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Will Flaring Costs Hurt U.S. Bancorp (USB) Q4 Earnings?

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U.S. Bancorp (USB - Free Report) is scheduled to report fourth-quarter 2016 results on Jan 18, before the opening bell.

The company’s third-quarter 2016 earnings were in line with the Zacks Consensus Estimate, aided by higher revenues. Driven by solid growth in mortgage banking revenues, earnings improved year over year. However, on the down side, the quarter witnessed higher expenses and provisions.

Notably, U.S. Bancorp had delivered positive earnings surprises in two of the prior four trailing quarters,with an average beat of 95%.

U.S. Bancorp Price and EPS Surprise

U.S. Bancorp Price and EPS Surprise | U.S. Bancorp Quote

Regarding the stock’s performance, shares of the company gained 32.4% over the past one year, underperforming the Zacks categorized Banks – Major Regional industry’s 38.7% growth.

Will the upcoming earnings release give a boost to U.S. Bancorp’s stock? This depends largely on whether the firm is able to post a beat in the fourth quarter. However, our quantitative model doesn’t conclusively point to an earnings beat this time. Here’s why.

U.S. Bancorp doesn’t have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing its chances of an earnings beat. Note that we caution investors against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Zacks ESP: The Earnings ESP for U.S. Bancorp is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 81 cents. This is a major indicator of a likely positive earnings surprise for the company. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: U.S. Bancorp’s Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

Factors to Influence Q4 Results

Expenses to Trend Higher: Expenses might trend upward in the upcoming release due to the increase in FDIC surcharge, which went effective in third-quarter 2016. Notably, management expects expenses to increase 2.5% sequentially, primarily driven by seasonally higher expenses, including tax credit amortization costs related to community development business.

Pressure on Net Interest Margin to Ease Slightly: Rise in the 10-year Treasury yield since Nov 8 is anticipated to alleviate pressure on net interest margin (NIM) to some extent. However, the favorable impact on NIM is not likely to occur in the quarter.

Net interest Income (NII) Growth: Driven by increase in earning assets, management had guided an improvement in NII. Though mortgage loan growth is expected to remain sluggish, in line with the reduction of refinancing activity and due to seasonality industry-wide, management foresees a rebound in commercial loan growth in the fourth quarter and expects rise in consumer loans to continue.

Weak Mortgage Operations: A significant increase in mortgage rates during the quarter should have an adverse impact on U.S. Bancorp’s mortgage banking revenues. Both fresh originations and refinancing are believed to have suffered due to higher mortgage rates.

Stable Credit Quality with Reduced Energy Allowances: The upcoming release is likely to record a stable credit performance. Further, given the rebound in oil prices after hitting rock bottom in Feb 2016, the allowances tied with the energy portfolio should not be significant.

Activities of U.S. Bancorp during the quarter to be reported were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at 81 cents over the last seven days. Notably, the estimated figure represents year-over-year growth of 1.9%.

Stocks That Warrant a Look

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

KeyCorp (KEY - Free Report) has an earnings ESP of +6.90% and a Zacks Rank #2. It is scheduled to report fourth-quarter results on Jan 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

The earnings ESP for Citigroup Inc. (C - Free Report) is +1.79% and it carries a Zacks Rank #2. The company is expected to release fourth-quarter results on Jan 18.

Fifth Third Bancorp (FITB - Free Report) has an earnings ESP of +2.33% and a Zacks Rank #1. It is slated to report fourth-quarter results on Jan 24.

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