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Mortgage Banking to Support U.S. Bancorp's (USB) Q3 Earnings

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U.S. Bancorp (USB - Free Report) is scheduled to report third-quarter 2020 results on Oct 14, before the opening bell. The company’s revenues and earnings are likely to have witnessed a year-over-year decline.

Before we look at the factors that might have impacted third-quarter earnings, let’s take a look at the company’s performance in the last few quarters.

U.S. Bancorp displays a decent earnings surprise history. It surpassed estimates in three of the trailing four quarters, the average positive surprise being 17.8%.

U.S. Bancorp Price and EPS Surprise

U.S. Bancorp Price and EPS Surprise

U.S. Bancorp price-eps-surprise | U.S. Bancorp Quote


Key Factors to Note

Lower Net Interest Income (NII): Slowdown in the lending scenario, mainly in the commercial & industrial and consumer loans front, is expected to have impacted NII during the quarter.  

Also, a cut in interest rates since March to near-zero level as a move to protect the economy from the impacts of coronavirus outbreak is likely to have hurt U.S. Bancorp’s net interest margin, thereby affecting NII.

The Zacks Consensus Estimate for average interest earning assets of $489.8 billion for the quarter indicates a 12.4% improvement from the year-ago reported quarter.

The consensus estimate of $3.17 billion for NII suggests a 3.3% year-over-year fall.

Higher Mortgage Banking Fees: Pickup in refinancing activities on the back of historically low mortgage rates during the quarter is likely to have offered support to the company. The Zacks Consensus Estimate for mortgage banking revenues is pegged at $489 billion, suggesting a 79.8% increase from the year-ago reported number.

Dismal Non-Interest Revenues: Per the Fed’s latest data, deposits have shown improvement in the quarter, which is likely to have resulted in higher revenues from service charges on deposits. In addition, trust income is likely to have supported the company on strong markets.

Also, market volatility due to coronavirus-related concerns persisted during third-quarter 2020. Thus, driven by a spike in volatility and higher client activities, the company’s trading business is likely to have received a substantial boost. Amid near-zero interest rates and the Federal Reserve’s bond purchase program that commenced on Mar 23, bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. Thus, the Zacks Consensus Estimate for U.S. Bancorp's commercial products revenue indicates 18.3% year-over-year growth.

However, card fees might have been hurt on lower consumer spending due to the pandemic-concerns. The consensus estimate for credit and debit card fees of $318 million indicates a 13.1% decline from the prior-year quarter’s reported number.

Also, merchant processing fees is expected to have declined during the quarter due to lower sales volume worldwide on account of impact of the pandemic on consumer and business spending. The consensus estimate of $323 million for the same indicates 21.2% fall sequentially.

The Zacks Consensus Estimate for non-interest revenues is pegged at $2.43 billion, suggesting a 6.9% fall from the year-ago quarter’s reported number.

Higher Expenses: While the absence of considerable legal expenses is encouraging, increased investments in technology to improve digital offerings might have moderately raised costs in the quarter under discussion.

Management expects non-interest expenses to be relatively stable in the third quarter of 2020 compared with the second quarter.

Here is what our quantitative model predicts:

U.S. Bancorp has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP for U.S. Bancorp is +7.70%.

Zacks Rank: U.S. Bancorp currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate for its earnings of 86 cents indicates a 25.2% fall on a year-over-year basis.

Other Stocks That Warrant a Look

Here are a few stocks you may want to consider, as according to our model these too have the right combination of elements to post an earnings beat this quarter.

Navient Corporation (NAVI - Free Report) is set to release quarterly results on Oct 20. The company currently has an Earnings ESP of +9.46% and a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Bank of America Corporation (BAC - Free Report) is +3.93% and it carries a Zacks Rank of 3 currently. The company is slated to report quarterly numbers on Oct 14.

Waddell Reed Financial, Inc. is scheduled to report quarterly earnings on Oct 27. The company, which carries a Zacks Rank of 2 at present, has an Earnings ESP of +11.82%.

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