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U.S. Bancorp's (USB) Beats Q4 Earnings Estimates, Costs Up

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U.S. Bancorp’s USB fourth-quarter 2017 adjusted earnings per share of 88 cents surpassed the Zacks Consensus Estimate by a penny. The figure came ahead of the prior-year quarter earnings of 82 cents.

Easing margin pressure on rising rates was witnessed in the quarter. Moreover, revenues improved on a year-over-year basis aided by rise in net interest income. Further, elevated average loans and deposit balances were tailwinds. However, escalating expenses and lower mortgage banking revenues were major drags.

After considering impacts of the tax reform and other notable items, net income was $1.68 billion, up 13.8% year over year.

For full-year 2017, adjusted earnings per share were $3.42 per share, in line with the Zacks Consensus Estimate. For 2017, net income of $6.2 billion was reported, up 5.6% year over year.

Revenues, Loans & Deposits Rise, Costs Increase

U.S. Bancorp’s net revenues came in at around $5.6 billion in the quarter, up 3.7% year over year. The increase in net interest income and non-interest income contributed to higher revenues. Also, revenues were in line with the Zacks Consensus Estimate.

U.S. Bancorp’s tax-equivalent net interest income totaled $3.1 billion in the quarter, up 6.4% from the prior-year quarter. The rise was mainly due to loan growth and rising interest rates.

Average earning assets climbed 2.8% year over year, supported by growth in average total loans and average investment securities, along with elevated average other earning assets. Furthermore, net interest margin of 3.08% was up 10 basis points (bps) year over year, driven by higher interest rates and loan portfolio mix. Higher funding costs and elevated cash balances partially mitigated the rise in margins.

U.S. Bancorp’s non-interest income increased slightly on a year-over-year basis to $2.4 billion. The rise was primarily due to higher payment services revenues, trust and investment management fees and deposit service charges, partially offset by lower mortgage banking and other revenues.

Provision for credit losses decreased 2% year over year to $335 million in the reported quarter.

U.S. Bancorp’s average total loans climbed 2.6% year over year to $279.8 billion. The growth was backed by a rise in commercial loans, residential mortgages, total other retail and retail leasing. These increases were partially offset by a drop in commercial real estate.

Average total deposits were up 3% from the prior-year quarter to $339.2 billion. The rise was due to growth in interest-bearing deposits, partly offset by lower non-interest-bearing deposits.

Non-interest expenses rose 31.1% year over year to $3.9 billion. Excluding the impact of notable items, expenses increased 3.6% year over year due to higher compensation and employee benefits expenses, partially offset by lower professional services expenses.

Credit Quality: A Mixed Bag

Credit metrics at U.S. Bancorp deteriorated in the reported quarter. Net charge-offs came in at $325 million, up nearly 1% year over year. On a year-over-year basis, the company experienced deterioration, mainly in net charge-offs in the commercial real estate and credit card segment.Also, total allowance for credit losses was $4.4 billion, up1.4% on a year-over-year basis.

However, non-performing assets came in at $1.2 billion, down 25.1% 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 came in at 10.8%, down 2 bps from the prior-year quarter. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9.1% as of Dec 31, 2017, in line with the year-ago quarter.

All regulatory ratios of U.S. Bancorp continued to be in excess of well-capitalized requirements. In addition, based on the Basel III fully implemented advanced approach, the Tier 1 common equity to risk-weighted assets ratio was estimated at 11.6% as of Dec 31, 2017, compared with 11.7% as of Dec 31, 2016.

The tangible common equity to tangible assets ratio was 7.6% as of Dec 31, 2017, compared with 7.5% as of Dec 31, 2016.

U.S. Bancorp posted an improvement in book value per share, which increased to $26.34 as of Dec 31, 2017, from $24.63 recorded at the end of the year-earlier quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the fourth quarter, U.S. Bancorp returned 72% of earnings to its shareholders through common stock dividends and buybacks. For full-year 2017, the company returned 77% of earnings to shareholders.

Conclusion

U.S. Bancorp posted a decent quarter. Along with elevated revenues, a solid capital position and increased lending activities were added advantages. In addition, rising margins were a positive. Further, improving economy and lower taxes will support its financials going forward.

Nevertheless, weakness in the credit card portfolio adversely affected its asset quality. Additionally, there are concerns related to the impact of legal issues and the company’s global exposure. Also, escalating expenses remain headwinds.

U.S. Bancorp Price, Consensus and EPS Surprise

U.S. Bancorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

Comerica Inc. CMA pulled off a positive earnings surprise of 5.8% in fourth-quarter 2017. Adjusted earnings per share of $1.28 surpassed the Zacks Consensus Estimate of $1.21. Also, the bottom line compares favorably with the prior-year quarter figure of 99 cents.

Though fixed income trading income slumped as expected, Citigroup Inc. C delivered a positive earnings surprise of 7.6% in fourth-quarter 2017 on prudent expense management and strong consumer banking. Adjusted earnings per share of $1.28 for the quarter easily outpaced the Zacks Consensus Estimate of $1.19. Also, earnings compared favorably with the year-ago figure of $1.14 per share.

Riding on higher revenues, The PNC Financial Services Group, Inc. (PNC - Free Report) reported a positive earnings surprise of 4.1% in fourth-quarter 2017. Adjusted earnings per share of $2.29 beat the Zacks Consensus Estimate of $2.20. Moreover, the bottom line reflected a 16.2% increase from the prior-year quarter.

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