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Is a Beat in Store for U.S. Bancorp (USB) in Q3 Earnings?
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U.S. Bancorp (USB - Free Report) is scheduled to report third-quarter results on Oct 18, before the opening bell. The company’s quarterly revenues are expected to have improved year over year, while earnings are projected to have declined.
In the last reported quarter, USB’s earnings missed the Zacks Consensus Estimate on higher expenses. Also, the deterioration of the company’s credit quality was a headwind. Nonetheless, an increase in net interest income (NII), supported by higher interest rates and loan growth, and a rise in non-interest income were positives.
U.S. Bancorp has a strong surprise history. Earnings surpassed estimates in the three of the trailing four quarters and missed once, the average beat being 2.68%.
The Zacks Consensus Estimate for third-quarter earnings of $1.04 has moved 1% south in the past week. Further, the figure indicates a decline of 11.9% from the year-ago reported number.
The consensus estimate for revenues is pegged at $7.01 billion, suggesting growth of 11.4% from the year-earlier reported figure. Management projects adjusted total revenues in the $6.9-$7.1 billion band, whereas it reported $7.2 billion in the second quarter. The outlook includes purchase accounting accretion of around $75 million.
Key Developments During the Quarter
In August 2023, USB issued 24 million shares of its common stock to MUFG Bank, a core banking subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG - Free Report) for approximately $936 million. The issuance is part of a debt-to-equity conversion and will help U.S. Bancorp to meet its repayment obligation to MUFG, as agreed upon during the acquisition of MUFG Union Bank N.A.'s core regional banking franchise on Dec 1, 2022.
This will increase MUFG Bank’s total shareholding in USB to 4.39% and further strengthen the strategic relationship between the two financial institutions.
The debt/equity conversion is projected to have a positive impact on U.S. Bancorp's capital levels. It will increase Common Equity Tier 1 ratio by roughly 20 basis points, signaling a solid financial position of the company.
Major Factors to Influence U.S. Bancorp’s Q3 Results
Loan Demand & NII: Given the challenging macroeconomic backdrop and high interest rates, banks’ lending activities are likely to have remained muted in the third quarter. Specifically, demand for commercial and industrial loans stayed muted in the third quarter, per Fed’s latest data. Moreover, demand for commercial real estate loans declined in the quarter under review from second-quarter end.
Given U.S. Bancorp's substantial exposure to commercial and real estate loans, the company’s lending book is likely to have been affected. Nonetheless, consumer loans experienced soft demand in September compared with second-quarter 2023 end.
Hence, moderate loan demand is likely to have negatively influenced USB’s average earning asset balance for the third quarter. In fact, the Zacks Consensus Estimate of $604.57 billion for average earning assets indicates a 1.5% sequential decrease.
Federal Reserve raised interest rates by another 25 basis points in the quarter under review. Thus, the policy rate reached 5-5.25% in July 2023, marking the 11th time FOMC has hiked interest rates in a tightening process that began in March 2022.
In September, the rate hike was paused. With this, interest rates reached a target of 5.25-5.5% in the third quarter, marking the highest level in around 22 years. Such high rates are likely to have a positive impact on the company’s NII.
However,an inverted yield curve, deposit migrations and higher funding costs are expected to weigh on NII and margins. Moreover, the investment securities portfolio balance dipped sequentially in second-quarter 2023, having offered limited scope for growth in interest income in the third quarter.
The consensus estimate for NII (taxable-equivalent basis) suggests a 4.1% sequential tumble to $4.27 billion. The company projects the metric in the $4.2-4.4 billion range, whereas it reported $4.4 billion in the second quarter.
Non-Interest Income: Market volatility and client activity were subdued in the third quarter due to seasonality. Also, risks of an economic downturn, central bank’s hawkish monetary policy stance to stem out “sticky” inflation and geopolitical concerns led to ambiguity among investors.
These factors resulted in lower volatility in equity markets and other asset classes. Hence, USB is likely to have recorded a weak performance in trading revenues this time. This is expected to have hindered commercial product revenues.
The Zacks Consensus Estimate for commercial products revenues is pegged at $351 million, suggesting a 2% sequential rise.
In the third quarter, mortgage rates continued to increase, with the rate on 30-year fixed mortgage reaching 7.31% in September, the highest level in nearly 23 years. The climb in mortgage rates, which kept home buyers on the sidelines, led to a smaller origination market, both purchase and refinancing compared with the prior-year quarter.
Hence, U.S. Bancorp is likely to have continued seeing declines in its home lending portfolio and mortgage banking revenues in third-quarter 2023. In fact, the Zacks Consensus Estimate for USB’s third-quarter 2023 mortgage banking revenues is pegged at $151 million, implying a 6.2% fall sequentially.
The Zacks Consensus Estimate for income from card fees is pegged at $417 million, indicating a decline of 1.2% from the prior quarter’s reported figure. Nonetheless, the consensus mark for trust and investment management fees is pegged at $636 million, indicating a sequential rise of 2.4%.
Overall, the Zacks Consensus Estimate for total non-interest income is pegged at $2.76 billion, implying a rise of 1.4% on a sequential basis.
Expenses: As USB continues to invest in digital initiatives, payment capabilities and technology modernization, such costs are likely to have weighed on its expense base to some extent in the to-be-reported quarter. Moreover, higher merger and integration costs and negative impacts of MUFG Union Bank’s operating expenses are expected to have increased expenditures. In fact, the company anticipates merger and integration charges to be between $150 million and $200 million.
Management expects non-interest expenses (excluding merger and integration charges) of around $4.3 billion, flat from its reported figure in the second quarter. The estimate includes $120 million of core deposit intangibles amortization related to the Union Bank acquisition.
Asset Quality: With expectations of a worsening macroeconomic outlook, growing recession risk and slower GDP growth, USB’s credit quality is likely to have deteriorated. Thus, it is expected to have built reserves in the third quarter. The Zacks Consensus Estimate for total non-performing assets of $1.2 billion implies a 10.9% jump from the prior quarter.
What the Zacks Model Predicts
Our proven model does not conclusively predict an earnings beat for U.S. Bancorp this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat which is not the case here. 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 0.00%.
Zacks Rank: USB currently carries a Zacks Rank of 4 (Sell).
Stocks That Warrant a Look
First Citizens BancShares, Inc. (FCNCA - Free Report) and Regions Financial Corporation (RF - Free Report) are a couple of stocks that you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases.
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Is a Beat in Store for U.S. Bancorp (USB) in Q3 Earnings?
U.S. Bancorp (USB - Free Report) is scheduled to report third-quarter results on Oct 18, before the opening bell. The company’s quarterly revenues are expected to have improved year over year, while earnings are projected to have declined.
In the last reported quarter, USB’s earnings missed the Zacks Consensus Estimate on higher expenses. Also, the deterioration of the company’s credit quality was a headwind. Nonetheless, an increase in net interest income (NII), supported by higher interest rates and loan growth, and a rise in non-interest income were positives.
U.S. Bancorp has a strong surprise history. Earnings surpassed estimates in the three of the trailing four quarters and missed once, the average beat being 2.68%.
U.S. Bancorp Price and EPS Surprise
U.S. Bancorp price-eps-surprise | U.S. Bancorp Quote
The consensus estimate for revenues is pegged at $7.01 billion, suggesting growth of 11.4% from the year-earlier reported figure. Management projects adjusted total revenues in the $6.9-$7.1 billion band, whereas it reported $7.2 billion in the second quarter. The outlook includes purchase accounting accretion of around $75 million.
Key Developments During the Quarter
In August 2023, USB issued 24 million shares of its common stock to MUFG Bank, a core banking subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG - Free Report) for approximately $936 million. The issuance is part of a debt-to-equity conversion and will help U.S. Bancorp to meet its repayment obligation to MUFG, as agreed upon during the acquisition of MUFG Union Bank N.A.'s core regional banking franchise on Dec 1, 2022.
This will increase MUFG Bank’s total shareholding in USB to 4.39% and further strengthen the strategic relationship between the two financial institutions.
The debt/equity conversion is projected to have a positive impact on U.S. Bancorp's capital levels. It will increase Common Equity Tier 1 ratio by roughly 20 basis points, signaling a solid financial position of the company.
Major Factors to Influence U.S. Bancorp’s Q3 Results
Loan Demand & NII: Given the challenging macroeconomic backdrop and high interest rates, banks’ lending activities are likely to have remained muted in the third quarter. Specifically, demand for commercial and industrial loans stayed muted in the third quarter, per Fed’s latest data. Moreover, demand for commercial real estate loans declined in the quarter under review from second-quarter end.
Given U.S. Bancorp's substantial exposure to commercial and real estate loans, the company’s lending book is likely to have been affected. Nonetheless, consumer loans experienced soft demand in September compared with second-quarter 2023 end.
Hence, moderate loan demand is likely to have negatively influenced USB’s average earning asset balance for the third quarter. In fact, the Zacks Consensus Estimate of $604.57 billion for average earning assets indicates a 1.5% sequential decrease.
Federal Reserve raised interest rates by another 25 basis points in the quarter under review. Thus, the policy rate reached 5-5.25% in July 2023, marking the 11th time FOMC has hiked interest rates in a tightening process that began in March 2022.
In September, the rate hike was paused. With this, interest rates reached a target of 5.25-5.5% in the third quarter, marking the highest level in around 22 years. Such high rates are likely to have a positive impact on the company’s NII.
However,an inverted yield curve, deposit migrations and higher funding costs are expected to weigh on NII and margins. Moreover, the investment securities portfolio balance dipped sequentially in second-quarter 2023, having offered limited scope for growth in interest income in the third quarter.
The consensus estimate for NII (taxable-equivalent basis) suggests a 4.1% sequential tumble to $4.27 billion. The company projects the metric in the $4.2-4.4 billion range, whereas it reported $4.4 billion in the second quarter.
Non-Interest Income: Market volatility and client activity were subdued in the third quarter due to seasonality. Also, risks of an economic downturn, central bank’s hawkish monetary policy stance to stem out “sticky” inflation and geopolitical concerns led to ambiguity among investors.
These factors resulted in lower volatility in equity markets and other asset classes. Hence, USB is likely to have recorded a weak performance in trading revenues this time. This is expected to have hindered commercial product revenues.
The Zacks Consensus Estimate for commercial products revenues is pegged at $351 million, suggesting a 2% sequential rise.
In the third quarter, mortgage rates continued to increase, with the rate on 30-year fixed mortgage reaching 7.31% in September, the highest level in nearly 23 years. The climb in mortgage rates, which kept home buyers on the sidelines, led to a smaller origination market, both purchase and refinancing compared with the prior-year quarter.
Hence, U.S. Bancorp is likely to have continued seeing declines in its home lending portfolio and mortgage banking revenues in third-quarter 2023. In fact, the Zacks Consensus Estimate for USB’s third-quarter 2023 mortgage banking revenues is pegged at $151 million, implying a 6.2% fall sequentially.
The Zacks Consensus Estimate for income from card fees is pegged at $417 million, indicating a decline of 1.2% from the prior quarter’s reported figure. Nonetheless, the consensus mark for trust and investment management fees is pegged at $636 million, indicating a sequential rise of 2.4%.
Overall, the Zacks Consensus Estimate for total non-interest income is pegged at $2.76 billion, implying a rise of 1.4% on a sequential basis.
Expenses: As USB continues to invest in digital initiatives, payment capabilities and technology modernization, such costs are likely to have weighed on its expense base to some extent in the to-be-reported quarter. Moreover, higher merger and integration costs and negative impacts of MUFG Union Bank’s operating expenses are expected to have increased expenditures. In fact, the company anticipates merger and integration charges to be between $150 million and $200 million.
Management expects non-interest expenses (excluding merger and integration charges) of around $4.3 billion, flat from its reported figure in the second quarter. The estimate includes $120 million of core deposit intangibles amortization related to the Union Bank acquisition.
Asset Quality: With expectations of a worsening macroeconomic outlook, growing recession risk and slower GDP growth, USB’s credit quality is likely to have deteriorated. Thus, it is expected to have built reserves in the third quarter. The Zacks Consensus Estimate for total non-performing assets of $1.2 billion implies a 10.9% jump from the prior quarter.
What the Zacks Model Predicts
Our proven model does not conclusively predict an earnings beat for U.S. Bancorp this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat which is not the case here. 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 0.00%.
Zacks Rank: USB currently carries a Zacks Rank of 4 (Sell).
Stocks That Warrant a Look
First Citizens BancShares, Inc. (FCNCA - Free Report) and Regions Financial Corporation (RF - Free Report) are a couple of stocks that you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases.
The Earnings ESP for FCNCA is +3.85% and currently carries a Zacks Rank #2. It is slated to report second-quarter 2023 results on Oct 26. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for FCNCA’s third-quarter earnings has moved 2.7% north over the past month.
RF currently has an Earnings ESP of +0.36% and a Zacks Rank #3. It is scheduled to release second-quarter 2023 results on Oct 20.
The Zacks Consensus Estimate for RF’s third-quarter earnings has moved 1.7% north over the past month.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.