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U.S. Bancorp (USB) Up 8.4% Since Earnings Report: Can It Continue?
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It has been about a month since the last earnings report for U.S. Bancorp (USB - Free Report) . Shares have added about 8.4% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it 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 catalysts.
U.S. Bancorp Q4 Earnings Beat on Improved Lending
U.S. Bancorp’s fourth-quarter 2016 earnings per share of $0.82 came $0.01 above the Zacks Consensus Estimate. Also, earnings increased 2.5% year over year.
Better-than-expected results were driven by growth in NII and non-interest income. Further, the quarter recorded a rise in loan and deposit balances, while capital position remained strong. However, a rise in expenses and higher credit costs were on the downside.
Net income remained relatively stable year over year at $1.48 billion in fourth-quarter 2016.
For 2016, earnings per share of $3.24 beat the Zacks Consensus Estimate by $0.01. Further, net income was $5.89 billion, marginally above the 2015 level.
NII & Fee Income Growth Drive Revenues, Costs Rise
U.S. Bancorp’s revenues of $5.39 billion climbed 4.4% year over year. In addition, revenues surpassed the Zacks Consensus Estimate of $5.35 billion.
For 2016, revenues of $21.11 billion rose 5% from the 2015 level. Revenues also outpaced the Zacks Consensus Estimate of $21.05 billion.
Tax-equivalent net interest income grew 4.6% from the prior-year quarter to $3 billion. The rise was mainly due to loan growth partially offset by lower net interest margin.
Average earning assets increased 7.7% year over year, supported by growth in average total loans, average investment securities and average cash balances.
However, net interest margin of 2.98% was down 8 basis points year over year. The fall was mainly due to lower yields on securities purchases, lower reinvestment rates on maturing securities and higher cash balances.
Non-interest income increased 3.9% from the year-ago quarter to $2.43 billion. The rise was primarily stemmed by increase in almost all components of non-interest income, except commercial products revenue, investment products fees and other income.
Non-interest expenses were up 6.9% year over year to $3 billion. The rise reflects higher expenses in nearly all categories, except employee benefits and other intangibles.
Strong Balance Sheet
Average total loans inched up 1.1% sequentially to $272.7 billion. This was mainly driven by growth in total commercial loans, total other retail loans, residential mortgages and credit card loans. Excluding covered loans, average total loans rose 1.2% from the third-quarter level.
Average total deposits were up 3.3% from the prior quarter to $329.2 billion. The rise was attributable to growth in non-interest-bearing deposits and total savings deposits, partly offset by lower time deposits.
Deteriorating Credit Quality
Net charge-offs were $322 million, up 5.6% year over year. Moreover, provision for credit losses increased 12.1% year over year to $342 million.
Total allowance for credit losses was $4.36 billion, up 1.2% on a year-over-year basis. Further, non-performing assets (excluding covered assets) were $1.57 billion, up 5.9% year over year.
Strong Capital Position
As of Dec 31, 2016, tier 1 capital ratio was 11.0%, down from 11.3% in the prior-year quarter. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9.1% as of Dec 31, 2016, stable from the year-ago quarter level.
All regulatory ratios of U.S. Bancorp continued to exceed “well-capitalized” requirements.
Outlook
Given the recent increase in the short term rates the impact of fee waivers is expected to be minimal in 2017.
In the first quarter of 2017, management expects loan growth to be stable sequentially, due to the implications of potential policy decisions and tax decisions of the new administration on customers. Further, relatively flat growth in residential and commercial mortgage loans is anticipated due to seasonal slow growth and credit card balances.
Overall, management remains optimistic that an improving economy will spur more consumer activity, which will help both payments businesses and consumer lending businesses, and improved economic backdrop should also result in a rise in business spending on development and capital investments.
Given the improving interest rate environment, including the current shape of the yield curve, management projects the NIM to expand modestly in first-quarter 2017. Further, mortgage revenue is projected to decline 10%–15%, in line with an expectation for lower refinancing activity, reflecting both seasonal trends and the impact of higher market rates.
Management expects expenses to decline slightly on a sequential basis, mainly driven by seasonally lower professional fees and a decline in tax credit amortization expense, resulting in a relatively stable efficiency ratio.
Given the underlying mix and quality of the overall portfolio, management anticipates credit quality to remain relatively stable.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been four upward revisions compared to two lower two months ago.
At this time, U.S. Bancorp's stock has a poor Growth Score of 'F', however its momentum is doing a bit better with a 'D'. Following the exact same course, the stock was allocated also a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregte VGM score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate investors will probably be better served looking elsewhere.
Outlook
While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.
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U.S. Bancorp (USB) Up 8.4% Since Earnings Report: Can It Continue?
It has been about a month since the last earnings report for U.S. Bancorp (USB - Free Report) . Shares have added about 8.4% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it 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 catalysts.
U.S. Bancorp Q4 Earnings Beat on Improved Lending
U.S. Bancorp’s fourth-quarter 2016 earnings per share of $0.82 came $0.01 above the Zacks Consensus Estimate. Also, earnings increased 2.5% year over year.
Better-than-expected results were driven by growth in NII and non-interest income. Further, the quarter recorded a rise in loan and deposit balances, while capital position remained strong. However, a rise in expenses and higher credit costs were on the downside.
Net income remained relatively stable year over year at $1.48 billion in fourth-quarter 2016.
For 2016, earnings per share of $3.24 beat the Zacks Consensus Estimate by $0.01. Further, net income was $5.89 billion, marginally above the 2015 level.
NII & Fee Income Growth Drive Revenues, Costs Rise
U.S. Bancorp’s revenues of $5.39 billion climbed 4.4% year over year. In addition, revenues surpassed the Zacks Consensus Estimate of $5.35 billion.
For 2016, revenues of $21.11 billion rose 5% from the 2015 level. Revenues also outpaced the Zacks Consensus Estimate of $21.05 billion.
Tax-equivalent net interest income grew 4.6% from the prior-year quarter to $3 billion. The rise was mainly due to loan growth partially offset by lower net interest margin.
Average earning assets increased 7.7% year over year, supported by growth in average total loans, average investment securities and average cash balances.
However, net interest margin of 2.98% was down 8 basis points year over year. The fall was mainly due to lower yields on securities purchases, lower reinvestment rates on maturing securities and higher cash balances.
Non-interest income increased 3.9% from the year-ago quarter to $2.43 billion. The rise was primarily stemmed by increase in almost all components of non-interest income, except commercial products revenue, investment products fees and other income.
Non-interest expenses were up 6.9% year over year to $3 billion. The rise reflects higher expenses in nearly all categories, except employee benefits and other intangibles.
Strong Balance Sheet
Average total loans inched up 1.1% sequentially to $272.7 billion. This was mainly driven by growth in total commercial loans, total other retail loans, residential mortgages and credit card loans. Excluding covered loans, average total loans rose 1.2% from the third-quarter level.
Average total deposits were up 3.3% from the prior quarter to $329.2 billion. The rise was attributable to growth in non-interest-bearing deposits and total savings deposits, partly offset by lower time deposits.
Deteriorating Credit Quality
Net charge-offs were $322 million, up 5.6% year over year. Moreover, provision for credit losses increased 12.1% year over year to $342 million.
Total allowance for credit losses was $4.36 billion, up 1.2% on a year-over-year basis. Further, non-performing assets (excluding covered assets) were $1.57 billion, up 5.9% year over year.
Strong Capital Position
As of Dec 31, 2016, tier 1 capital ratio was 11.0%, down from 11.3% in the prior-year quarter. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9.1% as of Dec 31, 2016, stable from the year-ago quarter level.
All regulatory ratios of U.S. Bancorp continued to exceed “well-capitalized” requirements.
Outlook
Given the recent increase in the short term rates the impact of fee waivers is expected to be minimal in 2017.
In the first quarter of 2017, management expects loan growth to be stable sequentially, due to the implications of potential policy decisions and tax decisions of the new administration on customers. Further, relatively flat growth in residential and commercial mortgage loans is anticipated due to seasonal slow growth and credit card balances.
Overall, management remains optimistic that an improving economy will spur more consumer activity, which will help both payments businesses and consumer lending businesses, and improved economic backdrop should also result in a rise in business spending on development and capital investments.
Given the improving interest rate environment, including the current shape of the yield curve, management projects the NIM to expand modestly in first-quarter 2017. Further, mortgage revenue is projected to decline 10%–15%, in line with an expectation for lower refinancing activity, reflecting both seasonal trends and the impact of higher market rates.
Management expects expenses to decline slightly on a sequential basis, mainly driven by seasonally lower professional fees and a decline in tax credit amortization expense, resulting in a relatively stable efficiency ratio.
Given the underlying mix and quality of the overall portfolio, management anticipates credit quality to remain relatively stable.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been four upward revisions compared to two lower two months ago.
U.S. Bancorp Price and Consensus
U.S. Bancorp Price and Consensus | U.S. Bancorp Quote
VGM Scores
At this time, U.S. Bancorp's stock has a poor Growth Score of 'F', however its momentum is doing a bit better with a 'D'. Following the exact same course, the stock was allocated also a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregte VGM score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate investors will probably be better served looking elsewhere.
Outlook
While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.