Back to top

Image: Bigstock

NII to Aid U.S. Bancorp (USB) Q4 Earnings Amid Fee Income Woes

Read MoreHide Full Article

U.S. Bancorp (USB - Free Report) is scheduled to report fourth-quarter and full-year 2022 results on Jan 25, before the opening bell. USB’s quarterly earnings and revenues are likely to have improved year over year.

Before we analyze the factors that are expected to have impacted the fourth-quarter earnings, let’s look at U.S. Bancorp’s performance over the last few quarters.

In the last reported quarter, USB’s earnings surpassed the Zacks Consensus Estimate on an increase in net interest income (NII), average loan growth and higher rates. However, rise in expenses and elevated provisions for credit losses were the offsetting factors.

U.S. Bancorp has a decent surprise history. Earnings surpassed estimates in three of the trailing four quarters and missed the mark once, the average surprise being 1.39%.

U.S. Bancorp Price and EPS Surprise

U.S. Bancorp Price and EPS Surprise

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

The Zacks Consensus Estimate for fourth-quarter earnings of $1.11 has moved 3.5% south in the past month. Nonetheless, the figure indicates a 3.7% rise from the year-ago reported number.

The consensus estimate for revenues is pegged at $6.66 billion, suggesting growth of 17.6%. Management anticipates fourth-quarter total revenue growth of 2% on a sequential basis.

Key Development During the Quarter

On Dec 1, 2022, U.S. Bancorp completed the acquisition of MUFG Union Bank’s core retail banking operations from Mitsubishi UFJ Financial Group (MUFG - Free Report) in a cash-cum-stock transaction. This will bolster U.S. Bancorp’s presence on the West Coast.

Under the terms of the deal, announced in September 2021, USB paid $5.5 billion in cash and issued almost 44 million shares of U.S. Bancorp common stock. At closure, MUFG held a minority stake of roughly 3% in U.S. Bancorp.

Major Factors to Influence Q4 Results

Loan Demand & NII: The bank’s NII and margins are likely to have been driven by the 125-basis-point (bp) interest rate hikes. Per the Fed’s latest data, loan growth continued at a decent pace in the to-be-reported quarter. Though loan demand moderated from the third-quarter 2022 level, higher interest rates offered support.

The Zacks Consensus Estimate of $564.5 billion for the quarterly average interest-earning assets indicates a 4.2% sequential improvement. The estimate for NII suggests a 6.8% sequential increase to $4.09 billion.

Non-Interest Income: Heightening volatility, uncertainty, recession fears and geopolitical tensions dampened the equity market performance. Amid this, disruptions in capital market activities are anticipated to have hindered commercial product revenues. The Zacks Consensus Estimate for U.S. Bancorp's commercial product revenues indicates a 4.6% sequential decline to $272 million.

Mortgage rates increased sequentially in the to-be-reported quarter, with the rate on the 30-year fixed mortgage remaining above the 6% mark all through the quarter. This is expected to have led to a decline in refinance originations. The Zacks Consensus Estimate for mortgage banking revenues is pegged at $80 million, suggesting a 1.2% fall.

The consensus mark for trust and investment management fees is pegged at $575 million, indicating a marginal rise. Also, credit and debit card revenues show a decent improvement on rise in usage of these. The Zacks Consensus Estimate for the same of $400 million indicates a 2.3% increase.

The elimination of certain fees and lower deposit balances are likely to have affected service charges. The consensus mark of $166 million indicates no change in revenues from service charges on deposits.

The Zacks Consensus Estimate for the total non-interest income is pegged at $2.47 billion, implying no change on a sequential basis.

Expenses: As USB continues to invest in digital initiatives, payments capabilities and technology modernization, such costs might have weighed on its expense base to some extent in the to-be-reported quarter and hindered bottom-line growth. Additionally, the acquisition of the MUFG Union Bank is likely to have resulted in higher expenses.

Management expects core expenses (excluding merger and integration charges related to the MUFG Union Bank buyout) to rise 2% sequentially.

Asset Quality: With the moderate rise in loan balance and expectations of economic slowdown due to geopolitical and macroeconomic headwinds, USB is expected to have built reserves in the fourth quarter.

The Zacks Consensus Estimate for total non-performing assets of $1.06 billion implies a 57.2% jump from the prior quarter. The consensus estimate for non-performing loans of $995 million suggests surge of 57.9%.

2022 Management Guidance

Total net revenues are projected increase 5-6%, given the revised interest rate assumptions. Further, fully-taxable equivalent NII is expected to grow in the low to mid-teen range. Fee income is expected to be slightly lower primarily due to a fall in mortgage banking revenues and deposit service charges.

A positive core operating leverage of at least 200 bps is anticipated.

What the Zacks Model Predicts

Our proven model does not predict an earnings beat for U.S. Bancorp for the fourth quarter. This is because the company does not have the right combination of the two key ingredients — positive Earnings ESP and a 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: U.S. Bancorp has an Earnings ESP of -2.87%.

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

Finance Stocks That Warrant a Look

Navient Corporation (NAVI - Free Report) and BOK Financial Corporation (BOKF - Free Report) are a few finance stocks that you might want to consider, as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Earnings ESP for NAVI is +0.31% and the company carries a Zacks Rank #3 at present. Navient is slated to report fourth-quarter and full-year 2022 results on Jan 24.

BOKF is scheduled to release fourth-quarter and full-year 2022 results on Jan 25. BOK Financial currently has a Zacks Rank #3 and an Earnings ESP of +0.87%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

Published in