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U.S. Bancorp (USB) Beats on Q3 Earnings, Expenses Flare Up

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Riding on higher revenues and lower provisions, U.S. Bancorp’s (USB - Free Report) third-quarter 2018 earnings per share of $1.06 outpaced the Zacks Consensus Estimate of $1.04. Also, results came ahead of the prior-year quarter earnings of 88 cents.

Shares of U.S. Bancorp climbed more than 1% in pre-market trading, highlighting investors’ optimism on higher revenues along with loan growth and lower provisions. Though lower mortgage banking revenues and escalating expenses disappointed, easing margin pressure on rising rates and overall higher fee income acted as tailwinds.

Net income was $1.8 billion, up 12.5% year over year.

Revenues & Loans Grow, Costs Flare Up

U.S. Bancorp’s net revenues came in at around $5.7 billion in the quarter, up 2.4% year over year. Increase in net interest as well as non-interest income led to this rise. Revenues came in line with the Zacks Consensus Estimate.

U.S. Bancorp’s tax-equivalent net interest income totaled $3.3 billion in the quarter, up 1.7% from the prior-year quarter. The upswing mainly stemmed from earning assets growth, increased security yields and rising interest rates. These positives were partially mitigated by reduced spread due to loan mix, higher rates on deposits and shift in funding mix.

Average earning assets climbed 1.6% 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 3.15% was up 1 basis point year over year, driven by higher interest rates. Deposit and funding mix, reduced loan spreads, and the impact of tax reform partially mitigated rise in margins.

U.S. Bancorp’s non-interest income escalated 3.3% on a year-over-year basis to $2.4 billion. The upsurge was mainly due to rise in mostly all components of income, partially offset by lower treasury management fees, mortgage banking revenues and commercial products revenues.

Provision for credit losses decreased 4.7% year over year to $343 million in the reported quarter.

U.S. Bancorp’s average total loans inched up 1.2% year over year to $281.1 billion. The growth stemmed from a rise in commercial loans, residential mortgages and credit card loans. These increases were partially offset by a drop in total other retail, commercial real estate and covered loans. Excluding covered loans, average total loans rose 1.5% year over year.

Average total deposits were down 1.5% from the prior-year quarter to $330.1 billion. The fall was due to decline in both interest-bearing and non-interest-bearing deposits.

Non-interest expenses flared up 1.5% year over year to $3 billion at U.S. Bancorp. The upswing in mostly all components of non-interest expenses was partially offset by lower professional services and other expenses along with other intangibles.

Efficiency ratio came in at 53.5%, improving from 53.9% in the year-ago quarter. A decrease in the ratio indicates improved profitability.

Credit Quality: A Mixed Bag

Credit metrics at U.S. Bancorp was mixed in the reported quarter. Net charge-offs came in at $328 million, slightly down year over year. On a year-over-year basis, the company experienced deterioration, mainly in net charge-offs in the credit card segment, which was offset by improvement in residential mortgages.

U.S. Bancorp’s non-performing assets (excluding covered assets) came in at $1 billion, down 23.1% year over year. However, total allowance for credit losses was $4.4 billion, slightly up on a year-over-year basis.

Strong Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. The Tier 1 capital ratio came in at 10.6% compared with 11.1% in 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 Sep 30, 2018, down from 9.6% reported 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 11.8%, as of Sep 30, 2018, compared with 12.1% in the prior-year quarter.

The tangible common equity to tangible assets ratio was 7.7% as of Sep 30, in line with the prior-year quarter.

U.S. Bancorp posted an improvement in book value per share, which increased to $27.35 as of Sept. 30 from $25.98 recorded at the end of the year-earlier quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the third quarter, U.S. Bancorp returned 78% of earnings to its shareholders through common stock dividends and buybacks.

Conclusion

U.S. Bancorp posted an impressive quarter. Rise in revenues, aided by increase in lending activities, is expected to continue. Though weakness in the credit card portfolio and escalating expenses remain headwinds, rising margins and lower provisions are likely to continue.
 

U.S. Bancorp Price, Consensus and EPS Surprise

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

U.S. Bancorp currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

Driven by expense management, Citigroup (C - Free Report) delivered a positive earnings surprise of 4.8% in third-quarter 2018. Earnings from continuing operations per share of $1.74 for the quarter handily outpaced the Zacks Consensus Estimate of $1.66. Also, earnings climbed 22.5% year over year.

Higher consumer banking, equity markets and fixed income market revenues along with loan growth were witnessed. Though investment banking revenues disappointed as strong advisory business was more than offset by lower underwriting fees on low client activity, reduced expenses and credit costs acted as tailwinds.

Impacted by lower mortgage banking revenues, Wells Fargo (WFC - Free Report) recorded a negative earnings surprise of 3.4% in third-quarter 2018. Earnings of $1.13 per share missed the Zacks Consensus Estimate of $1.17. However, the bottom line compared favorably with 83 cents recorded in the prior-year quarter.

Lower provisions and higher net interest income aided results. Also, expenses declined. However, reduced fee income was an undermining factor. Further, reduction in loans and deposits acted as headwinds in the quarter.

Reflecting the highest strong year-to-date net revenues in eight years, Goldman Sachs’ (GS - Free Report) third-quarter 2018 results recorded a positive earnings surprise of 15.9%. The company reported earnings per share of $6.28, comfortably beating the Zacks Consensus Estimate of $5.42. Further, the bottom line witnessed 25.1% year-over-year improvement.

The investment bank turned triumphant, with strong equity underwriting revenues aiding continued momentum in investment banking business, supported bottom-line numbers. In addition, Investment Management business was strong. However, lower Fixed Income, Currency and Commodities Client Execution (FICC) revenues and elevated expenses were undermining factors.

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