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Why is U.S. Bancorp (USB) Up 3.5% Since Its Last Earnings Report?
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A month has gone by since the last earnings report for U.S. Bancorp (USB - Free Report) . Shares have added about 3.5% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is USB 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's Q2 Earnings Beat on Higher Revenues
Reflecting top-line strength and lower provisions, U.S. Bancorp’s second-quarter 2018 earnings per share of $1.02 outpaced the Zacks Consensus Estimate by a penny. Also, results came ahead of the prior-year quarter earnings of 85 cents.
Easing margin pressure on rising rates was witnessed in the quarter. Moreover, revenues improved, aided by rise in net interest, as well as fee income. Further, elevated average loans and deposits balances, along with lower provisions, were tailwinds. However, escalating expenses and lower mortgage banking revenues were major drags.
Net income was $1.8 billion, up 16.3% year over year.
Revenues, Loans & Deposits Grow, Costs Flare Up
U.S. Bancorp’s net revenues came in at around $5.6 billion in the quarter, up 3.5% 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 $3.2 billion in the quarter, up 4.1% from the prior-year quarter. The upswing mainly stemmed from earning assets growth and rising interest rates.
Average earning assets climbed 2.2% 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 3.13% was up 5 basis points year over year, driven by higher interest rates. Loan mix, higher funding costs and the impact of tax reform partially mitigated rise in margins.
U.S. Bancorp’s non-interest income escalated 2.8% 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 6.6% year over year to $327 million in the reported quarter.
U.S. Bancorp’s average total loans inched up 1.1% year over year to $278.6 billion. The growth stemmed from a rise in commercial loans, residential mortgages, total other retail and credit card loans. These increases were partially offset by a drop in commercial real estate and covered loans. Excluding covered loans, average total loans rose 1.4% year over year.
Average total deposits were up 1.1% from the prior-year quarter to $334.8 billion. The upsurge was due to growth in interest-bearing deposits, partly offset by lower non-interest-bearing deposits.
Non-interest expenses flared up 3.4% year over year to $3.1 billion at U.S. Bancorp. The upswing in mostly all components of non-interest expenses was partially offset by lower professional services, other expenses, along with other intangibles.
Credit Quality: A Mixed Bag
Credit metrics at U.S. Bancorp was mixed in the reported quarter. Net charge-offs came in at $332 million, down 2.4% year over year. On a year-over-year basis, the company experienced deterioration, mainly in net charge-offs in the credit card segment, offset by improvement in residential mortgages.
U.S. Bancorp’s non-performing assets (excluding covered assets) came in at $1.1 billion, down 15.4% 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 10.5% 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 9.3% as of Jun 30, 2018, down from 9.4% 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 11.6% as of Jun 30, 2018, compared with 11.7% as of Jun 30, 2017.
The tangible common equity to tangible assets ratio was 7.8% as of Jun 30, 2018, compared with 7.5% as of Jun 30, 2017.
U.S. Bancorp posted an improvement in book value per share, which increased to $27.02 as of Jun 30, 2018, from $25.55 recorded at the end of the year-earlier quarter.
Capital Deployment Update
Reflecting the company’s capital strength during the second quarter, U.S. Bancorp returned 69% of earnings to its shareholders through common stock dividends and buybacks.
Recently, following the Fed’s approval for the company’s 2018 Capital Plan, U.S. Bancorp announced an increased quarterly common stock dividend of 37 cents per share on its common stock, up 23% from the prior payout.
Further, the company’s board of directors has approved a new common stock repurchase authorization of up to $3 billion worth shares, replacing the authorization approved in July 2017.
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%.
Management expects net interest income to increase at a low-single digit on a year-over-year basis in third-quarter 2018.
Management expects fee income to increase at a low-single digit on a year-over-year basis. Further, positive operating leverage in the third 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?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
At this time, USB has an average Growth Score of C, a grade with the same score on the momentum front. The stock was also 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.
Based on our scores, the stock is equally suitable for value, growth and momentum investors.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, USB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Why is U.S. Bancorp (USB) Up 3.5% Since Its Last Earnings Report?
A month has gone by since the last earnings report for U.S. Bancorp (USB - Free Report) . Shares have added about 3.5% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is USB 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's Q2 Earnings Beat on Higher Revenues
Reflecting top-line strength and lower provisions, U.S. Bancorp’s second-quarter 2018 earnings per share of $1.02 outpaced the Zacks Consensus Estimate by a penny. Also, results came ahead of the prior-year quarter earnings of 85 cents.
Easing margin pressure on rising rates was witnessed in the quarter. Moreover, revenues improved, aided by rise in net interest, as well as fee income. Further, elevated average loans and deposits balances, along with lower provisions, were tailwinds. However, escalating expenses and lower mortgage banking revenues were major drags.
Net income was $1.8 billion, up 16.3% year over year.
Revenues, Loans & Deposits Grow, Costs Flare Up
U.S. Bancorp’s net revenues came in at around $5.6 billion in the quarter, up 3.5% 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 $3.2 billion in the quarter, up 4.1% from the prior-year quarter. The upswing mainly stemmed from earning assets growth and rising interest rates.
Average earning assets climbed 2.2% 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 3.13% was up 5 basis points year over year, driven by higher interest rates. Loan mix, higher funding costs and the impact of tax reform partially mitigated rise in margins.
U.S. Bancorp’s non-interest income escalated 2.8% 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 6.6% year over year to $327 million in the reported quarter.
U.S. Bancorp’s average total loans inched up 1.1% year over year to $278.6 billion. The growth stemmed from a rise in commercial loans, residential mortgages, total other retail and credit card loans. These increases were partially offset by a drop in commercial real estate and covered loans. Excluding covered loans, average total loans rose 1.4% year over year.
Average total deposits were up 1.1% from the prior-year quarter to $334.8 billion. The upsurge was due to growth in interest-bearing deposits, partly offset by lower non-interest-bearing deposits.
Non-interest expenses flared up 3.4% year over year to $3.1 billion at U.S. Bancorp. The upswing in mostly all components of non-interest expenses was partially offset by lower professional services, other expenses, along with other intangibles.
Credit Quality: A Mixed Bag
Credit metrics at U.S. Bancorp was mixed in the reported quarter. Net charge-offs came in at $332 million, down 2.4% year over year. On a year-over-year basis, the company experienced deterioration, mainly in net charge-offs in the credit card segment, offset by improvement in residential mortgages.
U.S. Bancorp’s non-performing assets (excluding covered assets) came in at $1.1 billion, down 15.4% 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 10.5% 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 9.3% as of Jun 30, 2018, down from 9.4% 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 11.6% as of Jun 30, 2018, compared with 11.7% as of Jun 30, 2017.
The tangible common equity to tangible assets ratio was 7.8% as of Jun 30, 2018, compared with 7.5% as of Jun 30, 2017.
U.S. Bancorp posted an improvement in book value per share, which increased to $27.02 as of Jun 30, 2018, from $25.55 recorded at the end of the year-earlier quarter.
Capital Deployment Update
Reflecting the company’s capital strength during the second quarter, U.S. Bancorp returned 69% of earnings to its shareholders through common stock dividends and buybacks.
Recently, following the Fed’s approval for the company’s 2018 Capital Plan, U.S. Bancorp announced an increased quarterly common stock dividend of 37 cents per share on its common stock, up 23% from the prior payout.
Further, the company’s board of directors has approved a new common stock repurchase authorization of up to $3 billion worth shares, replacing the authorization approved in July 2017.
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%.
Management expects net interest income to increase at a low-single digit on a year-over-year basis in third-quarter 2018.
Management expects fee income to increase at a low-single digit on a year-over-year basis. Further, positive operating leverage in the third 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?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.
U.S. Bancorp Price and Consensus
U.S. Bancorp Price and Consensus | U.S. Bancorp Quote
VGM Scores
At this time, USB has an average Growth Score of C, a grade with the same score on the momentum front. The stock was also 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.
Based on our scores, the stock is equally suitable for value, growth and momentum investors.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, USB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.