A month has gone by since the last earnings report for U.S. Bancorp (USB - Free Report) . Shares have added about 2% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is USB due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
U.S. Bancorp's Q1 Earnings Beat Estimates, Revenues Up
U.S. Bancorp’s first-quarter 2018 adjusted earnings per share of 95 cents surpassed the Zacks Consensus Estimate by a penny. The figure came ahead of the prior-year quarter earnings of 82 cents.
The company’s top line benefitted from rise in net interest income on the back of easing margin pressure and higher fee income. Further, elevated average loans and deposit balances were tailwinds. However, escalating expenses and lower mortgage banking revenues remained major drags.
After considering impacts of notable items, net income was $1.68 billion, up 13.7% year over year.
Revenues, Loans & Deposits Rise, Costs Increase
U.S. Bancorp’s net revenues came in at around $5.5 billion in the quarter, up 3.4% year over year. The increase in net interest income and non-interest income contributed to higher revenues.
U.S. Bancorp’s tax-equivalent net interest income totaled $3.2 billion in the quarter, up 5.5% from the prior-year quarter. The rise was mainly due to loan growth and rising interest rates, partially offset by deposit and funding mix.
Average earning assets climbed 3.1% 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 3.13% was up 7 basis points (bps) year over year, driven by higher interest rates. Higher funding costs, loan mix 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 $2.3 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 commercial products revenues.
Provision for credit losses decreased 1.2% year over year to $341 million in the reported quarter.
U.S. Bancorp’s average total loans climbed 2.3% year over year to $279.4 billion. The growth was backed by a rise in commercial loans, residential mortgages, credit card lending, total other retail and retail leasing. These increases were partially offset by a drop in commercial real estate.
Average total deposits were up 1.9% from the prior-year quarter to $334.6 billion. The rise was due to growth in interest-bearing deposits, partly offset by lower non-interest-bearing deposits.
Non-interest expenses rose 5% year over year to $3.1 billion, primarily due to higher compensation and employee benefits expenses, technology investment and seasonal marketing and development expenses, partially offset by lower professional services and other expenses.
Credit Quality: A Mixed Bag
Credit metrics at U.S. Bancorp deteriorated in the reported quarter. Net charge-offs came in at $341 million, up nearly 1.8% year over year. On a year-over-year basis, the company experienced deterioration, mainly in net charge-offs in the credit card segment. Also, total allowance for credit losses was $4.4 billion, up 1.2%.
However, non-performing assets came in at $1.2 billion, down 19.5% year over year.
During the quarter under review, U.S. Bancorp maintained a decent capital position. Beginning Jan 1, 2018, the regulatory capital requirements fully reflected implementation of Basel III.
The tier 1 capital ratio came in at 10.4%, down 6 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% as of Mar 31, 2018, compared with 9.5% in 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 11.5% as of Mar 31, 2018, compared with 11.8% as of Mar 31, 2017.
The tangible common equity to tangible assets ratio was 7.7% as of Mar 31, 2018, compared with 7.6% in prior-year quarter.
U.S. Bancorp posted an improvement in book value per share, which increased to $26.54 as of Mar 31, 2018, from $25.05 recorded at the end of the year-earlier quarter.
Capital Deployment Update
Reflecting the company’s capital strength during the first quarter, U.S. Bancorp returned 68% of earnings to its shareholders through common stock dividends and buybacks.
Management expects the total interest bearing deposit beta following the most recent rate hike to be about 40%. As future rate hikes occur, deposit beta is expected to continue to gradually trend toward 50% level.
Management expects net interest income to increase at a mid-single digit on a year-over-year basis in second-quarter 2018.
Management expects fee income to increase at a low single digit on a year-over-year basis. Notably, fees are seasonally higher in the second quarter.
Merchant processing revenue continues to be impacted by exiting two joint ventures in the second quarter of 2017. Therefore, management continues to expect that merchant acquiring revenue will return to a more normalized mid-single digit pace by the third quarter of 2018.
Expense growth on a year-over-year basis is likely to be in the mid-single digit range, within long-term growth target of 3 to 5%. Management expects positive operating leverage for the full year 2018.
Credit quality is projected to remain stable sequentially.
Management expects effective rate in 2018 to be nearly 21%.
Management expects full-year 2018 expense growth to be within the 3-5% range.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to six lower.
At this time, USB has a subpar Growth Score of D, however its Momentum is doing a bit better with a C. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks style scores indicate that the company's stock is suitable for value and momentum investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, USB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.