Why Is U.S. Bancorp (USB) Up 4.9% Since Last Earnings Report?

It has been about a month since the last earnings report for U.S. Bancorp (USB). Shares have added about 4.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is U.S. Bancorp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

U.S. Bancorp Q3 Earnings Beat on Higher Revenues

Riding on higher revenues and lower provisions, U.S. Bancorp’s third-quarter 2018 earnings per share of $1.06 outpaced the Zacks Consensus Estimate of $1.04. Also, results came ahead of the prior-year quarter earnings of 88 cents.

Higher revenues along with loan growth and lower provisions were recorded. Though lower mortgage banking revenues and escalating expenses disappointed, easing margin pressure on rising rates and overall higher fee income acted as tailwinds.

Net income was $1.8 billion, up 12.5% year over year.

Revenues & Loans Grow, Costs Flare Up

U.S. Bancorp’s net revenues came in at around $5.7 billion in the quarter, up 2.4% year over year. Increase in net interest as well as non-interest income led to this rise. Revenues came in line with the Zacks Consensus Estimate.

U.S. Bancorp’s tax-equivalent net interest income totaled $3.3 billion in the quarter, up 1.7% from the prior-year quarter. The upswing mainly stemmed from earning assets growth, increased security yields and rising interest rates. These positives were partially mitigated by reduced spread due to loan mix, higher rates on deposits and shift in funding mix.

Average earning assets climbed 1.6% year over year, supported by growth in average total loans and average investment securities along with elevated average other earning assets. Furthermore, net interest margin of 3.15% was up 1 basis point year over year, driven by higher interest rates. Deposit and funding mix, reduced loan spreads, and the impact of tax reform partially mitigated rise in margins.

U.S. Bancorp’s non-interest income escalated 3.3% on a year-over-year basis to $2.4 billion. The upsurge was mainly due to rise in mostly all components of income, partially offset by lower treasury management fees, mortgage banking revenues and commercial products revenues.

Provision for credit losses decreased 4.7% year over year to $343 million in the reported quarter.

U.S. Bancorp’s average total loans inched up 1.2% year over year to $281.1 billion. The growth stemmed from a rise in commercial loans, residential mortgages and credit card loans. These increases were partially offset by a drop in total other retail, commercial real estate and covered loans. Excluding covered loans, average total loans rose 1.5% year over year.

Average total deposits were down 1.5% from the prior-year quarter to $330.1 billion. The fall was due to decline in both interest-bearing and non-interest-bearing deposits.

Non-interest expenses flared up 1.5% year over year to $3 billion at U.S. Bancorp. The upswing in mostly all components of non-interest expenses was partially offset by lower professional services and other expenses along with other intangibles.

Efficiency ratio came in at 53.5%, improving from 53.9% in the year-ago quarter. A decrease in the ratio indicates improved profitability.

Credit Quality: A Mixed Bag

Credit metrics at U.S. Bancorp was mixed in the reported quarter. Net charge-offs came in at $328 million, slightly down year over year. On a year-over-year basis, the company experienced deterioration, mainly in net charge-offs in the credit card segment, which was offset by improvement in residential mortgages.

U.S. Bancorp’s non-performing assets (excluding covered assets) came in at $1 billion, down 23.1% year over year. However, total allowance for credit losses was $4.4 billion, slightly up on a year-over-year basis.

Strong Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. The Tier 1 capital ratio came in at 10.6% 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% as of Sep 30, 2018, down from 9.6% reported in the year-ago 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 11.8%, as of Sep 30, 2018, compared with 12.1% in the prior-year quarter.

The tangible common equity to tangible assets ratio was 7.7% as of Sep 30, in line with the prior-year quarter.

U.S. Bancorp posted an improvement in book value per share, which increased to $27.35 as of Sept. 30 from $25.98 recorded at the end of the year-earlier quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the third quarter, U.S. Bancorp returned 78% of earnings to its shareholders through common stock dividends and buybacks.

Outlook

As future rate hikes occur, total interest bearing deposit beta is expected to continue to gradually trend toward 50% level, compared with the current level of about 45%.

Despite lingering market headwinds, management expects the year-over-year decline in mortgage banking revenue to moderate in the fourth quarter.

Management expects net interest income to increase at a low-single digit on a sequential basis in fourth-quarter 2018. Further, loan growth is anticipated to continue to accelerate in the fourth quarter.

Management expects fee income to increase at a low to mid-single digits on a year-over-year basis.  Further, positive operating leverage in the fourth quarter and for full-year 2018 is anticipated. Management expects compliance related cost to continue to moderate through the year. In addition, mortgage service and related costs are declining due to favorable economic conditions.

Credit quality is projected to remain stable sequentially.

Management expects effective rate in 2018 to be nearly 21%.

Management expects full-year 2018 expense growth to be at the lower end of 3-5% range.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, U.S. Bancorp has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

U.S. Bancorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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