue came in at around $5.32 billion in the quarter, up 5.7% year over year. The increases in net interest income as well as non-interest income were the tailwinds. Moreover, revenues outpaced the Zacks Consensus Estimate of $5.29 billion.

U.S. Bancorp’s tax-equivalent net interest income totaled $3.0 billion in the quarter, up 3.7% from the prior-year quarter. The rise was mainly due to loan growth, partially offset by contraction in net interest margin.

Average earning assets climbed 5.6% year over year, supported by growth in average total loans and average investment securities, along with elevated average cash balances. However, net interest margin of 3.03% was down 3 basis points year over year, and primarily reflected net impact of loan mix, reduced yields on new securities, elevated rates paid on deposits and a shift in interest-bearing liabilities mix.

U.S. Bancorp’s non-interest income jumped 8.4% on a year-over-year basis to $2.3 billion. The upsurge was primarily due to an increase in almost all components of non-interest income.

Provision for credit losses increased 4.5% year over year to $345 million in the reported quarter.

U.S. Bancorp’s average total loans increased 4.1% year over year to $273.2 billion. The growth was driven by a rise in commercial loans, total commercial real estate, residential mortgages, total other retail and credit card loans. These increases were partially offset by a drop in covered loans. Excluding covered loans, average total loans rose 4.5% year over year.

Average total deposits were up 11.0% from the prior-year quarter to $328.4 billion. The rise was stemmed by growth in non-interest-bearing deposits, savings deposits as well as interest-bearing deposits.

Non-interest expenses rose 7.1% year over year to $2.9 billion at U.S. Bancorp. Elevated compensation, employee benefits, marketing and business development, and other expenses mainly played spoilsports. These were partially offset by lower professional services, along with net occupancy and equipment expenses, and other intangibles.

Deteriorating Credit Quality

Credit metrics at U.S. Bancorp deteriorated in the reported quarter. Net charge-offs came in at $335 million, up 6.3% year over year. On a year-over-year basis, the company experienced deterioration in net charge-offs in the credit card segment.

Total allowance for credit losses was $4.4 billion, slightly up on a year-over-year basis. U.S. Bancorp’s non-performing assets (excluding covered assets) were $1.5 billion, down 11.8% year over year.

Strong Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. Effective Jan 1, 2014, the regulatory capital requirements for the company comply with Basel III, subject to certain transition provisions from Basel I over the next four years to full implementation by Jan 1, 2018.

The tier 1 capital ratio was 11.0% as compared with 11.1% in the prior-year quarter. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9.2% as of Mar 31, 2017, in line with the prior-year quarter.

All regulatory ratios of U.S. Bancorp continued to be in excess of “well-capitalized” requirements. In addition, based on the Basel III fully implemented advanced approach, the Tier 1 common equity to risk-weighted assets ratio was estimated at 11.5% as of Mar 31, 2017 compared with 11.9% as of Mar 31, 2016.

The tangible common equity to tangible assets ratio was 7.6% as of Mar 31, 2017 compared with 7.7% as of Mar 31, 2016.

U.S. Bancorp posted an improvement in book value per share, which increased to $25.05 as of Mar 31, 2017, from $23.82 recorded at the end of the prior-year quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the first quarter, U.S. Bancorp returned 78% of earnings to its shareholders through common stock dividends and buybacks. It was at the high end of the company’s long-term goal of returning 60–80% to its shareholders.

Conclusion

U.S. Bancorp posted an encouraging quarter. Along with higher revenues, a solid capital position and increased lending activities were the added advantages. The company follows a conservative growth stratagem and has made small but strategic acquisitions.

However, weakness in the credit card portfolio adversely affected the company’s asset quality. Additionally, there are concerns related to the impact of legal issues and its global exposure. Also, rising expenses, along with provisions, remain headwinds.

U.S. Bancorp Price, Consensus and EPS Surprise

U.S. Bancorp Price, Consensus and EPS Surprise | U.S. Bancorp Quote

U.S. Bancorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

Citigroup Inc. C delivered a positive earnings surprise of 8.9% in first-quarter 2017, riding on higher revenues. The company’s earnings per share of $1.35 for the quarter outpaced the Zacks Consensus Estimate of $1.24. Also, earnings compared favorably with the year-ago figure of $1.10 per share. Notably, results reflect one-time adjustments of 1 cent.

Driven by net interest income, Wells Fargo & Company’s WFC first-quarter 2017 earnings recorded a positive surprise of about 3.1%. Earnings of $1.00 per share outpaced the Zacks Consensus Estimate by 3 cents. Moreover, the figure compared favorably with the prior-year quarter’s earnings of 99 cents per share.

M&T Bank Corporation MTB recorded a positive earnings surprise of 10.8% in first-quarter 2017. The company reported net operating earnings of $2.15 per share which surpassed the Zacks Consensus Estimate of $1.94. Also, the bottom line improved 15% year over year.

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