Driven by solid growth in mortgage banking revenues U.S. Bancorp’s (USB - Free Report) third-quarter 2016 earnings per share of 84 cents increased 3.7% year over year. Also, earnings came in line with the Zacks Consensus Estimate.
Results reflected higher revenues generated on the back of growth in net interest income (NII) as well as non-interest income. Notably, mortgage banking revenues increased a whopping 40.2% year over year, driven by solid refinancing activities due to lower longer-term interest rates in the reported quarter.
However, on the down side, the quarter witnessed higher expenses and provisions. Notably, the company recorded continued growth in loans and deposits and maintained a strong capital position.
Net income improved nearly 1% year over year to $1.52 billion in third-quarter 2016.
NII & Fee Income Growth Drive Revenues, Costs & Provisions Up
U.S. Bancorp’s revenues of $5.34 billion increased 5.7% year over year. Revenues came at par with the Zacks Consensus Estimate.
The company’s tax-equivalent net interest income was $2.94 billion in the quarter, up 4.3% from the prior-year quarter. The rise was mainly due to loan growth and higher rates. These positives were partially offset by a continued shift in the loan portfolio mix and reduced yields in the investment portfolio.
Average earning assets climbed 6.6% year over year, driven by growth in average total loans and average investment securities. However, net interest margin of 2.98% was down 6 basis points year over year. The decline in margin was mainly due to increased funding costs, higher average cash balances and securities purchases at lower average rates, partially offset by higher rates on new loans.
U.S. Bancorp’s non-interest income increased 5.1% on a year-over-year basis to $2.44 billion. The rise was primarily due to increase in almost all components of non-interest income, partially offset by lower commercial products revenue and investment products fees.
However, provision for credit losses increased 15.2% year over year to $325 million.
Also, non-interest expenses rose 5.6% year over year to $2.93 billion at U.S. Bancorp. The rise reflected higher expenses in several categories, including compensation, professional services, marketing and business development and technology and communications. These increases were partially offset by lower employee benefits along with net occupancy and equipment expenses.
U.S. Bancorp’s average total loans increased 7.6% year over year to $269.6 billion. The growth was mainly driven by a rise in commercial loans, residential mortgages and credit card loans. These increases were partially offset by decrease in runoff covered loan portfolio. Excluding covered loans, average total loans rose 8.1% year over year.
Average total deposits were up 10% from the prior-year quarter to $318.5 billion. The rise was due to growth in non-interest-bearing deposits along with interest bearing savings and time deposits.
Deteriorating Credit Quality
Credit metrics at U.S. Bancorp deteriorated in the reported quarter. Net charge-offs were $315 million, up 7.9% year over year.
Total allowance for credit losses was $4.34 billion, up nearly on a year-over-year basis. U.S. Bancorp’s non-performing assets (excluding covered assets) were $1.63 billion, up 6.8% year over year.
Strong Capital Position
During the quarter under review, U.S. Bancorp maintained a solid capital position. Effective Jan 1, 2014, the regulatory capital requirements for the company comply with Basel III, subject to certain transition provisions from Basel I over the next four years to full implementation by Jan 1, 2018.
The tier 1 capital ratio was 11.1%, stable with 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 Sep 30, 2016, up from 9.2% in the prior-year quarter.
All regulatory ratios of U.S. Bancorp continued to exceed “well-capitalized” requirements.
Capital Deployment Update
Reflecting the company’s capital strength during the third quarter, U.S. Bancorp returned 79% of earnings to its shareholders through common stock dividends and buybacks.
U.S. Bancorp posted an encouraging quarter. A robust capital position and increased lending activities were among the tailwinds. The company follows a conservative growth strategy and has made small but strategic acquisitions.
However, weakness in the company’s asset quality, rising expenses, along with provisions, remain headwinds. Further, the company continues to face margin pressure amid the slow rise in interest rates. However, the company’s growth prospects should continue to get support from its solid business model, core franchise and diverse revenue streams.
U.S. Bancorp currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Performance of Other Major Banks
Among major banks, JPMorgan Chase & Co.’s (JPM - Free Report) third-quarter 2016 earnings of $1.58 per share handily surpassed the Zacks Consensus Estimate of $1.40. However, the figure reflects a 6% decline from the year-ago period. Notably, the results included a legal benefit of $71 million.
Supported by strong top-line growth, Wells Fargo & Company’s (WFC - Free Report) third-quarter 2016 earnings recorded a positive surprise of about 1%. Earnings of $1.03 per share beat the Zacks Consensus Estimate by a penny. However, it compared unfavorably with the prior-year quarter’s earnings of $1.05 per share.
Driven by decline in operating expenses, Citigroup Inc. (C - Free Report) delivered a positive earnings surprise of nearly 8% in third-quarter 2016. The company’s earnings from continuing operations per share of $1.25 for the quarter outpaced the Zacks Consensus Estimate of $1.16. However, earnings compared unfavorably with the year-ago figure of $1.36 per share.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>